The CML Handbook revised

The Council of Mortgage Lenders (CML) draws its members from banks, building societies and other mortgage lenders. Its associate members are drawn from a variety of related businesses that have an interest in the mortgage market and the work of the CML. The CML helps develop mortgage lending policy by responding to initiatives from government, regulators and other bodies and by promoting its own policies and objectives.

The CML Lenders’ Handbook provides comprehensive instructions for conveyancers acting on behalf of lenders in residential conveyancing transactions. The Handbook is divided into two parts. Part 1 sets out the main instructions; part 2 details each lender’s specific requirements. Copies of part 1 and the individual lenders’ part 2s are available on the CML website at www.cml.org.uk/handbook/frontpage.aspx .

Part 1 was last updated in August 2004. Following on a number of recent changes in law and practice, the CML has introduced a number of further amendments to part 1 which are effective from 1 December 2006. There have also been a number of recent developments in Scots law which have necessitated new instructions and guidance being provided in the Handbook. The Registers of Scotland will also be launching its Automated Registration of Title to Land (“ARTL”) system early in 2007, necessitating yet further instructions and guidance. Morton Fraser were instructed by the CML to advise it on these Part 1 amendments. This article highlights a number of the main changes and will hopefully provide the context in which the changes have been made.

Clause 3 – Safeguards

The first major amendment to part 1 is to remove the detailed provisions regarding checking evidence of identity from clause 3, along with the list A and list B documents. These changes reflect recommendations made by the Joint Money Laundering Steering Group towards a more risk-based approach in this area. The rules imposed by the Law Society of Scotland in this regard, coupled with the requirements of the Money Laundering Regulations, are considered by the CML to provide more than adequate safeguards to mortgage lenders.

The reference in clause 3.1 to the obligation to comply with the Money Laundering Regulations has been updated to the 2003 Regulations, and reference has been added to the Proceeds of Crime Act 2002. The original clause 3.3 has been deleted in its entirety and the old clause 3.4 renumbered accordingly.

Clause 5.2 – Searches and enquiries

Clause 5.2.3 deals with the procedures to be followed where it is reasonable to believe that the property could be affected by underground mine workings. The previous clause 5.2.3 has been split and reworded to make the distinction clearer as between coal mining reports obtained from the Coal Authority on the one hand and reports on other underground mine workings on the other. There is no longer a time limit on the age of the coal mining report. This reflects an understanding reached between the CML and the Conveyancing Committee of the Law Society of Scotland that the Lenders’ Handbook should not be prescriptive in this respect, and it should be down to solicitors to decide whether a new coal mining report should be obtained given the specifics of the property and the area in which it is located. This is also in light of the ability to obtain coal mining reports relatively cheaply and quickly.

Clause 5.3 – Planning and building regulations

In terms of clause 5.3.1.1 solicitors are obliged to take all reasonable steps to ensure that the property has the benefit of any necessary planning and building regulation consents. The clause has been amended to make it clear that this obligation is not limited to the original construction of the property, but also covers subsequent alterations to the property which are material or significant. If the alterations are trivial or minor then it is not anticipated that they would affect the value of the lender’s security, nor the value of the property or its marketability. The CML has stopped short of imposing a time limitation for investigating historical alterations as it does not consider that it is its role to lead the market in this debate. It is down to solicitors, their clients and their surveyors to decide whether historic alterations fall into the “material or significant” category.

Clause 5.4 – Good and marketable title

Clause 5.4.2 sets out the requirement for flatted properties to check that the title splits the cost of maintenance of the roof between the owners of the building of which the flat forms part in equitable proportions. The Tenements (Scotland) Act 2004 has introduced detailed provisions affecting flatted properties relating to the maintenance and repair of common parts and services. Clause 5.4.2 has therefore been adjusted to cover only those situations where the 2004 Act does not apply. Reference to the maintenance of the foundations of the building has been removed.

Clause 5.6 – Title conditions

The position relating to title conditions has been amended by the Title Conditions (Scotland) Act 2003, and for title conditions to be enforceable they must be “real burdens” as defined in the Act. Clause 5.6.1 obliges the solicitor to enquire whether the property has been built, altered or is currently used in breach of a real burden. The lender is relying on the solicitor to take reasonable steps to check that the real burden is not enforceable. If the solicitor is unable to provide an unqualified certificate of title as a result of the risk of enforceability, then they are to ensure that indemnity insurance is in place at settlement. Clause 5.6.2 sets out the circumstances in which indemnity insurance is not required. Under the 2003 Act real burdens can now be extinguished by acquiescence or by negative prescription and clause 5.6.2 has been adjusted to take account of this. The previous reference to breaches of title conditions continuing for more than the long negative prescriptive period of 20 years has been removed.

