On completion of a property transaction, the buyer will need to be satisfied that any existing charges over the property have been or will be discharged. In theory the buyer will want to see the charges discharged before parting with the purchase money. However, this can be tricky if the seller plans to use the proceeds of sale to discharge outstanding charges because lenders generally refuse to execute discharges before being paid.
The legal profession has found a practical solution to this problem. On completion, the seller’s solicitor will provide the buyer’s solicitor with a written undertaking to redeem any outstanding mortgages, and to forward the requisite discharges when they are received. Such undertakings play a key part in conveyancing transactions because solicitors are required to fulfil undertakings given in the course of practice.
None the less, the giving and receiving of undertakings is not without risk. The risk in giving an undertaking is that a misunderstanding or dispute may arise concerning the amount required to redeem a mortgage. The risk involved in accepting an undertaking is that the seller’s solicitor may fail to keep its promise.
Angel Solicitors v Jenkins O’Dowd & Barth [2009] EWHC 46 (Ch); [2009] PLSCS 17 demonstrates the dangers of: (i) giving an undertaking without first having obtained a redemption statement; (ii) failing to secure an agreement that the lender will release the property on payment of a specified sum where the property is the subject of an all moneys charge to secure a loan that exceeds of the value of the property being sold; (iii) any delays in paying over the sums required to redeem the charges following the completion of a sale.
In Angel, the seller’s solicitor accepted that it was liable to comply with undertakings given in the course of the sale of three properties, but disputed the amount that they were liable to pay. It argued that, before the credit crunch, banks were willing to accept 70% of the proceeds of sale of a property to discharge an all-moneys charge (as opposed to the 100% now being demanded), and that lenders should not be entitled to require payment of a higher sum. The High Court upheld the buyer’s claim. The judge ordered the seller’s solicitor to comply with its undertaking, and refused to impose a redemption figure on the mortgagees simply because they might have been prepared to accept a lesser sum had they been asked to do so before the properties were sold.
The Law Society has recently issued a guidance note reminding solicitors that they must honour undertakings to pay money despite the current banking crisis and, following queries about their acceptability, discouraging solicitors from offering qualified undertakings to discharge residential mortgages. Indeed, it is difficult to envisage that any buyer would part with purchase money, or that any lender would advance a loan, without having received satisfactory assurances that any existing charges have been, or will be, discharged.
Allyson Colby is a property law consultant
