Finance and Acting for Lenders — SQE1 FLK2 Property Law and Practice

Your client is buying a house with a mortgage, and you act for him and for the bank. Over the phone he mentions, in passing, that the deposit he described to the lender as savings is actually a loan from his brother-in-law. He would rather the bank did not hear about it. He is not asking you to lie. He is asking you to say nothing. What do you do? You stop acting for the bank.

That is the shape of this whole topic. Two clients on one file, and a duty to each that the other may not want performed. This is Finance and Acting for Lenders. Why you may act for both. What the lender is entitled to know. And what it needs from you before it parts with the money. Keep your client and his brother-in-law in mind.

Here is the route. First the dual role, and the conduct rule that makes it possible. Then what you owe the lender, and what happens when that collides with confidentiality. Then the Handbook and the certificate of title. Then the offer, its conditions, and the money. Then the charge itself and how priority is won and lost. And finally two boundaries you must not cross.

Start with the dual role. Almost every purchase involves a mortgage, and in residential work you will usually be asked to act for the buyer and the lender at once. Two clients, one file. The convenient answer is that it saves the client money. The examinable answer is why the conduct rules permit it at all.

They permit it because of the substantially common interest exception in paragraph 6.2(a) of the SRA Code of Conduct for Solicitors. On an ordinary purchase with a mortgage on standard terms the borrower and the lender want the same thing. Both want the buyer to obtain a good and marketable title, properly investigated, with the lender's charge validly created and registered.

Now note the framing, because this is where answers are won. You act for both because their interests are aligned, not because a conflict can be managed. If there really is a conflict, or a significant risk of one, you cannot act at all. There is no version of this where you act and simply keep the conflict under control.

And the exception is conditional. All the clients must give informed consent, given or evidenced in writing. Effective safeguards must be in place where confidential information is at risk. And you must be satisfied that it is reasonable to act for all of them. Keep it under review, because a substantially common interest can disappear in the middle of a transaction.

Which brings us to what you owe the lender, and the first thing is to take seriously that the lender is a client. You owe it care, skill and diligence. You must report anything material to the security or to the decision to lend. And you must not prefer the borrower's interests to the lender's.

So what counts as material? Incentives, discounts and cashbacks from a developer. The seller paying the buyer's costs. A deposit that is not really a deposit. A second charge in the background. A change in the purchase price. Lenders' instructions say so expressly, and a conveyancer who completes without reporting one of those is exposed.

So back to your client and his brother-in-law. You are caught between two duties. The loan is plainly material to the lender's decision, and the lender is entitled to know. But the information is your buyer's and it is confidential, so you cannot simply pass it on.

The way through is to ask the buyer to consent to disclosure. If he consents, you report it. If he refuses, you cannot go on acting for the lender while knowingly withholding something material to it. So you cease to act for the lender. And you may find you have to cease acting for him as well.

Now the lender's own rulebook. The UK Finance Mortgage Lenders' Handbook, which you will still hear called the Council of Mortgage Lenders' Handbook, sets out standard instructions. It comes in parts, and this is the bit candidates miss. Part 1 holds the general requirements that apply across participating lenders. Part 2 holds each lender's own variations. You have to read both.

What it covers is the practical spine of the file. What class of title is acceptable and how defects are handled. Which searches must be done. Buildings insurance in place before completion. Consents from adult occupiers. The pre-completion priority search. The certificate of title. And how the money is to be handled.

The certificate of title is the centre of it. It is your report to the lender, given in the standard approved form, and it is the document on which the advance is released. In substance it certifies that on completion the borrower will take a good and marketable title, and that the lender will have a first legal charge over it.

And it is a professional undertaking, not a formality. If it is inaccurate, or something material is missing from it, you can be liable to the lender for the resulting loss. Never issue one until you are satisfied with the title.

One reporting duty worth knowing by name. Standard instructions require you to tell the lender where the seller has owned the property, or been registered as proprietor, for less than six months. Rapid back-to-back sales are a recognised mortgage fraud indicator, and the report goes to the lender before exchange, not afterwards.

