Ensuring you have an undertaking

Alan Riley of PropertyPSL Ltd looks at the recent case of Nationwide Building Society v Davisons (a firm) (2012) Ch Div 24 April and discusses the importance of ensuring you have an undertaking.  This article was first published on http://www.propertypsl.co.uk/ and we are grateful to Alan for allowing us to republish this.
How does a buyer’s conveyancer complete a property transaction where a seller’s mortgage remains to be discharged? If a mortgage discharge is not available at completion, standard practice is to rely upon solicitors’ undertakings. In many cases, in advance of completion, the buyer’s conveyancer will use form STER, which asks the seller’s solicitor to supply a list of all mortgages and other financial charges affecting the property (the Charges), to confirm that all the Charges are to be discharged on completion, to confirm that the purchase money be sufficient to discharge all the Charges, and, if discharges will not be available on completion, to supply drafts of any undertakings proposed in respect of the discharges.
Completion may take place through the post, in which case the undertaking itself may not actually arrive until the completion paperwork arrives shortly after completion. But what if the undertaking does not arrive? Solicitors will normally be comforted by having adopted the Law Society’s Code for Completion by Post which states (at paragraph 11(ii)) that: “When completing, the seller’s solicitor undertakes…to redeem or obtain discharges for every mortgage, charge or other financial incumbrance specified [in writing to the buyer’s solicitor before completion] so far as it relates to the property which has not already been redeemed or discharged.” 
However, in the recent case of Nationwide Building Society v Davisons (a firm) (2012) Ch. Div 24 April, the court did not think that the adoption of the Code for Completion by Post automatically resulted in an undertaking to discharge a charge. The judge said: “Had the Law Society intended that mere adoption of the Code should supplant the need for undertakings to be given separately and clearly, it would have said so in the Code itself and expressly incorporated the forms of such undertaking.” The judge continued: “It was insufficient for [the defendant firm] to proceed, as in my judgment [it] did, without clearly worded undertakings on these matters, and assume, as [it] did, that because the Code for completion by post meant that undertakings had to be given, [it] had them already.”
This is surprising, since the Code for Completion applicable at the time said (and still says) in its notes: “As with the Law Society’s formulae for exchange of contracts by telephone and fax, the code embodies professional undertakings and is only recommended for adoption between solicitors and licensed conveyancers.”
The law firm was held, therefore, to have acted unreasonably in falling back in reliance upon the Code when it had not extracted a separate written undertaking. This was significant, since the seller’s “solicitor” was a fraudster, the claim against the law firm was for breach of trust (i.e. parting with mortgage advance money in completion of a non-existent fraudulent purchase transaction), and relief under section 61 Trustee Act 1925 in breach of trust cases will only exonerate a person from liability if he/she has acted honestly and reasonably, and ought fairly to be excused for the breach of trust. There was no dishonesty here, and not a lot of unreasonableness, but relief was denied. The firm is believed to be considering an appeal.
The lawyer who has applied best practice procedures throughout should be comforted: “The careful, conscientious and thorough solicitor, who conducts the transaction by the book and acts honestly and reasonably in relation to it in all respects but still does not discover the fraud, may still be held to have been in breach of trust for innocently parting with the loan money to a fraudster. He is, however, likely to be treated mercifully by the court on his section 61 application.” Lloyds TSB Bank Plc v Markandan & Uddin (A Firm) [2012] EWCA Civ 65. However, departures from best practice may expose a lawyer to liability.
In the light of this case, safest practice must therefore involve insisting upon having a formal written Law Society recommended form of undertaking in your possession before parting with or releasing the mortgage advance.
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