This advice was first published in the Law Society's Conveyancing Handbook.
Accepting undertakings on completion
The first instance decision in Patel v. Daybells [2000] All ER(D) 1004 caused consternation among conveyancers. It held that it was negligent for a buyer's solicitor to accept an undertaking for Form 53 (now DS1), save in exceptional circumstances. The Court of Appeal ([2001] EWCA Civ 1229) has now upheld the decision that the solicitor in the case was not negligent, but reversed the reasoning – the acceptance of a solicitor's undertaking for aDS1will not normally be negligent. But does this mean a return to business as usual?
The Court of Appeal held that 'conformity to a common (or even universal) professional practice is not an automatic defence against liability; the practice must be demonstrably reasonable and responsible'. This involves considering the risks involved and how to avoid them. The Court of Appeal was satisfied that the legal profession had considered the risks of accepting an undertaking and that in the standard case it was reasonable to rely on the existence of compulsory insurance, the Compensation Fund and the summary procedure for enforcing undertakings when assessing the extent of that risk. Other relevant factors were: the Council of Mortgage Lenders' advice to its members to discharge a mortgage even where insufficient funds were sent, if this was due to the lender's error; and the problems which would ensue if the buyer's solicitor had to communicate directly with the seller's lender.
Exceptional cases
The 'exceptional circumstances' in which it might be negligent for a buyer's solicitor to accept an
undertaking were not specified by the Court of Appeal, although the court made it clear that the fact
that the seller's solicitor was a sole practitioner did not make the transaction exceptional.
The court referred in detail to the expert evidence on behalf of the buyer's solicitor that it would not
be normal or advisable to rely on an undertaking in two situations, but did not expressly endorse
these as the relevant 'exceptional circumstances'.
The two situations mentioned are:
- where the amount required to redeem the seller's mortgage exceeds the minimum level
of solicitors' indemnity insurance (currently [£2m] per claim); or
- where the mortgagee is not a member of the Council of Mortgage Lenders.
Minimising the risks in exceptional cases
The risk of accepting an undertaking for a DS1 is that it might not be forthcoming (e.g. because of
the fraud or negligence of the seller's solicitor or because of problems in identifying the amount
required to redeem the mortgage). Default by the seller's solicitor is dealt with by the requirement
for compulsory insurance and, ultimately, the Compensation Fund. Only where the figures exceed
the compulsory level of insurance might the buyer's solicitor need to take additional steps to deal
with that risk. The risk of a dispute with the lender should not normally be a problem where the
lender is a member of the CML. Even disputes not covered by the CML's advice may not put the
buyer's solicitor at risk: the Law Society's recommended form of undertaking puts an absolute
obligation on the seller's solicitor to discharge the relevant mortgage. It is therefore the seller's
solicitor who is at risk if the DS1 is not forthcoming: his obligations can be summarily enforced and
are backed by compulsory insurance and in certain cases, the Compensation Fund.
In each of the exceptional cases mentioned in Patel v. Daybells the matter comes back to the
safeguards put in place by the profession. The only variable is the level of insurance cover and that is
only relevant in the case of large mortgages. Normally the buyer's solicitor does not know the
amount of the debt (and the Court of Appeal disapproved of the idea that the buyer's solicitor should
have to make such enquiries). It is common to ask in preliminary enquiries for confirmation that the
sale price exceeds the amount secured on the mortgage. Provided the sale price is not more than
[£2m], such confirmation should give the buyer's solicitor the necessary comfort to accept an
undertaking from the seller's solicitor. In larger transactions the buyer's solicitor may wish to take
additional steps before or instead of accepting an undertaking.
- The buyer's solicitor could ask the seller's solicitor to get express written confirmation
from the lender that he has been appointed the lender's agent for the receipt of the
redemption money. This places the risk of default or dispute with the lender and avoids
the buyer having to investigate either the details of the mortgage or the seller's
solicitor's insurance.
- The buyer's solicitor could insist on sending the redemption money direct to the lender.
The buyer's solicitor should ask to see the redemption statement as independent
evidence of the figure. The Court of Appeal disapproved of the buyer making such
enquiries in the standard case but in an exceptional case, where large sums are involved,
this may be inevitable. As this information is confidential to the seller, the seller's
solicitor should get instructions before revealing it. However, this solution does not deal
with the problem of a dispute over the amount required to redeem. It may also be
difficult to arrange in the case of an 'all moneys' mortgage. If this course is followed,
Standard Condition 6.7 should be amended (or, if using the Standard Commercial
Property Conditions, expand condition 6.7). In either case, the issue must be addressed
before exchange (or if using the Standard Commercial Property Conditions, expand
condition 8.7).
- Where the amount of the mortgage debt exceeds the minimum indemnity insurance (as
will often be the case in commercial transactions), a buyer's solicitor might only accept
an undertaking for DS1 if coupled with a warranty from the seller's solicitor that his
insurance cover exceeds the amount required to redeem the mortgage.
- Finally, there is no obligation to accept an undertaking in place of performance of the
obligation. Indeed, solicitors have often been unwilling to accept an undertaking for the
DS1 in the case of a mortgage to a non-institutional or overseas lender or in the case of a
private loan. However, if that is the buyer's solicitor's position, a contract condition that
the DS1 must be available on completion will be necessary. In many cases this will not
be a realistic option as institutional lenders' procedures do not include issuing the DS1
in escrow.
Before the buyer's solicitor accepts an undertaking where the expert evidence in Patel v. Daybells
stated it would not be normal practice to do so, it is essential to explain the risks to the buyer and get
clear instructions that the buyer is willing to take them.
V
Even where the lender is separately represented, the buyer's solicitor should consider whether there
are any exceptional circumstances making it unwise (or potentially negligent) to accept an
undertaking (or at least without evidence of the lender's solicitor's authority to accept the
redemption money).
ENDs
The use of Electronic Notifications of Discharge (END) presents a particular problem as there is
never a paper DS1 to be handed over: the buyer's solicitor is always reliant on an undertaking by the
seller's solicitor to forward the redemption money and the END form to the lender, who then sends
the discharge notification directly to the Land Registry. Even where the transaction might fall into
the category of exceptional cases the buyer's solicitor will ultimately have no choice but to accept
the undertaking and will have to take such steps as are available (e.g. split payments, evidence of the
seller's solicitor's authority, evidence of sufficient insurance cover).