Clause 5.10 – Inhibitions and insolvency

Clause 5.10.1 sets out the requirement to obtain clear personal searches prior to the date of completion of the advance. The wording has been amended to clarify that the personal searches should be no more than three working days old prior to the date of completion of the advance, having previously just said “three days”.

Clause 6.3 – Purchase price

Clause 6.3.2 imposes an obligation on the solicitor to advise the lender if he or she will not have control over the payment of all of the purchase money (for example, if it is proposed that the borrower pays money to the seller direct). The exceptions to this are (a) a deposit held by an estate agent, or (b) a reservation fee paid to a builder or developer. In recognition that builders and developers are looking for higher and higher sums by way of reservation fees, the financial amount set in clause 6.3.2 has been increased from £500 to £1,000. If the reservation fee exceeds £1,000, the solicitor should inform the mortgage lender of this.

Clause 6.5 – Properties let at settlement

This is the next major amendment to part 1, affecting properties let at settlement. It reflects the introduction of licensing requirements for landlords under the Antisocial Behaviour (Scotland) Act 2004, and in relation to houses in multiple occupation under the Civic Government (Scotland) Act 1982 (Licensing of Houses in Multiple Occupation) Order 2000, as amended. A new clause 6.5.3 has been introduced with requirements on the solicitor to report non-compliance to the mortgage lender.

The starting point is that any letting of the property is prohibited without the lender’s consent. If the property is already let, or is to be let, the solicitor should then check the details set out in the mortgage offer, or any consent to let issued by the lender. Accordingly, where lenders already set out detailed letting conditions in the mortgage offers for their “buy to let” mortgages, solicitors should comply with these. Clause 6.5.3 then provides a set of default provisions should the lender consent to the letting but the consent to let and the mortgage offer otherwise remain silent. The new clause covers three areas:

Clause 6.5.3.1 requires that the letting be a short assured tenancy under the Housing (Scotland) Act 1988 and that the borrower serve notice of ground 2 of schedule 5 to that Act1 on the prospective tenants before the tenancy commences. If the property is already let, and the let does not comply with these requirements, the solicitor must report this to the lender. The lender is taking a certain amount of risk in relation to their ability to recover vacant possession of the property should the borrower default and is therefore seeking to minimise that risk where possible.

Clause 6.5.3.2 requires the solicitor to check that the borrower is registered as a landlord under the ASBO landlord licensing requirements, and that any letting agent employed by him is also registered. Non-compliance must again be reported to the lender.

Clause 6.5.3.3 requires the solicitor to confirm with the borrower that the property meets the HMO licensing requirements and that he has obtained an HMO licence where appropriate. Non-compliance must again be reported to the lender.

It should be noted that several licensing authorities have reported substantial backlogs in processing applications for landlord registration under the ASBO licensing regime and for HMO licences. An informal telephone poll we carried out of a number of authorities, in relation to their ability to process applications, produced a range of responses: from 20 minutes to three months at one end of the scale, and one to two years at the other. Mortgage lenders are well aware of this and most will have contingency procedures in place while the authorities clear their backlogs, particularly those lenders who have “buy to let” mortgage products. One lender has indicated that they typically ask for a copy of the application form with confirmation of receipt from the licensing authority and an undertaking to examine the registration certificate/licence once issued.

Clause 6.6 – New properties

This clause principally covers buildings standards indemnity schemes and is unchanged insofar as it relates to these schemes. However, it was recognised that the Lenders’ Handbook previously made no mention of any requirement on a solicitor to check that the property had been inspected by the relevant building control authority and a certificate of completion issued. On this basis a new clause 6.6.7 has been added which sets out the requirements that solicitors should follow where the property is newly built or newly converted, or to be occupied for the first time. New procedures in this respect were introduced under the Building (Scotland) Act 2003 in relation to building warrants issued on or after 1 May 2005. Clause 6.6.7 therefore sets out the different requirements that will apply depending whether the building warrant was issued before or after that date.

For building warrants issued before 1 May 2005, the solicitor must check that the property has been inspected, where appropriate, by an officer from the local building control authority, and that the officer has passed the property as suitable for human habitation and has either (a) issued a completion certificate in connection with the construction or conversion of the property, or (b) issued a temporary certificate authorising the occupation of the property.

For building warrants issued after 1 May 2005, the solicitor must check that the property has been inspected, where appropriate, by a verifier authorised and appointed under the 2003 Act, and that the verifier has either: (a) accepted the submission of a completion certificate in connection with the construction or conversion of the property, or (b) granted permission for the temporary occupation of the property without a completion certificate.

The checks should be carried out before the certificate of title is submitted to the lender.

