Classic letters of obligation

by Lionel Most

Master Policy insurers have agreed a slight relaxation to the conditions which have to be satisfied before letters of obligation are treated as “classic” letters of obligation

The Journal, October 2002, page 12

As from 1st November 2002 the Master Policy Insurers have agreed to a slight relaxation in the conditions which have to be satisfied before letters of obligation are treated for Master Policy purposes as ‘classic’ letters of obligation. Any claim arising out of the granting of a letter of obligation which satisfies all the relevant conditions and qualifies as a ‘classic’ letter of obligation is (a) disregarded for future Master Policy premium discount/loading purposes and (b) is subject to a Nil self-insured amount contribution (excess).

The relaxation agreed by the Master Policy insurers is an extension of the maximum period of the time limit proviso which must qualify letters of obligation if they are to be regarded as ‘classic’. The extension is from the previous maximum period of 14 days from the date of settlement to a maximum period of 21 days.

The need for this extension has come about primarily because practitioners are finding that the Stamp Office is taking longer to stamp deeds and sometimes with holiday periods the Registers are taking longer to receipt Forms 4.

The extension is to take account of these external factors and is not intended to encourage practitioners to be slower in the presentation of documents for stamping or registration. It is important that all practical steps are taken to avoid the risk of claims arising out of the granting of letters of obligation and that includes using best endeavours to have documents presented as quickly as possible following settlement.

None of the other ‘classic’ conditions have been altered. For a letter of obligation to be treated as ‘classic’, it must be restricted to standard undertakings only – these comprise covering the “gap” period in the search and obliging the granting solicitor to deliver, as appropriate, a discharge and/or a feu duty redemption receipt (subject to the further conditions below).

In addition, there are four pre-requisites which are as follows:

A search must have been carried out “immediately prior to settlement” including in Sasine cases a search in the computerised presentment book and the search must be clear;
Proper enquiry must have been made of the client regarding any outstanding security or other matter which might adversely affect the search;
The granter of the letter of obligation must be unaware of any other security or other matter which might adversely affect the search;
The granter of the letter of obligation must have (control of) sufficient funds to pay the loan and/or the redemption of feu duty as the case may be (and must know the identity and whereabouts of the party entitled to the redemption money).

The Council of Mortgage Lenders require a search to be dated no more than 3 days prior to the date of entry. For the purposes of the letter of obligation the Conveyancing Committee consider that such a search falls within the meaning of “immediately prior to settlement”.

This welcome relaxation by the Master Policy Insurers will assist us all, as Professor Henry said in 1959, as “the lubricant to oil, the settlement of a transaction”.

Note: The foregoing comments represent merely a summary of the ‘classic’ letter of obligation definition and conditions. For the full text, please refer to the Certificate of Insurance issued to your practice at each annual renewal of Master Policy cover.

Lionel Most, Member of the Conveyancing Committee. (Written in consultation with Marsh)