Council Of Mortgage Lenders CML Handbook

The CML Handbook is a set of standard instructions from mortgage lenders to solicitors when dealing with conveyancing transactions. The CML handbook is issued by the Council of Mortgage Lenders (CML) and applies only to those lenders who are members of the CML. When acting in a purchase where the purchaser is taking a mortgage it is usual for the solicitor to do the conveyancing for both lender and purchaser and in the same way that not following the purchaser client's instructions can lead to a negligence claim, failure to follow the CML Handbook can leave a solicitor in hot water.

The CML Handbook covers most aspects of a conveyancing transaction which might impact on a lender's security from what identity checks a solicitor should be performing to what minimum term of lease will be acceptable to what insurance arrangements need to be in place. Even if not acting for a lender, a solicitor would do well to be aware of the contents of the CML Handbook as it contains some useful guidance for conveyancing transactions.

CML Handbook Explained

The CML Handbook is split into two parts. Part 1 is applicable to all CML members. To allow for the fact that some lenders will want to take a different approach on certain points, each lender has its own CML Handbook part 2. Part 1 will sometimes refer the reader to the individual lender's Part 2 for its specific instructions.

Part 1 as well as each lender's part 2 can be found on the CML website via this link. At the time of writing the version of the CML Handbook in use is dated 01/12/2010, but it is updated regularly and you should refer to the CML website for the latest version. What we will do now is to go through the 01/12/2010 part 1 of the CML handbook paragraph by paragraph. You should open the CML handbook on the CML website and read this guide in conjunction with it. It should also be remembered that this guide is only the writer's interpretation of the CML handbook.

1 Instructions and Guidance

As well as defining certain terms which are used throughout the CML handbook, this section sets out three key points. It confirms that the CML handbook complies with the Code of Conduct for Solicitors 2011, which is essential for a solicitor to be able to act for purchaser and lender in a conveyancing transaction, it points out that a solicitor can only act for a lender if he (or his firm) is part of that lender's conveyancing panel and it sets out the rules which apply when the purchaser or seller are related to a solicitor acting for a lender. Basically, if either seller or buyer is a member of the immediate family (including such people as co-habitees and step children) of a solicitor dealing with the transaction or the solicitor himself is the seller or buyer then this must be reported to the lender and the firm must not act further unless the lender so authorises and if so, another solicitor within the firm of no less standing must act for the lender.

This section of the CML Handbook also contains a disclaimer to the effect that the handbook does not obviate the need to use the due care and diligence which you normally apply to a requisition, that is to say, if you believe a particular enquiry or course of action is necessary then the fact that it is not specifically mentioned in the handbook does not mean that it need not be pursued.

2 Communication

All communication with a lender must, according to the CML handbook, be in writing and include the mortgage account number, borrower's surname and initials. This section also sets out the rules when making a report to the lender. You must first check that the issue is not adequately provided for in the CML handbook and if it is not, you should should identify the relevant handbook provision and the extent to which the issue is not covered by it. You should provide a concise summary of the legal risks and your recommendation on how the lender should protect its interest. Of course, once a report has been made you should not complete the mortgage, even if advance funds are subsequently received, until you have the lender's written authority.

3 Safeguards

Section 3.1 applies to solicitors and 3.2 applies to licensed solicitors. The gist of both is that the solicitor must follow their professional body's guidance on anti-money laundering procedures and mortgage fraud, as well as (unless the client is known to the firm) check the client's identity using documents from the list provided. There are additional lender specific lists in each lender's part 2 instructions. You will note also that some lenders will not proceed where the seller is not legally represented. You should consult the individual lender's part 2 CML handbook instructions if acting in a purchase where the seller is undertaking his own conveyancing.

4 Valuation of the Property

The solicitor is obliged to check the property valuation report. If no copy is provided by the lender then it must be supplied by the borrower. You must check that the correct property has been valued (by checking the address on the valuation against that on the contract or title) and that any assumptions made by the valuer, such as tenure, restrictions on use, availability of parking etc are correct. Any errors or omissions should be reported to the lender so that they can ask the valuer whether the valuation needs to be revised as a result of them. The CML handbook also states that where a property needs to be re-inspected prior to completion (for example a newly built property which was not constructed at the time of the original valuation) at least 10 days notice (check part 2 for lender specific requirements) needs to be given of the completion date, so that the advance can be released in time. This should be taken into consideration when exchanging contracts. If exchanging in advance of the property being ready then the seller must be obliged to give at least 10 days notice of the completion date.