Clause 6.10 – Neighbourhood changes

Clause 6.10 has been amended so that the solicitor’s obligation to report to the lender is where the property is in “an area scheduled for redevelopment or in any way materially affected by road proposals”, the word “materially” having been added. Again lenders should only be interested in road proposals which might impact on the value of their security.

Clause 7 – Other occupiers

Clause 7.1 obliges solicitors to ensure that there are no occupancy rights which have priority over the lender’s security. This has been amended to include reference to the Civil Partnership Act 2004, as amended. This obliges solicitors to ensure that the evidence they obtain in relation to occupancy rights covers not only the matrimonial homes legislation, but also the Civil Partnership Act 2004. Notwithstanding that the 2004 Act has been in force in Scotland since December 2005, there are still a number of lenders whose standard securities incorporate affidavits and consents making no reference to the 2004 Act. From 1 December 2006 solicitors should ensure that the evidence they obtain2 makes reference to both the matrimonial homes legislation and the 2004 Act. This may mean using a separate document for written declarations and consents, rather than the lender’s own proforma documents, as most lenders will not let solicitors amend their proformas without their express written consent.

Clause 8 – Separate representation

Clause 8.3 has been amended to incorporate references to non-entitled civil partners and family home within the meaning of the Civil Partnership Act 2004 as amended. The solicitor is under an obligation not to advise any non-entitled spouse or non-entitled civil partner intending to occupy the property who is to execute a consent to the taking of the loan, or a renunciation of occupancy rights, and the solicitor must arrange for them to obtain independent legal advice. Any advice that the solicitor gives any of these people must also be given in the absence of any other person interested in the transaction. The solicitor should be particularly careful if the “matrimonial home” or the “family home” is being charged to secure a business debt.

Clause 10 – The loan and certificate of title

Clause 10.3 details the circumstances in which the solicitor is authorised to release the loan funds, namely that the solicitor holds sufficient funds to complete the purchase of the property and pay all stamp duty land tax and registration fees to perfect the security forthwith as a first charge or, if the solicitor does not have them, the solicitor accepts responsibility to pay them themselves. The previous reference to stamp duty has been updated to stamp duty land tax. A new provision has been added to the effect that the solicitor must ensure that all stamp duty land tax returns are timeously completed and submitted to allow registration of the security to take place forthwith. This recognises the delays inherent in the present system of paper returns and that a solicitor should attempt to mitigate these delays by having the paperwork ready to submit to HM Revenue & Customs at settlement.

Clause 14.1 – Application to Registers of Scotland

Following the introduction of the Land Registration (Scotland) Rules 2006, it will no longer be a requirement to submit the existing land certificate and charge certificate when making an application to register a dealing. The 2006 Rules also allow the Keeper of the Registers of Scotland to issue electronic certificates as opposed to paper certificates. It is understood that these changes will come into effect on 22 January 2007, and that the option to go for electronic certificates will apply to both ARTL and non-ARTL transactions.

On this basis the requirement in clause 14.1 that the solicitor keep a certified copy of the land certificate (if any) on their file before making the application for registration has been removed. In addition, the requirement that the solicitor check the land and charge certificates for accuracy following registration has been amended so that the requirement applies only where the lender requires paper certificates to be issued. Where no paper certificates are required, the requirement is that the solicitor check that the title sheet in the Land Register has been updated accurately. It may be possible to meet this requirement by simply checking the electronic certificates issued following registration. The requirement in sasine cases remains to check that the sasine deeds appear to have been properly recorded and that the completed searches disclose the relevant deeds, with no adverse entry.

Clause 14.2 – Title deeds

In the event that mortgage lenders do decide to accept the “de-materialisation” option under the Land Registration (Scotland) Rules 2006, they will need to specify in their part 2 that they do not require paper land and charge certificates and associated documentation relating to the property sent to them in relation to dealings in the Land Register where the application for registration is submitted on or after 22 January 2007. Clause 14.2.1 is the relevant clause in part 1, and this directs the solicitor to check the lender’s part 2 on this point. Note that under clause 14.2.2 the lender requires that the solicitor should obtain the borrower’s instructions concerning the retention of documents the solicitor is told not to send to the lender. I understand that the Law Society of Scotland is planning to issue guidance to solicitors on the retention of documents which will touch on this issue.

Clause 15 – Legal costs

Clause 15 previously stated that the solicitor should not allow non-payment of fees or outlays to delay the stamping and registration of documents. Of course it is no longer necessary to have the disposition “stamped” as such. The requirement in clause 15 has therefore been amended to the effect that the solicitor should not allow non-payment of fees or outlays to delay the procurement of the appropriate stamp duty land tax certificate and registration of documents.

