Lending a hand

The first four months of my articles of clerkship were spent in my firm’s litigation department, mostly sitting with counsel or attending the magistrates’ court accompanying one of the firm’s advocates, and occasionally doing some advocacy before the registrar in the local county court. It was not overly taxing, and I was suitably horrified to be told that the firm needed some help in the conveyancing department, and I would be transferring forthwith.

There was a feeling among some lenders that solicitors did not always read part 2 of the handbook, which often provides an answer to the question being raised in correspondence

However, conveyancing in those days was a comparatively straightforward process. Clients were told that completion would take place 28 days after exchange, and didn’t argue. Lenders’ instructions were usually limited to a single sheet of paper, and the fees charged made the work profitable.

I learned – through the great patience of the senior conveyancing partner – that when we were acting for a buyer who was obtaining a mortgage, we would, as an adjunct, get the mortgage deed signed, send off a request for the mortgage advance, and then register the mortgage at the same time as the transfer. We didn’t (at that time) charge the client an additional fee for “acting for your mortgage lender”. We rarely corresponded with the lender other than to request the mortgage advance and send off the title deeds once the matter had been completed and registered. We made an informed decision as to whether the title was satisfactory, and on the rare occasions where it wasn’t, obtained a bespoke defective title indemnity policy.

I also learned that if the price of a property was to be reduced, perhaps to reflect the cost of necessary works to the property, one sought to obtain an ‘allowance’ at completion, rather than an actual reduction which would necessitate telling the lender, and possibly triggering a reduction in the mortgage advance. A subtle distinction, and not one that I suspect a lender would accept – certainly not today.

By contrast, at a roundtable summit held in April at Chancery Lane, with representatives of the Law Society’s Property Section and Conveyancing and Land Law Committee, and six of the major lenders (between them representing over 50% of the current mortgage market), we heard that one lender receives around 500 letters a day reporting a variety of different matters and seeking the lender’s authority to proceed with the mortgage. Invariably, this resulted in an exchange of correspondence over a period of time, resulting in additional work for both lender and solicitor, a delay to the transaction, and frustration to all involved.

Why have things changed so much, and how can solicitors and lenders work better together to make the process quicker and simpler?

The historical context

The amount of regulation and legislation relating to residential property has increased enormously over the last 40 years, making the conveyancing process far more complicated, and the risk to the conveyancer significantly greater.

Some lenders, like some solicitors, are not as good as others! 

Solicitors remember the conveyancing boom of the late 1980s, when the price of property in some areas increased on a weekly basis. Such a bull market could not continue, but lenders continued to advance high percentages of the purchase price. The subsequent market collapse in the early 1990s resulted in many homeowners having negative equity and being unable to move house. Properties were repossessed and sold, but the proceeds of sale were insufficient to clear the outstanding mortgage. Lenders sought to recover their losses by trawling through solicitors’ files, and in some cases, seeking compensation on the basis that if the solicitor had drawn the lender’s attention to a particular point, the loan would not have been made.

The result, of course, was that solicitors subsequently sought to cover themselves by reporting every minor defect to the lender, which brings us to the present situation in which there is an understandable reluctance to make a judgement call, even on matters that can have no significant impact on the value of a property.

Insofar as the (then CML, now UK Finance Mortgage Lenders’) Handbook, introduced in July 1999, was intended to reduce the number of referrals back to the lender by providing specific instructions on what to do in certain situations, it would no longer seem to be fit for purpose. The availability of information relevant to a property is far greater today than it was 20 years ago, creating uncertainty as to what a lender should be told, with conveyancers inevitably erring on the side of caution.

How can lenders and solicitors work better together?

At the summit, we sought to identify areas where a greater understanding of each other’s position might improve the process and save time.

Understanding what a lender wants to know

Does the lender really want to know that there is no FENSA certificate for the new front door that has been fitted and is more than 50% glazed? Would the lender insist on an indemnity policy? From our meeting with lenders, the answer would seem to be no, as there is no material impact on the value of the property. But conveyancers will be concerned that the lender’s view might be different if they had to repossess the property, and then sold it at a loss. Could lenders be more specific in identifying those matters that they do not need to be notified about?

Advising the lender as our client

Where it is necessary to refer a matter to a lender, we need to remember that they are our client as well as the buyer. If the property being purchased has an extension built 10 years ago for which planning permission had been obtained but building regulation approval had not, we would no doubt advise the buyer that although the enforcement period during which the local authority (LA) could bring enforcement action has passed, there would still be a risk (albeit a very small one) that the LA could bring injunctive proceedings under section 36(6) of the Building Act 1984 (Cottingham and Cottingham v Attey Bower & Jones [2000] PNLR 557). You might mention the availability of an indemnity policy to protect against such a risk, but explain to the client that the main issue is whether or not the extension has been properly built, and the client should seek guidance from their surveyor in this respect. Lenders expect to be similarly advised.

A letter merely reporting the existence of the extension and the lack of building regulation approval will simply result in a response asking the solicitor to give advice. The person dealing with the correspondence may be aware of the issue, but will not have the necessary knowledge to determine the seriousness of the matter or the appropriate remedial steps to take.

Accurate valuations

The number of referrals back to lenders could also be reduced if mortgage offers were not issued on the basis of a valuer’s assumptions.

The assumption that a lease has at least 85 years remaining may comply with the Royal Institute for Chartered Surveyors’ Red Book in carrying out the valuation, but it only generates work for others and causes delay if the lease is shorter.

The UK Finance Mortgage Lenders’ Handbook (paragraph 5.14.9) requires conveyancers to ensure that “the amount of the increased ground rent is fixed or can be readily established and is reasonable” and that “if you consider any increase in the ground rent may materially affect the value of the property, you must report this to us”. We are lawyers, not valuers. Isn’t it time that the valuer valued the property on the basis of the actual terms of the lease, and if a lender relies on a desk-based valuation without any inspection of the property, that they obtain the necessary information themselves?

Specific instructions

Some lenders, notably Nationwide, are now using part 2 (section 5.14.1) to set out specific examples of what is and what is not acceptable. Perhaps others might consider copying their example?

Other lenders have attempted to reduce referrals by adding specific instructions to the mortgage offer, for example to say that they were aware of a parental gift. They still found, however, that they received correspondence on the point. The suggestion was that solicitors had not properly read their instructions, but equally, the wording may not have been specific, and the solicitors might have considered the instruction ambiguous and were seeking clarification as a result. In such a case, the solicitor needs to make it clear that they have noted what has been said, but for a particular reason, still wish to draw it to the lender’s attention – such as that the gifted deposit is not coming from the parents, but from grandparents.

There was a feeling among some lenders that solicitors did not always read part 2 of the handbook, which often provides an answer to the question being raised in correspondence.

Other thoughts

The restriction on sole practitioners and small firms acting for some lenders or in mortgages over a specific figure was discussed. It was accepted that in some cases, this might be because of fears of greater risk, but that the risk assessment might no longer be accurate.

Lenders also noted a continuing problem with buyers being scammed into sending money to criminals rather than to their solicitors.

The roundtable was positive, with both sides keen to recognise pinch points in the process and identify ways in which, by working together, we can save each other time and money by reducing or eliminating unnecessary delays.

We will be holding another roundtable event later this month. We will be discussing a number of common issues solicitors experience with lenders, but we also want to identify and recognise things specific lenders do particularly well. Some lenders, like some solicitors, are not as good as others! A constructive dialogue will hopefully enable those on both sides to recognise how each can improve, and take steps to do so.