Where the purchaser receives a copy of the valuation report, he should be advised that he should not rely on it in deciding whether to buy the property. He should be advised to instruct his own more detailed survey.

5 Title

5.1 Surrounding Circumstances

If the seller has owned the property for less than 6 months, or the seller is not the registered proprietor, then the CML handbook states that this must be reported to the lender. The exceptions to this rule are where the sale is by personal representatives, a mortgagee under power of sale, a trustee in bankruptcy, receiver or liquidator or a builder who is selling a property acquired in part-exchange.

5.2 Conflicts of Interest

This important provision of the CML handbook states that if you become aware of something which you reasonably believe may affect the lender's decision to lend but you are not authorised by the borrower to reveal it (for example you become aware that the borrower has given mis-leading information or that his financial circumstances have altered) then a conflict of interest has arisen and you must cease to act for the lender you must return the instructions stating that you can no longer act as a conflict of interest has arisen.

You need not and must not give the lender any further information. Although the CML handbook does not say so, you must also cease acting for the borrower as failure to do so would have been a breach of rule 3 of the Code of Conduct for Solicitors 2007 and so would likely be a breach of the 2011 Code.

5.3 Searches and Reports

This section of the CML handbook sets out the lenders' requirements in terms of conveyancing searches. It contains the catch-all phrase "all usual and necessary searches and enquiries". This simply puts the onus on the solicitor to decide what investigations are required rather than allowing him to rely exclusively on the handbook provisions. The CML handbook also states that searches must be no more than 6 months old on completion. The exception is any search which has a priority period, such as a bankruptcy search or OS1. These searches must be renewed before completion if the priority period has expired.

Not all lenders accept personal searches and not all accept search insurance. A solicitor needs to check the lender's part 2 if he wishes to use personal searches or insurance. Where these options are acceptable it is still up to a solicitor to be satisfied that the search provider is competent and properly insured. Where a lender's CML handbook part 2 states that it does not want to receive contaminated land reports (environmental searches) then adverse search results do not need to be reported however in all case contaminated land entries revealed on a local authority search do.

5.4 Planning and Building Regulations

A solicitor is obliged to ensure that all necessary planning permissions and building regulations approvals are in place for the use of the property as a residential dwelling and that there is no evidence of breaches of a planning condition. Some conveyancing solicitors interpret this as meaning that permissions and completion certificates must be obtained for all works done to the property (including its original construction). In my humble opinion this is a mistake. Necessary should be interpreted as meaning just that – i.e. it is not necessary for their to be planning permission if a structure has stood in plain view for more than 4 years because the local authority cannot take enforcement action, therefore it would not be a breach of CML handbook instructions not to obtain it.

A solicitor is also required to be satisfied that any obligations under a planning agreement, such as a section 106 agreement, have been complied with or do not bind the individual property. Although most will not bind individual properties and a solicitor will often “take a view” particularly when the agreement is a number of years old, to comply strictly with the CML handbook a copy must be inspected.

5.5 Good and Marketable Title

This section deals with the title to the property. The CML handbook states that there should be no charges, restrictions or encumbrances which could adversely affect the value of the property or prevent the proprietor or charge being registered (which of course the solicitor would want to ensure anyway) and it also goes on to set out the lender requirements in terms of good leasehold title and possessory title.

Good leasehold title occurs when the leasehold title is registered but the freehold is not. The lender will require that evidence of the freehold (and/or superior leasehold) title be obtained going back at least 15 years, or if the freehold is registered then of course Official Copies would provide suitable proof of the freehold title. In the absence of either a solicitor may certify that the lack of freehold title is commonplace and generally accepted in the particular area - this is common in some parts of Bolton and Blackburn - though obviously a solicitor is taking a risk. The final option is indemnity insurance.

Possessory title is a topic all of its own and if encountered should be studied separately, but briefly it occurs when a person occupies a piece of land and claims it as his own, even though he did not purchase it. If he can demonstrate that he has occupied the land for 12 years (or 10 for land that is registered) and that occupation has not been challenged by the legal owner then the land registry may grant him possessory title. This means that, whilst he is registered as the owner, if the real owner makes a claim to reclaim possession and can prove he has a better claim (for example a deed conveying the land to him) then he will be registered as the owner and the person claiming possessory title will lose his title. A further 12 years after being registered with possessory title a person may apply to be upgraded to absolute title, and if successful his ownership cannot be challenged in future. According to the CML handbook lenders will accept possessory title provided that the proprietor is or will be registered and that, if the land in question contains any buildings or forms part of the access to the property, indemnity insurance is in place. If it does not contain buildings or access then a plan marking the extent of the land which has only possessory title should be submitted to the lender for consideration by the valuer.

