Progressing to exchange of contracts - Acting for a lender: requirements and certificates of title

Learning Outcomes

This article explains the essential steps and responsibilities involved when a solicitor acts for a lender in a property transaction leading up to the exchange of contracts. It details the investigation of title from the lender's standpoint, the requirements outlined in the UK Finance Mortgage Lenders’ Handbook, and the critical role of the Certificate of Title. After reading this article, you should be able to identify the lender's key requirements, understand the purpose and content of a Certificate of Title, and recognise potential issues, such as conflicts of interest, that can arise when acting for both borrower and lender.

SQE1 Syllabus

For SQE1, you are required to understand the practical aspects of acting for a lender during the pre-exchange phase of a conveyancing transaction. This includes the due diligence required to protect the lender's security and the process of reporting findings via a Certificate of Title.

As you work through this article, remember to pay particular attention in your revision to:

  • The specific requirements imposed by lenders, often standardised in the UK Finance Mortgage Lenders’ Handbook.
  • The process of investigating title from a lender's standpoint, focusing on ensuring the property provides good security.
  • The purpose, content, and implications of issuing a Certificate of Title to the lender.
  • Identifying and managing potential conflicts of interest when acting for both borrower and lender.
  • The steps necessary to request and handle mortgage funds leading up to exchange.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is the primary purpose of a Certificate of Title in a conveyancing transaction?
  2. Identify two potential conflicts of interest that might arise when a solicitor acts for both a borrower and a lender.
  3. What is the significance of the UK Finance Mortgage Lenders’ Handbook for a solicitor acting for a lender?
  4. True or False: A solicitor acting for both borrower and lender must always disclose all information received from the borrower to the lender.

Introduction

When a buyer finances a property purchase with a mortgage, their solicitor often also acts for the mortgage lender. This dual role requires the solicitor to balance duties owed to both clients, ensuring the property provides adequate security for the loan while also enabling the buyer's purchase. Key tasks in the lead-up to exchanging contracts include investigating the title from the lender's standpoint, reporting findings through a Certificate of Title, and managing potential conflicts of interest. Understanding the lender's specific requirements, often detailed in the UK Finance Mortgage Lenders’ Handbook, is essential.

Lender Requirements and the Solicitor's Role

Institutional lenders, such as banks and building societies, provide a substantial majority of mortgage finance. When instructing a solicitor (often the buyer's solicitor), the lender relies on them to ensure the property represents good and marketable security for the loan.

The Lender's Instructions

Lenders provide specific instructions to their solicitors, typically incorporating the UK Finance Mortgage Lenders’ Handbook. This Handbook standardises the process and sets out detailed requirements.

Key Term: UK Finance Mortgage Lenders’ Handbook
A standardised set of instructions issued by most institutional lenders in England and Wales to solicitors acting for them in residential mortgage transactions. It comprises general instructions (Part 1) and lender-specific variations (Part 2).

The solicitor must meticulously follow these instructions, which cover areas such as title investigation, searches, property valuation checks, and insurance requirements. Any deviations or issues must be reported promptly to the lender.

Investigating Title for the Lender

While the investigation process mirrors that undertaken for the buyer, the focus is explicitly on protecting the lender's security interest. The solicitor must verify:

  • Good and Marketable Title: Ensuring the title is free from defects or encumbrances that could adversely affect the property's value or the lender’s ability to sell it if the borrower defaults.
  • Valuation Assumptions: Checking that any assumptions made by the lender's valuer about the property's title (e.g., tenure, rights, boundaries) are correct.
  • Compliance: Ensuring the property complies with planning permissions and building regulations.
  • Specific Lender Requirements: Satisfying any particular requirements detailed in Part 2 of the Handbook (e.g., regarding flying freeholds, lease lengths, or properties near potential hazards).

Worked Example 1.1

You are acting for both a buyer, Sarah, and her lender, Northern Rock Bank, on the purchase of a flat. The official copies reveal the lease has only 65 years remaining. Northern Rock Bank's Part 2 instructions in the UK Finance Mortgage Lenders’ Handbook state they require a minimum unexpired lease term of 70 years at completion.

What action should you take?

Answer: You must report this issue to Northern Rock Bank immediately. The remaining lease term does not meet their minimum requirement. Proceeding without informing them would breach your duty to the lender. The lender may withdraw the offer, require the lease to be extended before completion, or potentially accept the shorter term with specific conditions or indemnity insurance.

