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Missives in motion

12 December 11

A new edition of the Combined Standard Clauses for Edinburgh and Glasgow solicitors has been produced only two years after the initial version, to keep up with the ever-changing legal picture (fuller article)

by Robert Rennie, Stewart Brymer

You may be wondering just why it is necessary for there to be a second edition of the combined standard clauses so quickly. I suppose the answer is that with a standard form it is important to adapt it to take account of changes not just in practice but also in the law itself.

There are an increasing number of cases coming before the courts in relation to conveyancing and property law matters. You only need to look at Gretton and Reid’s yearly book to get a feel for the pace of change.

The most recent change to the standard clauses comes, for example, from the sheriff court case of Fullerton v Smith 2011 GWD 25-567, a case which concerned the two year period in a non-supersession clause and the date from which it ran. There have also been difficulties surrounding the rescission provisions in relation to dissatisfaction with title. The original Combined Standard Clauses provide a time limit within which a purchaser has to take objection to the title. If the purchaser does not, he or she cannot rescind, but is that the same as saying he can be forced to proceed if there is indeed something wrong with the title?

It is likely that in the future, as we become more litigious, there will be more cases and therefore the need to look at the Combined Standard Clauses again.

As before, changes to the Combined Standard Clauses were submitted to four professors, Professors Brymer, Paisley, Reid and Rennie (in alphabetical order). Two of these professors are full time academics and two are still in practice. The professors do not generally speaking suggest how matters in practice should be handled; this is best left to those who practice full time in residential conveyancing. What the professors did as part of their review was to comment on legal points and possible legal difficulties arising from wording used on the basis that it is better to get the wording right before an expensive litigation.

The following are the changes proposed. Some require little or no comment, but others are more complex.

CSC 4: Development

This is quite a tricky clause. Everyone knows what it is meant to cover. The original wording applied to any development which had not been completed, or in respect of which the planning permission granted had lapsed or had been refused. This was not clear and these words are deleted. The new clause is a warranty that the seller has not himself or herself served nor been served nor received any neighbour notification in respect of planning permission for any development. However, the warranty does not apply in three situations:
(a) where the development is completed, so will normally be visible;
(b) where a planning permission has lapsed, and therefore strictly speaking does not exist and a fresh application would be necessary; or
(c) where an application for planning consent has been refused or withdrawn.
In other words, the warranty only applies to a live planning permission where the development has not been completed.

There was a point which was raised by the professors in relation to this clause, and that was that it had no teeth. What precisely was the purchaser’s remedy if indeed there had been neighbour notification in respect of any development? The clause as previously drafted and as now proposed does not state, for example, that the purchaser will be entitled to rescind. But then that would hardly be reasonable. Supposing there was neighbour notification in respect of a new house across the street on a vacant site. Should a purchaser simply be able to rescind even if the new house was a perfectly reasonable structure which would have absolutely no effect on the value of the house being purchased?

People of course can be picky, and moreover, in times of recession purchasers can also look for reasons to rescind which are entirely artificial. The view was taken therefore that the clause should be left as an information clause only. What would a purchaser’s rights be? A warranty might result in a breach of contract claim for damages, but then what would the damages be in the case of a perfectly normal bungalow across the road as opposed to a sewage farm next door? The difficulty of course in framing Combined Standard Clauses is that they have in some way to reflect what a reasonable purchaser is entitled to expect and also what a reasonable seller would be expected to give. This is not easy.

CSC 6: Property management and factors

The professors raised the question as to whether or not clause 6 should be made an “essential” or “material” condition of the missives. Breach of a material condition allows the party not in breach to rescind as well as claim damages. The view was taken not to add these words. That of course is not to say that a party might not argue that it is a material condition, but it would be an argument which had to be made. Again this reflects the difficulty of treading the middle line between seller and purchaser in respect of matters where there can be a genuine difference of opinion, or where one party might seek simply to use a clause for the wrong reason. What are, for example, “major repairs proposed”? What if the top flat proprietor proposes some ludicrous but vastly expensive repair which has no chance of winning majority approval within a tenement? Is that a proposal? A question for another day perhaps.

