With a downturn in the property market increasing the risk of claims from lenders for losses suffered through mortgage default, the article examines how to minimise this
Against a background of the current “credit crunch”, reports of increased mortgage default and a less buoyant property market, it will be surprising if there is not an increase in claims by lenders against solicitors. Errors or omissions which would have gone undetected or caused no loss on the part of a lender while property prices were rising, may become the cause of claims when there is a downturn in the property market and the economy generally.
Claims by lenders very often allege breach of contract on the basis that the terms of the lender’s instructions have not been fully complied with. If the instructions were to secure an enforceable first ranking security over a valid and marketable title, there will be limited defences to the lender’s claim if no security is ever recorded, if the security is not a first ranking security, or if the borrower’s title is defective.
Failure to record/register
Solicitors A & Co acted for Mr X in a house purchase and for Mr X’s lenders in putting a security in place in respect of a mortgage. The disposition and standard security were returned by the Registers on account of a discrepancy in the deeds. It was only after Mr X defaulted and the lenders wished to commence proceedings for repossession that it was discovered that, for some reason, the discrepancy in the deeds had never been addressed and the deeds never re-submitted to the Registers.
There are also instances of omission to register as charges in the charges register within the relevant time limit standard securities granted by companies.
Often, these claims are very costly, and there is a clear incentive to have a reliable means of ensuring that deeds are submitted for recording (and, where appropriate, registration as charges) promptly following settlement and also, in the event of rejection of deeds on account of some deficiency, that the deficiency is addressed and the deeds re-submitted with minimum delay.
Errors in security deeds
B & Co, solicitors acted for Mr and Mrs Y in a house purchase and for their lenders. Unfortunately, there was an error in the designation of the lenders who therefore found themselves without an effective security. By the time the error was discovered, two further securities had been registered.
While spellcheckers in word processing software may highlight obvious typographical errors, they may not detect all errors in the name or designation of the lender. Therefore, it may be necessary to consider a system for verification of the information required for the security document(s), and for comparison of the principal deed against the final draft.
C & Co acted for Mr Z in the acquisition of a property funded by secured loans from two lenders. Although a standard security was granted in favour of each lender, the postponed security was not formally intimated to the holder of the first ranking security.
It can sometimes be easy to overlook the “administrative” requirements of a transaction and therefore, as with presentation of deeds for recording/registration, practices should have a system for making sure that any such requirements are attended to promptly.
Overlooking adverse entries in searches
Firm D & Co were instructed to act for a lender in taking a second security over a property. However they failed to notice that the search report disclosed that there were already two securities over the property. As a consequence, the lenders’ security ranked third rather than second.
Claims arise from time to time out of adverse entries in search reports being misconstrued or overlooked altogether. There have been instances of both seller’s solicitors and purchaser’s solicitors missing the same adverse entry in a search obtained and exhibited prior to settlement. This can result in potential claims against the seller’s solicitors under their letter of obligation and against the purchaser’s solicitors for overlooking the adverse entry.
Most frequently, the search report discloses two or more outstanding securities but one of the outstanding securities goes unnoticed until, following settlement, the seller defaults on the outstanding loan and the purchaser is threatened with repossession.
In many cases, the relevant entry has been overlooked even though the solicitor has read the search report. This type of error can be avoided if each page of the search report and/or all entries are initialled to show that they have been seen and checked. See the article “Same Old Story” (Journal, May 2005, 32) for a further discussion of the risk management issues.
Reporting to lenders
Whether or not you are familiar with a particular lender’s “standard” form of report on title, each set of instructions and each report on title should be considered individually. Even if the lender’s instructions appear to be standard or proforma, you should always consider: if clarification is required in respect of e.g. any ambiguity, unfamiliar terms etc;
whether the report can be granted in the terms demanded, or qualifications need to be attached;
how best to avoid providing commitments in respect of matters which are not within your control;
whether there is anything unduly onerous, for example a requirement to acknowledge that you owe a duty of care to carry out the work “in accordance with best practice”.
The Master Policy claims experience includes examples of claims by lenders where, following settlement of a property sale, one of the seller’s loans was redeemed but one or more other loans were overlooked. There are also one or two instances of the entire proceeds of sale being remitted to the seller as a result of oversight or communication error, the lenders being overlooked entirely.
In these situations, typically the seller has received and “spent” the free proceeds by the time the error is discovered.
Errors on redemption statements
A major insurer of solicitors’ professional indemnity cover has flagged up their experience of inaccuracies in redemption statements provided by lenders. The insurers suggest that the risk of unwittingly acting on an inaccurate redemption statement calls for: full enquiries into the client’s borrowings – some solicitors apparently have questionnaires which they require their clients to complete, providing account numbers and balances;
care in providing lenders with full details of borrowers’ names, addresses, and mortgage account details;
checking the redemption statement against information previously received.
Certificate of title issues
In the context of (potential) lender claims, as certificates of title are very much part of regular practice, it is perhaps worth mentioning/noting the following insurance cover and risk management points, in addition to the points mentioned above under the heading “Reporting to lenders”:
undertakings which constitute “classic” letters of obligations will attract a nil self-insured amount. This applies to standard undertakings (e.g. delivery of searches) granted after seeing clear searches and after making proper enquiry with regard to undisclosed securities;
certain undertakings may give rise to the application of a doubled self-insured amount (so-called “risk management deductible”) – e.g. if a warranty/undertaking is given in respect of a matter not within the solicitor’s own knowledge/control;
there is no Master Policy cover for any undertaking which constitutes a personal financial guarantee.
In some cases, lenders’ claims arise not because of any defect in the standard security, its recording or ranking but because of a defect in the title to the secured property. There are instances of the borrower’s title being reducible, and there have also been instances where the borrower has a good title but only to part of the property over which the lender expected to have a security.
Claims continue to arise out of alleged failure to acquire title to the entirety of the property clients believed they had purchased. For example, there have been cases where purchasers of residential property did not obtain title to part of their garden and where purchasers of licensed premises acquired no title to part of the car park “belonging to” the premises. Very often, these problems emerge only on the subsequent resale of the property. How do these problems arise –
misunderstanding between solicitor and client as regards the extent or boundaries of the property?
failure to examine the title properly, or to reconcile the title description with the client’s expectations?
drafting errors or omissions?
See the article “Know your boundaries” (Journal, October 2005, 32), which addresses risk management issues relating to boundary discrepancies and disputes.