The mortgage offer next. It sets out the amount, the rate, the term, the fees, any early repayment charges, and the conditions precedent. It is usually valid for three to six months, and it lapses on its own terms. The lender is under no obligation to extend it, and an extension may mean fresh underwriting and a different rate.

Conditions precedent are the requirements that must be satisfied before the advance is released. Clear searches. Insurance with the lender's interest noted. Indemnity cover for a title defect. Works completed. Occupier consents signed. All of them, not most of them. Complete with one outstanding and the lender may decline to release the money, or refuse the security altogether.

So work this one out. A house at £400,000. On exchange your client paid a 10% deposit of £40,000 from her savings. Her offer is for £300,000, but the valuer found damp, and the lender is retaining £20,000 of the advance until the works are done and guaranteed. How much must she find on completion?

£80,000. The balance is the price, less what has already been paid, less what the lender will actually release. £400,000 less the £40,000 deposit, less the £280,000 net advance. And that is the sting of a retention. The borrower has to bridge the retained sum herself, and gets it back only when the works are done. Here they cannot even start until she has moved in.

A related trap is the down-valuation. A lender lends a percentage of value, not a percentage of price, and value is whatever its valuer says it is. If the valuation comes in below the agreed price the advance falls with it, and the gap lands on the buyer. Find the difference, renegotiate the price, or withdraw, but do it before exchange, because after exchange he is bound.

And when the advance arrives, remember whose money it is. It is sent to you to be held to the lender's order, and to be used only to complete the purchase it was sent for, on the completion date notified. If completion is delayed, tell the lender and deal with the advance as it directs. For anything beyond a very short delay that will normally mean sending it back.

The charge itself. A mortgage does not transfer the property to the lender, whatever clients think. The borrower keeps the legal estate. The lender takes security over it, created by deed and taking effect as a charge by way of legal mortgage under s 87 of the Law of Property Act 1925.

Why does the lender insist on a first legal charge? Because a charge is only as good as its rank. If the borrower defaults and the house is sold, the proceeds are applied to the charges in order of priority. The first charge is paid its principal, arrears, interest and costs in full before anything reaches the second. That is why second charge lending is priced so much higher.

So try another. Two charges over the same registered house. One was created in March and registered in June. The other was created in April and registered in May. Which is paid first out of the proceeds of sale? The April one.

Priority on a registered title is not the order in which the charges were created. Registered charges rank as between themselves in the order shown in the individual register, under s 48 of the LRA 2002. A charge created first but registered second loses. That single sentence answers a lot of questions.

Which is why registration is not an afterthought. The grant of a legal charge over a registered estate is a registrable disposition, and it does not operate at law until the registration requirements are met. A validly executed deed sitting in a file is the beginning of the matter, not the end. Delay, and a later entry can be registered ahead of your lender.

The protection against that is the official search with priority. It is not an information search; it is a protective device for the gap between completion and registration. It confers a priority period of thirty working days. Provided the applications to register the transfer and the charge are lodged within it, they take priority over any entry made in the meantime.

Then occupiers, which is the other way a lender's security can be undermined. Lenders require every adult occupier to sign a form consenting to the mortgage and postponing to the lender any rights they have or may acquire.

The reason is a trust. Where a partner who is not on the title contributes to the price, that contribution may give her a beneficial interest. And a person with a beneficial interest who is in actual occupation can have an interest that overrides a registered charge. Williams & Glyn's Bank v Boland, 1981, and Schedule 3 paragraph 2 of the Land Registration Act 2002.

So the form exists to make sure her occupation cannot give her rights binding the lender on an enforced sale. Note what it does not do. It does not make her a borrower, it creates no tenancy, and it does not make her a legal owner. And good practice is that she takes independent advice before signing it, precisely because she is giving up protection.

Insurance belongs in the same family of requirements. The house is the lender's security, and if it burns down uninsured the loan is left secured on a plot worth a fraction of the advance. So cover must be in place at completion, normally on a reinstatement basis, with the lender's interest noted on the policy.