The Certificate of Title (CoT)

Before releasing mortgage funds, the lender requires formal confirmation from their solicitor that the title is satisfactory. This is provided via a Certificate of Title (CoT).

Key Term: Certificate of Title (CoT)
A formal report from the solicitor acting for a lender confirming that the property title is good and marketable and meets the lender's requirements, effectively requesting the release of the mortgage advance.

Purpose and Content

The CoT serves two main functions:

  1. Confirmation: It confirms to the lender that the legal checks have been completed and the property is acceptable security.
  2. Request for Funds: It acts as the formal request for the mortgage advance to be released in time for completion.

Standard forms (approved by the Law Society and UK Finance for residential transactions, or the City of London Law Society form for commercial deals) are typically used. The solicitor certifies various statements about the title, searches, planning compliance, and other relevant matters. Any issues or qualifications must be clearly disclosed.

Timing and Liability

The CoT is usually submitted shortly before completion is anticipated, allowing sufficient time for the lender to process the request and release funds (typically 5-7 working days' notice is required). Issuing a CoT carries significant responsibility. The solicitor is liable to the lender for any losses incurred due to negligence in their investigation or inaccuracies in the certificate. Failing to report a known defect which later affects the lender's security could lead to a substantial negligence claim.

Worked Example 1.2

You are preparing the CoT for a lender. Your investigation revealed a restrictive covenant preventing any extension being built, but your buyer client plans extensive works post-completion and has instructed you not to mention this specific covenant to the lender, believing it won't be an issue.

Can you issue an unqualified CoT?

Answer: No. You have a duty to the lender to disclose all material information affecting their security. The restrictive covenant materially affects the property's potential use and possibly its value. The buyer's instruction creates a conflict of interest. You cannot issue an unqualified CoT. You must explain the conflict to the buyer and state that you cannot proceed without disclosing the covenant. If the buyer refuses consent to disclose, you must cease acting for the lender, and likely for the buyer too.

Conflicts of Interest

Acting for both borrower and lender is common in standard residential mortgages but requires constant vigilance regarding potential conflicts of interest, as outlined in the SRA Codes of Conduct.

Key Term: Conflict of Interest
A situation where a solicitor's separate duties to act in the best interests of two or more clients in relation to the same or related matters conflict.

A conflict typically arises if the solicitor receives information from one client that is material to the other but cannot be disclosed due to the duty of confidentiality.

Common Scenarios

  • Undisclosed Information: The buyer reveals information affecting their mortgage application's validity (e.g., loss of job, intention not to occupy, funding part of the price with an undisclosed loan) which they don't want disclosed to the lender.
  • Title Defects: Defects are discovered which the buyer is willing to accept but which breach the lender's instructions (e.g., a planning breach, a short lease term).
  • Undervalue/Incentives: The solicitor becomes aware that the actual purchase price differs from that stated in the mortgage offer, or there are undisclosed incentives from the seller.

Managing Conflicts

If a conflict arises, the solicitor usually cannot continue acting for both parties. They must explain the situation to both clients. Typically, the solicitor ceases acting for the lender due to the duty of confidentiality owed to the buyer. Depending on the circumstances, they may also need to cease acting for the buyer, particularly if there is any suggestion of mortgage fraud.

Key Point Checklist

This article has covered the following key knowledge points:

  • Solicitors acting for lenders must ensure the property provides good and marketable security, adhering strictly to the lender's instructions, often contained within the UK Finance Mortgage Lenders’ Handbook.
  • Title investigation for a lender involves verifying ownership, checking for adverse entries, ensuring planning compliance, and confirming any specific lender requirements are met.
  • The Certificate of Title (CoT) confirms the title's acceptability to the lender and requests the release of mortgage funds. It carries significant solicitor liability.
  • Issuing an inaccurate or unqualified CoT when issues exist constitutes negligence.
  • Solicitors acting for both borrower and lender must be alert to potential conflicts of interest, particularly regarding confidential information material to the lender.
  • If a conflict arises that cannot be resolved with informed consent (where permissible), the solicitor must typically cease acting for at least the lender.

Key Terms and Concepts

  • UK Finance Mortgage Lenders’ Handbook
  • Certificate of Title (CoT)
  • Conflict of Interest
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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