What we can say is that while the CSC do not define materiality, the authors are of the view that this would probably depend on whether any proposed repairs were “major”, and that most practitioners would be able to judge, in the particular circumstances, what was, or was not, major.

CSC 13: Breach of contract by purchaser

This is the much vexed and litigated so-called penalty, or liquidated damages, or interest, or “call it what you will” clause. Mercifully you will be glad to know that there are no changes, although something needs to be said later about the remedies for breach of missives by the purchaser.

CSC 14: New home warranty schemes

The addition here is to allow a professional consultant’s certificate with other necessary information and compliance with the CML Lenders Handbook to be produced instead of an NHBC guarantee. It goes without saying of course that NHBC, or indeed any other documentation or certification, has to be checked.

Professor Rennie has recently come across instances with the Zurich protection scheme where they have split their guarantee between the flat itself and the common parts. (Zurich, of course, no longer provides such cover.) In that case, Zurich gave a guarantee only on the flat with the words “excluding common parts”. This has caused a problem because the builder (now in administration) has apparently not carried out conversion works necessary to the common parts and more especially the common roof. Costs are estimated in six figures.

There is also a rather frightening English case on this point, Rickards v Jones [2002] EWCA 1334; [2003] PNLR 13. This was a Court of Appeal decision. The court held that a solicitor does not come up to the required standard of care where he or she does not obtain confirmation that the builder was duly registered with the NHBC, even if there is NHBC documentation, if subsequently the builder ceases to be registered. The documentation offered by that builder is valueless. The facts are slightly worrying. The builder had forwarded NHBC documentation in respect of the house to the purchaser’s solicitors. The house had already been completed. The solicitors then sent the completed paperwork to the NHBC after settlement, and received a response that the builder had ceased to be a member of the scheme.

One might have thought that if a builder forwarded prima facie valid NHBC documentation, a solicitor was entitled to assume that the builder was still in the scheme. One of the difficulties in the case was that the house in question had already been completed and so one might have expected that there should be an NHBC certificate in place, although the builder was the seller. The judge at first instance held that the solicitor was entitled to believe that the NHBC was bound. The Court of Appeal reversed this decision, although it did appear to me when I read it that the defending solicitor was not a good witness. One of the judges stated that it was clear that he only had “the vaguest idea” of what was involved in or in accepting NHBC cover.

In another recent case, a solicitor had checked the NHBC website and it showed the builder as being registered (good practice). When he presented the application post-settlement, it transpired that the builder had been “de-registered” in the intervening period. After an examination, it turned out that it was another builder trading under a similar name that had been de-registered, so there was no problem. It was a nervous time, however.

There is, of course, an intention to move to the ability to check online whether or not a property has the benefit of NHBC cover. This was highlighted at Journal, September 2011, 33. This and other changes were prompted by independent research carried out by NHBC, which allegedly indicated that many conveyancers were not checking that homes have the benefit of cover before conclusion of missives, as required by the CML Lenders Handbook.

CSC 15: Title conditions

The amendments proposed to this clause perhaps merit the most discussion. Clause 15.1(e), as it now stands, contains an addition which makes it clear that if the purchaser does not exercise the right to resile within 10 working days of receipt of the titles, then the purchaser is deemed satisfied with the title and the seller is deemed not to be in breach. Previously the clause stopped short, simply saying that the purchaser’s sole right was to resile following intimation of intention within the 10 days.

The clause did not cater for the possibility that there was a defect in the title which the purchaser’s solicitor did not notice and no intimation of rescission was made within the 10 day period. The assumption was that the purchaser would be bound to proceed. However, the law of contract contains many rules, one of which is known as the mutuality principle. What that means is that if party A to a contract is in breach of that contract then he or she cannot compel party B to that contract to perform.

