Professional Practice Committee

Guideline on Settlement by Cheque, Loan Redemption and Remit of the Free Proceeds of Sale, effective 1 November 2008

This guideline replaces the guideline published at Journal, July 2008, 41

The Professional Practice Committee has seen an increasing number of requests for information or guidance on the question of whether settlement of house purchase and sale transactions should take place by cheque or electronic (CHAPS) transfer. This is also getting to be a frequently asked question by clients, and the issues are not well understood.

Almost all transactions now settle by post. A solicitor can send a cheque subject to conditions but cannot attach conditions when sending a CHAPS transfer. It is perfectly proper to reach agreement with the other solicitor in advance of sending funds by CHAPS transfer that those funds will be held as undelivered pending fulfilment of certain conditions, but if that is not agreed in advance, it is too late to impose the condition at the time the funds are sent by CHAPS transfer.

If such pre-arranged conditions are not fulfilled, the solicitor receiving the funds would risk a finding of professional misconduct if the funds are treated as delivered and paid out to clients or third parties.

An electronic transfer cannot be stopped, but if the buyer’s solicitor does not receive the titles, letter of obligation, keys etc in return for a client’s account cheque which has been sent to be held as undelivered, he can either demand the return of a cheque or stop the cheque (in extreme circumstances). Settlement by cheque therefore protects the buyer by giving the buyer’s solicitor control over the money even after the cheque has been sent. A seller’s solicitor can also protect the seller by attaching conditions to deeds etc sent by post, including a condition about interest on the price if settlement has been delayed (a not infrequent problem these days).

Traditionally, when a selling solicitor received and banked another solicitor’s client account cheque, he could write his own client account cheques to redeem his client’s loan or settle his client’s purchase on the same day. Problems are encountered very occasionally if the solicitor receiving the cheque banks at the same branch of the same bank as the solicitor sending the cheque, although that is rare.

Since the introduction of the cheque clearing process known as 2-4-6, there is a risk that the cheque sent out will be presented for payment at the sender’s bank before the cheque paid in has cleared. The Professional Practice Department at the Society has received a number of telephone calls from solicitors affected in this way.

These problems may be surmounted by either

(1) clients arranging short term bridging loans; or

(2) solicitors arranging a temporary facility with their own bank that would allow the bank to transfer sufficient funds into the client bank account to meet the presentation of an outgoing cheque where the incoming cheque has still to clear. Any interest payable could be charged to the client, although that would have to be specified in the relevant terms of business.

If neither of these options is adopted, a third option, namely

(3) settlement by CHAPS transfer, is suggested to avoid the possibility of a shortfall in the client account that may in turn lead to a failure to comply with rule 4(1)(a) of the Solicitors (Scotland) Accounts etc Rules 2001.

If a selling solicitor is also purchasing for his client on the same day and wishes the sale to be settled by CHAPS transfer, the selling solicitor should put a clause in the missives requiring the sale to be settled electronically. That will be subject to agreement by the buyer, but it must be in the missives or it cannot be insisted upon.

Subject to these considerations, the Professional Practice Committee remains of the view that settlement by cheque between solicitors is in both clients’ interests as the cheque can be sent in advance to be held as undelivered pending delivery of relevant items and/or confirmation that the sender is in funds, and the disposition can be sent in advance subject to the seller’s conditions.

Lenders and clients

The committee agreed however that so far as settlement with the client and the lender are concerned, the seller’s agent should ascertain in advance whether the seller would prefer to meet the cost of a CHAPS transfer of funds or opt for the issue of a cheque in relation to (a) redemption of the loan (if the method is not prescribed by the lender), and (b) remit of the free proceeds of sale to the seller. Such instructions will of course be subject to the solicitor ensuring that there are sufficient cleared funds to meet whatever method of payment is adopted.

England & Wales

If a client is purchasing a property in England or Wales out of the proceeds of sale of a property in Scotland, it is important to ascertain the requirements for settling the purchase at the earliest possible stage. Purchase and sale transactions routinely settle by CHAPS transfer in England & Wales and the client’s English or Welsh solicitor will assume that he will receive funds by CHAPS transfer. If there will not be sufficient time for a cheque to clear before funds are required in England or Wales, the selling solicitor should explain that to the client and conclude the bargain for the sale on the basis that settlement will be by CHAPS transfer or advise the client that he will need to arrange temporary bridging facilities to await cleared funds. Failure to address these issues at an early stage is likely to lead to a dissatisfied client and a possible complaint to the Scottish Legal Complaints Commission.

This revised guideline is on the Society’s website www.lawscot.org.uk . At time of writing a link can be found on the home page.

Guideline on the ownership and destruction of files

The Guideline on the Ownership and Destruction of Files 2001 has been amended to refer to the requirement of reg 19 of the Money Laundering Regulations 2007 that records relating to customer due diligence should be retained for five years. The additional paragraph reads:

“Money laundering – customer due diligence records

“In terms of reg 19 of the Money Laundering Regulations 2007, records relating to customer due diligence should be retained for five years. This continues the requirement under the previous Regulations to retain such records for five years.

(introduced October 2008)”

The complete guideline, as revised in 2003, 2005 and 2008 can be found at www.lawscot.org.uk/Members_ Information/rules_and_guidance/guides/ Rules/files/destruction_files.aspx .