PastPaperHero | 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. It also covers lender-focused due diligence on tenure and covenants, occupier consents and undue influence safeguards, pre-completion searches used to protect the lender’s security, and practical requirements for requesting and handling mortgage funds. 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, including the due diligence required to protect the lender's security and the process of reporting findings via a Certificate of Title, with a focus on the following syllabus points:

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.
The use and purpose of pre-completion searches undertaken for a lender, including OS1/OS2 and the bankruptcy-only search (K16).
Occupier consents and undue influence safeguards (including the Etridge guidance) when the borrower is not the sole occupier.
Practical lender concerns around lease length, ground rent and service charges, structural warranties for newbuilds, restrictive covenants and planning/building control compliance.

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.

What is the primary purpose of a Certificate of Title in a conveyancing transaction?
Identify two potential conflicts of interest that might arise when a solicitor acts for both a borrower and a lender.
What is the significance of the UK Finance Mortgage Lenders’ Handbook for a solicitor acting for a lender?
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.

Acting for a lender frequently means the solicitor must verify that the lender can achieve its remedies swiftly in case of default (usually sale under a legal charge). The solicitor therefore tests the whole security package: good and marketable title, enforceability of the mortgage (including execution formalities), removal or acceptability of adverse matters, and the absence of legal or practical obstacles to sale. The lender will also expect assurance on occupier rights, source of funds, and any purchase incentives that could distort the price or lending decision. Pre-completion searches are used to protect both buyer and lender, and practical steps must be taken to request and account for mortgage funds safely and on time.

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), with Part 3 used when a conveyancer is instructed by the lender only.

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. In addition to title quality, typical lender concerns include:

Tenure and lease terms: minimum unexpired lease length at completion and clarity on ground rent and service charges. Many lenders will not lend where ground rent is high, escalates steeply, or contains onerous review clauses that could affect saleability or affordability.
Newbuild protection: acceptable structural warranty or insurance-backed guarantee (such as NHBC or other recognised providers) and compliance with planning/building control.
Title risks: flying freeholds, estate rentcharges, unusual restrictions, or missing rights of support or services requiring careful analysis and reporting in line with each lender’s Part 2 requirements.
Incentives and price integrity: disclosure of any seller incentives, cashbacks or allowances; accuracy of the purchase price and deposit source (including any gifted deposits).
Occupancy: whether the borrower will live in the property or let it; any adult occupiers must waive rights that could interfere with the lender’s security.
Insurance: confirmation that appropriate cover is arranged from exchange where risk passes to the buyer, in accordance with contract terms.

Any deviations or issues must be reported promptly to the lender. The lender may require a solution (for example, title rectification, undertakings, retentions, indemnity insurance where acceptable under the Handbook, or an amended facility structure), or may decline or vary the offer.

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. Check the Property, Proprietorship and Charges Registers (for registered title) and ensure a good root and clear chain for unregistered title.
Valuation and Assumptions: Checking that any assumptions made by the lender's valuer about the property's title (e.g., tenure, rights, boundaries) are correct. If the valuer assumed, for example, adopted roads or unrestricted vehicular access, verify and report any discrepancy.
Compliance: Ensuring the property complies with planning permissions and building regulations, and assessing the impact of any breaches or lack of consents (including enforcement risk and lender acceptance of indemnity insurance where permitted).
Leasehold specifics: Confirm minimum unexpired term at completion, identify ground rent and service charge provisions (including escalation formulae), and check rights and covenants are sufficient and typical for saleability. Many lenders expect clarity that no forfeiture trigger is imminent and that the lease contains necessary rights to services, support, and access.
Rights and Easements: Confirm the property has the benefit of all necessary rights (way, services, support), and any burdens do not materially reduce value or marketability. Rights should be legal and properly protected (noted or registered as appropriate).
Restrictions and Rentcharges: Identify restrictions that require consent for disposition (including Form A restrictions signalling a trust of land and overreaching requirements), and whether any estate rentcharge could impede resale.
Adoption and infrastructure: For estates, check road adoption status and s38/s104 agreements; private roads or sewers can carry future maintenance liabilities that affect saleability.
Newbuild warranties: Verify an acceptable structural warranty is in place and assignable to the lender/borrower.
Specific Lender Requirements: Satisfy any Part 2 requirements (e.g., lenders’ approaches to flying freeholds, lease length thresholds, ground rent provisions, properties near potential hazards, or particular indemnity policies).

If matters fall outside lender criteria, the solicitor must report to the lender for instructions before proceeding.

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.

Worked Example 1.2

Your buyer client’s deposit includes £20,000 gifted by a parent. The mortgage offer does not refer to any gifted deposit, and the lender’s Part 2 requires disclosure and confirmation of the giftor’s identity and source of funds.

What should you do?

Answer:
You must report the gifted deposit to the lender, obtain the lender’s required declarations (typically from both borrower and giftor), and supply identity/source of funds information as per the lender’s Part 2. Do not proceed to exchange until the lender confirms acceptance. Failing to disclose could breach your duty to the lender and risk the mortgage offer being withdrawn.