The best example of this in conveyancing terms is the now old case of Bowie v Semple’s Executors 1978 SLT (Sh Ct) 9 (Cusine & Rennie, Missives (3rd ed), 4.20; 8.09; 8.19; 8.22). What happened in the case was that the seller tried to force the purchaser to take entry to the property on payment of a deposit with a liability to pay interest thereafter. This would have been reasonably common practice at the time. The reason for the delay in settlement was that there was a strike of civil servants and this included the sheriff clerks. The sellers were executors but they did not have confirmation. Accordingly, strictly speaking they could not produce a title to sell. In the circumstances, they raised an action against the purchaser to force the issue and the sheriff quite properly held that since the sellers could not produce a title, they could not force the purchaser to take entry or to pay anything, nor was the purchaser liable for any interest.

Both Professors Rennie and Brymer (not in alphabetical order this time) have in recent months been asked for opinions in relation to the old clause 15. Both professors came to the view, quite independently, that if the defect in the title amounted to a breach of contract by the seller, then although the purchaser was barred from resiling, or more properly rescinding the missives if notice was not given timeously, that did not mean that the seller could bring an action of implement to force the purchaser to pay. In other words, there was the possibility of a Mexican stand-off. For this reason, the new clause provides that failing exercise of the right to resile, the purchaser will be deemed to be satisfied as to the position and the seller shall be deemed not to be in breach.

There is also a change to clause 15 in relation to servitudes. Servitudes are an overriding interest. The old clause provided that there were no unusual, unduly onerous or restrictive burdens, conditions, servitudes or overriding interests within the meaning of s 28(1) of the Land Registration (Scotland) Act 1979. It was felt, given the long list that there now is of overriding interests, that this was too onerous as a warranty or condition. Accordingly, overriding interests are taken out of the new clause 15.1(c), but a new clause 15.2 in relation to awareness of servitudes or overriding interests is inserted. Accordingly, the seller would have to be aware of the existence of such interests before there is a breach.

CSC 18: Risk

This deals with risk and insurance. The words “the Date of Settlement” are replaced by the words “the time at which settlement takes place”, because of the worry of what they might mean in a legal context. This is a problem highlighted by an unreported case from Dundee Sheriff Court, where the sheriff applied a technical definition of the date of entry – that where it is stated that risk passes on the date of entry, this is deemed to be 12:01 am on the defined date in the missives, and not the actual date when entry was taken.

The problem in practice, of course, was that many practitioners would anticipate that risk passes at the moment of exchange of keys. Accordingly, the new wording for clause 18 binds the seller to maintain the property and the risk until the time at which settlement takes place. There could of course be reasons, legitimate reasons, for delays in settlement. It might be that the seller’s title had a problem, or some documentation was not available. One might argue, one supposes, that it would be unfair to force a seller to maintain insurance and keep the risk of the property in a situation where the purchaser can’t or won’t pay on the date of entry in terms of the missives. However, no seller would want to cancel insurance in these circumstances. There is also the evidential issue in theory, but that is clearly preferable to the suggestion that risk would pass early that morning before the purchaser had even taken entry, or indeed before the transaction had actually settled.

CSC 19: Property enquiry certificate

The words which have been added mirror the words added in clause 15. It is now provided that if a purchaser does not resile within the 10 working days of receipt of a property enquiry certificate, then the purchaser will be deemed satisfied as to the position and the seller shall be deemed not to be in breach.

CSC 20: Coal Authority report

In relation to the Coal Authority report and the 10 day period there, there is a similar addition binding the purchaser to proceed.

CSC 22: Supersession of missives

The alteration here is to make the period of two years run from the date of settlement. The point of this is to cover the situation where the two years runs from the date of entry, as that date is expressed in the missives.

Professor Rennie has recently had to give an opinion in a situation where a purchaser defaulted in payment and the seller then rescinded and put the property back on the market. Market conditions in the particular area were very poor and the property did not sell. The house was taken off the market to rest and then put back on. There had been attempts to settle after the contractual date of entry and it was a number of months before the seller rescinded. With the original delay before rescission, the time taken initially to market, the rest period and the final marketing spurt, more than two years elapsed from the contractual date of entry until the property was sold and the damages could be calculated. The question was that if the missives were truly dead, could even a damages claim be mounted after the two year period? The opinion Professor Rennie gave was to the effect that the damages claim was not competent.

