Header graphic for print
Keeping It Real Estate News and Trends in UK Real Estate, Disputes and Planning Law
Posted in Real Estate News

A common approach for discharging mortgages?

Earlier this week, the City of London Law Society issued a new Protocol for discharging mortgages of commercial property but will this mean a common approach for all commercial property transactions?

Historically, commercial property transactions do not benefit from the Law Society endorsed code of practice that relates to residential properties.  Instead, where a transaction involves mortgaged property, there is a chicken and egg scenario that needs to be resolved each time: the buyer does not want to release the sale proceeds before the mortgage has been discharged and the seller’s bank does not want to discharge the mortgage (or release the title deeds) until it has the redemption monies.  The scenario is complicated further if the buyer also intends to mortgage the property.

The solution is often a series of tortuous completion mechanics and undertakings which need to be negotiated by the lawyers from scratch for every transaction.  The new Protocol includes draft contract provisions as well as draft undertakings, which the seller’s solicitors give to their client’s bank, the buyer’s solicitor and (if appropriate) to the buyer’s bank’s solicitors.

The Land Law Committee of the City of London Law Society has designed the Protocol as a “best practice” guide.  It is not compulsory but it sets out the steps which the Committee consider to be “appropriate and fair to all parties”. It is for the parties themselves to decide on a case by case basis whether to adopt the Protocol or whether to adopt it with variations.

The Financial Law Committee of the City of London Law Society and the Association of Property Lenders have both been consulted in devising the Protocol, so it is to be hoped that banks and their solicitors will agree to adopt it.  However, the “preferred” scenario presented in the Protocol involves the mortgage release being signed by the seller’s bank and sent to the seller’s solicitor before completion.  It also assumes that the seller’s bank will unconditionally release the mortgage release when the seller’s solicitor is holding the redemption money, but before it has been received by the bank itself.  Anecdotal evidence suggests that these two key steps may not be agreed by the seller’s bank in practice.

In recognition of this, the new Protocol includes an “alternative” scenario in which the completion monies are split between the redemption monies which are to be sent to the bank’s solicitors and the rest of the money which is to be sent to the seller’s solicitors.  The buyer relies on an undertaking from the bank’s solicitor to send the mortgage release following completion.  It remains to be seen whether the alternative scenario will in fact be the banks’ preferred scenario.  It also fails to overcome the problem of banks who rely on in-house non-legal staff (who cannot provide legally binding undertakings) to process discharges rather than the appointment of external or even in-house solicitors.

The new Protocol is welcome news for owners of commercial property as well as their lawyers.  If it becomes widely adopted, protracted negotiations of completion mechanics can be short-circuited, which should speed up the transaction process and re-direct focus appropriately.  Unfortunately the uptake depends rather more on a change in attitude from the banks which, to date, have shown little sign of changing their practices.