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:

Confirmation: It confirms to the lender that the legal checks have been completed and the property is acceptable security. The certificate addresses title class and quality, arrangements for completion, mortgage execution, rights and easements, planning/building compliance, lease particulars and charges, insurances, and any material qualifications.
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. Lenders expect the certificate to match their Handbook requirements and mortgage offer conditions; if special conditions (such as retentions for works) exist, these should be flagged and aligned with completion plans.

It is good practice to distinguish the lender’s CoT from any narrative report on title: the certificate is a warranty instrument, whereas a report (particularly in commercial transactions) provides detailed analysis but does not substitute the certificate. The lender will rely on the certificate to make the funding decision.

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, but always check Part 2 for the specific lender). In practice, timing must also accommodate pre-completion searches:

OS1/OS2: Official search with priority to protect both the buyer and lender’s registrations (for registered titles).
Bankruptcy-only search (K16): For an individual borrower, completed on the lender’s behalf to ensure there is no bankruptcy petition or order affecting the borrower.

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. If the certificate is qualified, the qualification must be precise and sufficient to alert the lender to the risk. The lender may decide to proceed, adjust conditions (such as a retention or requirement for remedial works), or decline.

Handling mortgage funds must comply with SRA Accounts Rules. Where acting for both the borrower and lender, client money belonging to each must be recorded on separate ledgers in the name of each client. On receipt, mortgage funds are credited to the lender’s ledger and transferred to the borrower’s ledger on the day of completion as an inter-client transfer. This ensures clarity of accounting, especially since deposits received as stakeholder are held for both parties and should be segregated until completion.

Key Term: Bankruptcy-only search (K16)
A Land Charges Department search for bankruptcy entries against an individual borrower’s name, made on the lender’s behalf prior to completion to confirm the borrower is not subject to bankruptcy proceedings or orders.

Worked Example 1.3

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.

Worked Example 1.4

You discover after pre-contract enquiries that a conservatory was built without building regulations approval two years ago. The local search reveals no enforcement action, and the buyer is prepared to accept a suitable indemnity policy.

Should you qualify the CoT, and what do you report?

Answer:
You should report the absence of building regulations approval and confirm any enforcement risk and lender policy on indemnity insurance (per Handbook Part 1 and 2). If the lender permits indemnity insurance in such circumstances, arrange a compliant policy and disclose it in the CoT. If the lender does not accept indemnity, the CoT must be qualified and submitted for lender instructions. Never arrange or recommend insurance beyond your authorisation under FSMA; ensure compliance with SRA Financial Services rules when arranging any indemnity product.

Worked Example 1.5

You act for a company borrower taking a commercial mortgage. The lender requires confirmation that its charge will be registered at Companies House promptly.

What practical steps do you take alongside issuing the CoT?

Answer:
Confirm the timeline for submitting the MR01 at Companies House within 21 days of creation, and prepare to submit a certified copy of the charge with particulars. Ensure the OS1/OS2 priority search protects both transfer and charge registration at the Land Registry. The CoT should note the intention to file MR01 promptly and the effect of any delay (risk of the charge being void against liquidators or creditors). Coordinate completion timings to avoid jeopardising registration priority.

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. In residential cases, dual representation is usually acceptable where the mortgage is on standard terms and the approved certificate of title is used. However, the solicitor must be able to act in accordance with the ‘substantially common interest’ exception and ensure informed written consent and effective safeguards. If material confidential information cannot be disclosed, a conflict exists and dual representation is no longer permissible.

Where adult occupiers reside who will not be borrowers, separate legal advice and written consents may be necessary to protect the lender’s security and to address undue influence concerns, particularly in transactions involving guarantees or non-beneficial loans secured over a home.

Key Term: Occupier’s consent (waiver)
A signed consent by an adult occupier who is not a borrower, acknowledging the mortgage and agreeing that any rights of occupation rank behind the lender’s security, so the lender can enforce without being impeded by occupier rights.

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, onerous ground rent escalation).
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 or third parties (including gifted deposits).

In addition, undue influence risks can arise where the loan is secured on a matrimonial or family home but the loan is for the benefit of one party only. The Etridge guidance requires that the potentially influenced party be advised independently and face-to-face, with appropriate disclosures from the lender (e.g., loan purpose, indebtedness, terms). The lender is entitled to rely on the solicitor’s certificate that proper advice has been given.

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.

Where the substantially common interest exception applies and both clients give informed consent, it is still necessary to ensure that no material confidential information is withheld that the other client would expect to be disclosed. If the integrity of the certificate of title or lender’s reliance would be compromised by non-disclosure, dual representation must stop.

Worked Example 1.6

You act for both borrower and lender. The buyer confirms privately that the seller will rebate £10,000 after completion, reducing the effective price, and asks you not to tell the lender.