Clause 16.4 – Properties to be let after settlement

Substantial changes have been made to clause 16.4.2 which deals with the procedures which should be followed where the borrower applies for consent to let the property after settlement, the lender approves the application for consent and instructs the solicitor to act for the lender. In essence they follow the provisions set out above in relation to clause 6.5 – Properties let at settlement, as detailed above. The solicitor should advise the borrower of the requirements: (a) that the borrower must register as a landlord on the register of landlords with the local authority where the property is situated in terms of the ASBO landlord registration scheme; (b) where the property falls within the definition of a house in multiple occupation under the HMO licensing scheme, that the borrower must obtain any licence required in respect of the property; and (c) that the tenancy agreement must be a short assured tenancy and the borrower must serve notice on the prospective tenants before the tenancy commences of ground 2 of schedule 5 to the Housing (Scotland) Act 1988.

Clause 17 – Redemption

Clause 17.1.2 has been amended so that where a payment to redeem a loan is being made by cheque, then the redemption cheque must be made payable to the lender stating the name of the borrower. Where space allows, the cheque should also state the mortgage account or roll number. This ties the wording of this clause with the wording of rule 6(2) of the Solicitors (Scotland) Accounts etc Rules 2001 and the Guide to the Rules appearing in the Parliament House Book. Please note that the guidance notes on the Accounts Rules which appear on the Law Society of Scotland’s website in this respect are misleading in so far as they make reference to a rule 6(3) – there is no rule 6(3). The Society has acknowledged this error and has undertaken to amend the guidance notes as soon as it is able.

Clause 18 – Automated Registration of Title to Land (“ARTL”)

This is, of course, an entirely new clause. The provisions apply in relation to dealings under the ARTL system operated by the Registers of Scotland and as such they are supplemental to the remaining clauses in part 1. Although ARTL has not yet been launched, the CML was keen to have provisions in place in part 1 which would provide a basic framework and point of reference for solicitors. Lenders will therefore be able to indicate in their part 2 responses to clause 18 whether they are participating in ARTL, and the extent to which they are doing so.

Clause 18.1 requires that solicitors must comply with the Solicitors (Scotland) (Automated Registration of Title to Land Mandates) Practice Rules 2006 and any other practice rules or guidance notes issued by the Law Society of Scotland and/or the Registers of Scotland. I understand that the Keeper of the Registers of Scotland is planning to issue his own guidance notes – to be called Keeper’s Directions. The Society’s ARTL Steering Group is also close to publishing its guidance notes for solicitors on ARTL.

Clause 18.2 relates to standard securities and requires solicitors to check their mortgage instructions and/or the lender’s part 2 to see whether the lender allows the solicitor to complete and register the standard security on ARTL. Where the lender is participating in ARTL in this respect, the solicitor should send a copy of the standard security to the borrower. Where the lender has more than one style of standard security held on ARTL, the solicitor should check their mortgage instructions to see which style they should use.

Clause 18.3 relates to discharges and requires solicitors to check the lender’s part 2 or the ARTL system itself to see whether the lender will digitally execute the discharge. Where the lender has digitally executed the discharge and has returned it to the solicitor within the ARTL system prior to redemption, the solicitor must hold the discharge as undelivered until the solicitor has sent the redemption money to the lender.

It may well be that the ARTL clauses will need to be beefed up as practice evolves, but clause 18 should provide solicitors with a starting point in relation to the requirements of their client’s mortgage lender.

Conclusion

As you will appreciate, a large number of amendments have been made to part 1 of the CML Lenders’ Handbook. Many of the amendments and new provisions in part 1 are there in response to changes in the existing law or pieces of new legislation, many of which emanate from our own Scottish Parliament. The CML consulted with the Conveyancing Committee of the Law Society of Scotland and also the CML’s own legal advisory group on these amendments. The Lenders’ Handbook is, by necessity, an evolving document. It is hoped that the latest incarnation will assist rather than hinder solicitors (and independent qualified conveyancers) involved in residential conveyancing.

While I have attempted to reflect the views of the CML in this article accurately, the words are my own.

    John A Lunn, Partner, Morton Fraser LLP

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NOTES TO THE TEXT
1 Ground 2 of Schedule 5 to the Housing (Scotland) Act 1988 is to the effect that the property is subject to a heritable security and that the heritable creditor may seek to evict the tenants and recover possession of the property in the event that the landlord borrower fails to keep to the conditions of the loan. Provided that notice of ground 2 is given to the tenants before the tenancy commences, the heritable creditor will be entitled to rely on this mandatory ground to evict the tenants before the end of the tenancy.
2 Note the changes to the Matrimonial Homes legislation and Civil Partnership Act 2004 introduced by the Family Law (Scotland) Act 2006 and the Family Law (Scotland) Act 2006 (Consequential Modifications) Order 2006, which set out that a written declaration is now sufficient evidence of the absence of occupancy rights. A formal affidavit sworn before a notary public is no longer necessary.