5.6 Flying Freeholds and Freehold Flats

Not all lenders will lend on freehold flats or on flying freeholds and the solicitor must check the individual lender's CML handbook part 2 instructions. A freehold flat is fairly self explanatory, and is a flat within a block which is not on a lease. The problem here is that a flat requires certain things from the remainder of the block such as rights of support, a covenant by the owners of the rest of the building to insure their own parts and to contribute toward the maintenance of the common parts such as the roof, foundations and any shared landings and passageways etc. All these things would normally be contained in the lease and the covenants would be enforced by the landlord. This is important because of the fact that positive covenants (i.e. to pay a service charge, to insure or to repair and maintain etc) are only enforceable between the original covenanting parties except when contained in a lease, therefore even though the title to a freehold flat might contain all the necessary covenants, once the flats start to be sold by the original owners the covenants will become unenforceable. If there is a block of freehold flats then when they are first sold off there should be a restriction placed on each flat's title to the effect that before any transfer is registered the new owner must enter into a direct covenant with the other flat owners (which would need to be filed at land registry). In this way all the flat owners will have directly covenanted with each other.

This set up would work ok for blocks of 2 or 3 flats, however much larger and it becomes a problem. Just having the new deed of covenant signed by everybody after each sale itself would be quite an undertaking, but in addition there is still noone monitoring the flat owners to check that they are complying with their covenants, such as ensuring that their flat is insured. Also in the event that a particular flat owner fails to comply with his covenants (refuses to contribute toward maintenance for example) a landlord has the option to take proceedings to determine the lease and seize possession of the flat, but in a freehold flat situation noone has that power. The other flats owners could sue but this would be a long and expensive process, and getting flat owners who are not directly affected by the breach to join in the action may prove difficult.

Ultimately, if the lender will lend on a freehold flat, it will rely on the solicitor to certify that the title is good and marketable (that old CML handbook get out of jail free card for the lender), so these issues should be considered very seriously before proceeding.

A flying freehold occurs when part of one property overhangs another. The most common example is where there is a covered passage between two terraced houses. If the passage owned by, say, the property on the right, but the upper floor of the property on the left extends over all or part of the passage this is a flying freehold, the problem being that part of the property on the left is supported by land which it does not own. If the extent of the property which overhangs is as small as in this example then it usually is not such an issue (though you will need to check the lender's CML handbook part 2), but sometimes whole rooms can overhang another property. A plan showing the extent of the flying freehold should in all cases be sent to the lender for approval. In addition you must check that there are necessary rights of support from the neighbouring property as well as a right to enter the property in order to maintain and repair the part subject to the flying freehold. If there are no such rights then indemnity insurance can, and must, be obtained. The opposite of a flying freehold, where part of a property extends under another, is known as a creeping freehold, and the same rules apply.

5.7 Other Freehold Arrangements

This section of the CML handbook covers a few situations which arise when dealing with flats. First, where the flat is freehold but the borrower does or will own the freehold of the whole building, there are no more than four flats in the block and all of the other flats are subject to long leases this will usually be acceptable. Where the subject flat is on a lease and the owner of one of the other flats also owns the freehold of the building and again, there are no more than 4 flats in the block, this will also be acceptable.

Where the leaseholders in a block of flats jointly own the freehold of the building between them (often referred to as “share of freehold”) or where there are two flats and the leaseholder of one owns the freehold of the other and vice versa (known as a “Tyneside lease” or “crossover lease”), then you will need to check the individual lender's CML handbook part 2 to see whether they will lend and if so what their requirements are

5.8 Commonhold

Commonhold is a new type of title, created by the Land Registration Act 2002, as an alternative to Leasehold. I do not intend to go into great detail here, that is for another chapter, but briefly a block of flats, instead of being leased, are split into commonhold units (each flat being 1 unit) and each unit owner must be a member of a commonhold association (effectively a management company), and the rules of the company are contained in a commonhold community statement, which basically replaces the covenants that would normally be contained in a lease. Not all lenders are prepared to lend on commonholds and their CML handbook part 2 must be consulted. Where they are the following steps must be taken:-

  • Ensure that the common parts of the building are insured in accordance with the lender's usual CML handbook insurance requirements
  • Obtain a commonhold unit information certificate and ensure that the commonhold assessment (service charge) for the property has been paid up to completion
  • Ensure that the community statement does contain any material restrictions on the occupation or use of the commonhold unit (such as for example that the units cannot be occupied by persons of less than pensionable age etc.)
  • Under the law applying to commonhold there is a provision that allows the unit holders to wind up the commonhold association so that the commonhold units then become freehold. The community statement must therefore contain a provision that in this event the unit holders must repay any mortgage secured on their unit on termination
  • A company search must be carried out against the commonhold association to verify that it is in existence and that there are no registered signs that it is to be wound up
  • Within 14 days of completion notice of transfer and charge of the commonhold unit must be sent to the commonhold association.

