System in chains
Why there are still advantages to using standard missives for residential property, despite the effects of the recession in giving rise to chains of transactions
The Scottish missive system was once lauded as being swift and sure. In theory (if not in practice), parties could enter into a legally binding contract within hours, or at least days, by submitting a written offer which was then met with a written acceptance.
This compared favourably to the English system whereby, although parties might agree terms in principle, they did not become legally bound until “contracts were exchanged” (typically only a few days before the intended completion date). Because no legally binding contract was in place, parties were free to change their minds or withdraw altogether. Gazumping and gazundering (almost unknown in Scotland) were rife, and prior to the introduction of HIPS (home information packs) in 2007, it was reckoned that one in three deals fell through before completion.
In 2010, the coalition Government scrapped the compulsory use of HIPS. The provision of pre-purchase information had had no impact on the number of transactions failing. The risk of transactions failing in England prior to “exchange” remains high. The worry in Scotland is that we now operate under the English system by default.
One of the main aims of the Combined Standard Missives and Clauses was and is to conclude the missives as soon as possible, with either a straight acceptance of the offer or hopefully not more than one qualified acceptance before final acceptance.
Due to matters that are outwith the control of the legal profession that aim is now only an aim and not realistic at the present time. One of the main problems with early conclusion of the missives is that lending decisions are very slow and loan instructions are not being processed with speed by lenders. Buyers and their solicitors are wary of concluding missives until they know the buyer has an offer of loan or at least an offer of loan in principle.
Prior to the recession, buyers would often act on the strength of a “nod” from the lender, but when the recession came, some “nods” were withdrawn because of new lending criteria, creating uncertainty and lack of confidence in buyers to predict whether they would be granted a loan. Solicitors now find it necessary to urge caution on buyers to obtain a definite offer of loan, or an offer of loan in principle, before concluding missives.
Another cause of delay is that before the recession, purchasers were “purchase driven”, buying the property they wanted and then marketing their own house, knowing it would very likely sell without a problem. Now, most buyers will not wish to take that chance and will not conclude missives for a purchase until they have sold their own house (“sale driven”).
On the table
These factors have led to a Scottish missive chain. Here is how such a chain works.
A purchaser (P1) cannot conclude missives with the seller (S1) because P1 has no offer of loan. S1 cannot enter missives for purchase with S2 till his sale to P1 is concluded and S1’s offer of loan issued, and so on up the chain.
Standard missives are still helpful as, if an offer is submitted in the Combined Standard Clauses style, it is now possible that you could receive a straight acceptance. This has forced purchasing clients to be more “upfront” with the seller, as the buyer needs to add clauses to their offer to state whether the offer is subject to (1) survey, (2) a loan, or (3) conclusion of missives for the sale of their own property. These clauses, being non-standard are easy to spot in the offer.
They ensure frankness by a purchaser who cannot risk concluding missives without inserting these additional and conditional clauses. From a seller’s point of view there is now much greater transparency regarding the purchaser’s position. A seller can see exactly what the problem is.
Combined standard missives still do assist more straightforward conclusion of missives, with few of the delays caused under the old system by non-standard missives. Speed and ease of conclusion of missives can follow if and when a buyer has their offer of loan and a sale of their own house tied up. Standard clauses with which both the solicitor and client are familiar remain enormous benefits.
Ian C Ferguson, Mitchells Roberton, and Paul Carnan, Blaney Carnan. The authors write as members of the Standard Missives Joint Working Party of the Edinburgh Conveyancers Forum and the Royal Faculty of Procurators in Glasgow