This was also the decision in Fullerton v Smith, although the facts were different in that case. There was a claim for damages for failure to pay the purchase price timeously. The missives provided for a date of entry of 4 July 2008, but settlement did not take place and the purchase price was not paid until 28 November 2008. The date of entry was not amended as such, although there was correspondence between the parties in which the sellers indicated that they were reserving their right to recover losses for the delay. The sellers served an action for damages as a result of the delay on 24 November 2010, less than two years after entry was actually taken but more than two years after the date of entry provided for in the missives. The sellers claimed that the date of entry had been changed. The sheriff held that it had not, because the phrase “date of entry” had a technical as well as a practical meaning. He therefore held that the proceedings should have been raised by 3 July 2010 and the seller was time barred.

CSC 26: Minimum period of ownership

This change reflects a provision which a number of solicitors are already utilising to reflect the terms of the CML Handbook, i.e. a warranty that the seller has owned the property for at least six months prior to the date of the offer. The wording reflects the terms of the CML Handbook, and no attempt has been made to interpret the semantics of what the word “owned” actually means!

Miscellaneous

(1) Users will also note that there is now consistency in way in which numbers are referred to. Previously, there was a mixture of words and numbers. It was decided to opt for figures in the revised edition.

(2) Although the professors made comment about the interpretation clause being at the end of the Combined Standard Clauses rather than at the beginning, a decision was made to leave the provision where it was (clause 27). Perhaps that comment says more about the professors!

(3) A matter discussed but not included in this revised version is the often vexed question of planning use restrictions. Such restrictions, e.g. agricultural occupancy conditions, usually appear in registered s 75 agreements and may only appear in planning permissions. Consequently, it may be impossible for a purchaser or his/her solicitor to identify that the use restriction exists. It is very unlikely that such restrictions will be noted in the property enquiry certificate. An approach might be made to the providers of PECs to ascertain whether it is possible to have a way through which such conditions might automatically appear in the local authority databases and thus in PECs. That is probably not going to be possible, however, and it is likely that this unfortunate gap in the process will remain unfilled, unless and until we have a central electronic property information database which can be uniformly searched for all information relative to a particular property in the context of the neighbourhood in which it is located. See www.unifiscotland.com

Future revision

It is inevitable that as law and practice develop, it will be necessary to review the Combined Standard Clauses – especially since society as a whole is much more litigious these days. It is recommended that there be a formal annual review as a matter of course, although it is accepted that the review process is, in essence, an ongoing job as the law develops.

A structured review process would hopefully also capture any changes introduced as a result of the aforementioned CML Handbook. In many instances, the obligations imposed in the Handbook are higher than those sought by the purchaser in the missives. This could result in a gap, and it is essential from a professional practice perspective that the purchaser/borrower’s solicitor is not left caught in the middle between what the purchaser is contractually entitled to receive in terms of the CSCs, and the obligation that the solicitor agrees to as a matter of contract under the CML Handbook.

For as long as there is no rule against a solicitor acting for both borrower and lender, such a risk is a reality. It may, however, be the case that such a risk will always be present even if the parties, who, in truth, have diametrically opposed interests, were to be separately represented. In such an eventuality, the lender’s solicitor is likely to require that the borrower’s solicitor grant a certificate on title. It is perhaps sufficient at this point in time to flag the issue as meriting attention some time soon. So-called “liability creep” is on the rise.

The committee behind the review of the Combined Standard Clauses is to be commended for all the hard work that they put in on this very important subject. They proved the doubters wrong when they produced the first edition as a collaboration between Edinburgh and Glasgow solicitors. It is inevitable that there will be more standardisation as we move towards electronic missives, which themselves will soon be a reality once the Land Registration (Scotland) Bill has been enacted and appropriate safeguards are in place to deal with the use of digital signatures. Once again, another subject for another day – some time soon!

Robert Rennie, Harper Macleod LLP and University of Glasgow

Stewart Brymer, Brymer Legal Ltd and University of Dundee

 

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