5.9 Restrictions on Use and Occupation

According to the CML handbook any restrictions on the title in respect of the occupation or use of the property as a private dwelling (such as in respect of age, income or employment) must be reported to the lender. The lender may still proceed, however further instructions must be obtained before proceeding to exchange. Restrictions that prevent the property being used for some purpose other than a private dwelling (for example as a hotel or shop) need not be reported.

5.10 Restrictive Covenants

Enquiries must be made to ascertain whether the property has been built, altered or is currently used in breach of a restrictive covenant. If there has been a breach then it is up to the solicitor to decide whether there is a risk that the covenant will be enforced. If he cannot give an unqualified certificate of title then indemnity insurance must be obtained, unless the solicitor is satisfied there is no risk to the lender's security, the breach has subsisted for more than 20 years and there is nothing to suggest that action in respect of the breach is being taken or threatened. This provisions is a good example of the CML handbook being useful as a general conveyancing guide.

5.11 First Legal Charge

On completion the CML handbook states that the lender requires that they have the first charge on the property and that that charge is executed by all legal owners of the property. All existing charges on the property must be removed, though the lender may agree to a charge remaining (instructions should be obtained from the lender) provided that it is postponed to rank behind the lender's charge. This is done by the existing lender executing a Deed of Postponement (which must be in the new lender's standard form). Ordinarily charges gain priority on the basis of oldest first, so that if a charge were to remain and not be postponed the new lender's charge would rank behind it, meaning that if they wanted to repossess they would have to pay off the old charge before taking any money for themselves. Postponement usually only applies in remortgages, since when acting in a purchase there would obviously be no reason to require any of the seller's mortgages remained secured on the property, nor would any new lender ever agree to this.

5.12 Other Loans

The solicitor must enquire of the borrower as to how they intend to fund the balance monies - that is to say the difference between the purchase price and the amount borrowed under the mortgage. If a solicitor becomes aware that the balance is coming from somewhere other than the borrower's own savings or the sale of an asset (such as another property), for example a loan, or gift or second charge, then this must be reported to the lender. The borrower's consent to make the report must first be obtained however, and in the event that consent is not given the solicitor must return the lender's instructions (the mortgage offer) and explain that he can no longer as for the lender as a conflict of interest has arisen. Although not a CML handbook requirement, the solicitor should also cease to act for the borrower.

5.13 Leasehold Property

When acting in respect of a leasehold property a solicitor must check the lender's CML handbook part 2 instructions to see what minimum remaining term of lease is acceptable. Each lender has its own requirements but it is generally around 60 - 65 years. If the remaining term does not satisfy the lender's requirements this should be reported and the term may need to be extended.

A lease must not contain a provision allowing the landlord to forfeit the lease (i.e. bring the term to an end and evict the lessee) because the lessee has become insolvent, since obviously this means the lender would not be able to repossess. This provision is rarely seen now since it effectively makes a property unmortgageable however a few still remain. In the event that a solicitor discovers one the provision must be removed by way of a Deed of Variation, that is to say a deed varying the terms of the lease.

A lender will not accept restrictions that either absolutely prohibit assignment or mortgage of the lease, or else require consent to assignment or mortgage, unless consent cannot be unreasonably withheld. If consent is required then it must be obtained before completion.

A solicitor must check that the lease contains adequate rights of support and shelter from the other parts of the building, rights of access, of entry to other parts of the building (including other flats) to repair and maintain the subject flat and rights to use the services (water, electricity, gas etc) which cross other parts of the building. There must also be adequate covenants and arrangements in place in respect of insurance and maintenance of the structure and the common parts, that is to say the roof, foundations, load bearing walls, gardens, landings, stairways etc. Buildings insurance must be the responsibility of either the landlord, one or more of the tenants, or the management company. If responsibility falls on the tenants then the CML handbook requires that the lease must contain a covenant by the landlord or management company to enforce the covenant to insure against the other tenants and the request of the tenant requiring enforcement. Such a covenant by the landlord will usually be subject to the tenant agreeing to be responsible for any cost incurred by the landlord or management company in taking enforcement action. Although not mentioned in the CML handbook, a solicitor should also insist on seeing a copy of each flat owner's insurance to ensure that it both exists and is sufficient. If copies cannot be supplied then a solicitor should insist on contingent buildings indemnity insurance.