Finally, two boundaries. The first is regulatory. Advising a client on the merits of entering into a particular regulated mortgage contract is a regulated activity. Carrying it on without authorisation breaches the general prohibition in s 19 of the Financial Services and Markets Act 2000.

So when your client asks which of two offers she should take, explain the legal effect of the terms, by all means. What you must not do is recommend one product over the other. That goes to an authorised financial adviser or broker, and saying so is not unhelpfulness, it is the line.

The second boundary is the valuation. The lender's valuer is instructed by the lender, for the lender's purposes, and a mortgage valuation is not a survey. Your client who wants to know about the roof should pay for a homebuyer report or a building survey.

But the valuer is not beyond reach. Smith v Eric S Bush, 1990. The House of Lords held that a valuer instructed by a lender owes a duty of care in tort to the purchaser of a modest dwelling-house. The reason is that the valuer knows perfectly well the buyer will rely on the report. And a disclaimer will not necessarily save him.

A word on how SQE1 tests this. You will not be asked to recite a section number or a case name. You get a scenario, five answers, and one instruction: pick the best. This is a practice topic, so most of it is conduct rules and lender instructions rather than case law, and there are only two case names in it worth carrying.

If you keep only three. Paragraph 6.2(a) of the SRA Code, because it is why you may act for borrower and lender at all, and it is conditional. Then s 48 of the LRA 2002, because charges rank by the register and not by the date of creation. And Williams & Glyn's Bank v Boland, because an occupier with a beneficial interest is the reason those consent forms exist.

Four traps. One: you do not act for both because the conflict is manageable. You act because there is no conflict, the interests being substantially common. Any option offering you a way to act while preferring the lender, or managing a real conflict, is wrong.

Two: confidentiality does not evaporate because the lender is also your client. You cannot report the borrower's confidential information without his consent. What you can do is decline to go on acting for the lender, and that is the answer the examiners want. Three: priority follows the register, not the deed.

Four: a retention is not a reduction in the price. The borrower still has to find the retained sum on completion and claims it back later, so the completion figure is price less deposit paid less the net advance. Then a habit for the exam. Ask who your clients are, what each is entitled to know, and whether the lender will actually release the money on the day.

Quick check. A firm is instructed by a woman buying a house for £310,000 with a £232,500 mortgage on the lender's standard terms. The lender, for which the firm acts regularly, asks the firm to act for it as well. The title is registered with no unusual features and nothing in the transaction is contentious. On what footing, if any, can the firm take both instructions?

Three candidate answers. One: it cannot, because the interests of a borrower and a lender always conflict on a purchase. Two: it can, because a mortgage on standard terms cannot give rise to a conflict of interest at all. Three: it can, because they share a substantially common interest, given informed written consent and safeguards. Pause here if you want a moment.

The answer is three. A solicitor must not act where there is a conflict of interest or a significant risk of one. But there is an exception where the clients have a substantially common interest, under paragraph 6.2(a) of the SRA Code. On an ordinary purchase on standard terms the borrower and the lender do share one. Both want a good and marketable title, properly investigated, with the charge validly created and registered.

But the exception is conditional, and that is what the third option carries. Informed consent, given or evidenced in writing. Effective safeguards where confidential information is at risk. And a judgement that it is reasonable to act for all of them. Option one fails because these interests plainly do not always conflict. Option two fails because it overstates the position: standard terms make a conflict unlikely, not impossible.

Five things to take away. One: you act for borrower and lender under the substantially common interest exception, on informed written consent, with safeguards, and only where it is reasonable. Two: the lender is a client, so anything material to the security or the decision to lend has to be reported. That is why your client's borrowed deposit ended the joint retainer.

Three: the certificate of title is the document the advance is released on, and it is a professional undertaking you can be sued on. Four: charges rank in the order shown in the register, under s 48 of the LRA 2002. A charge created first but registered second loses, and the priority search protects the gap.

Five: a retention has to be bridged by the borrower, and advising on which mortgage product to take is a regulated activity that you refer out. Next time, Contracts and Exchange.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.