The lease should contain a covenant by the landlord confirming that all other leases in the block will be in substantially the same form, and in particular will contain the same covenants. In the absence of this provision each lease should be inspected to ensure that it contains the necessary covenants, or else indemnity insurance should be obtained. This is not essential where the responsibility of insurance and maintenance of the structure and common parts falls on the landlord.

Leases which contain provisions allowing for periodic increases in the level of ground rent are acceptable provided that the increases are fixed or can be readily established and are reasonable. If the solicitor suspects that the provision for ground rent increases is such that the level of rent may in future materially affect the value of the property, this should be reported. Many leases contain a provision whereby the rent is increased in line with the Retail Price Index (basically the cost of living). This is generally acceptable. The mortgage offer will often state how much the lender believes the annual ground to be currently. If the figure in the offer is not accurate this should be reported.

Enquiries should be raised of the landlord or management company to establish whether there is likely to be any significant increase in the level of service charge in the foreseeable future (for example if any major works are planned, or if it has been decided that the current level of charge is sufficient to meet expenditure) and if there is this must be reported. If any term of the lease is not satisfactory then it must be varied by way of a Deed of Variation. As an alternative the lender may accept indemnity insurance . The lender's CML handbook part 2 instructions to be checked and if the lender's instructions are still not clear a solicitor should write to the lender to ask for further instructions.

A clear ground rent receipt and service charge receipt, or other written confirmation that the same has been paid, must be obtained from the landlord/management company on or prior to completion. In the event that the landlord is absent and a receipt cannot be obtained then the solicitor may proceed if he is satisfied that this is common practice in the area and that the seller has confirmed that no breaches of the lease (other than the covenant to pay rent) have been committed and that the solicitor is prepared to give a clear, unqualified certificate of title. If an unqualified certificate of title cannot be obtained then indemnity insurance will be necessary. Some lenders require that the receipt for rent and service charge be sent to them following completion, check the individual lender's CML handbook part 2 instructions.

Whether or not required by the lease, the a solicitor must in accordance with the CML handbook serve notice on the landlord (or management company) of the assignment of the lease and of the new mortgage, including the name and address of the lender and the mortgage account number, and a receipt for the notice (usually in the form of a copy signed by the landlord) must be obtained. In the event that a receipt cannot be obtained then as a last resort evidence of service of the notice will be acceptable. Note that landlords will generally charge a fee for receipting notices and this should be ascertained and collected from the purchaser prior to completion. A letter from the landlord acknowledging the notice but asking for a fee before providing the receipt is usually sufficient evidence of service.

If the landlord is either absent or insolvent then this must be reported to the lender. If they are to lend then they may require indemnity insurance.

If the leasehold title to the property is registered but the lease has been lost the lender will proceed provided that a copy of the lease produced by the land registry is obtained and inspected and that it appears to be a complete copy.

5.14 Management Company

If there is a management company which is required to insure the building and maintain the common parts then it must be granted a legal right to enter the property to do so. Unless that right is granted by way of a lease of the common parts or by being a party to a leases of the flats, the company must be made up of the tenants of the building. If it is not then the CML handbook states that the lease should contain a covenant by the landlord to take over the management company's responsibilities in the event that it fails. If the lease was granted before 1st September 2000 and does not meet these requirements but the a solicitor is nonetheless satisfied that the arrangements which are in place are sufficient then the lender will be happy to proceed provided that a solicitor is prepared to give a clear certificate of title.

A company search should be carried out to verify that the management company is registered and is still in existence. The past 3 years' service charge accounts be inspected and any apparent problems should be reported to the lender. If the company is limited by shares and the tenant is required to become a shareholder of the company then a solicitor should obtain confirmation that the seller's share certificate will be handed over on completion together with a stock transfer form signed by the seller. He must also ascertain the procedure and fee for the issue of a new certificate in the purchaser's name and ensure that the new certificate is issued after completion. Some lenders will require that the new share certificate is given to them after completion together with a blank stock transfer form signed by the purchaser and a copy of the company's memorandum and articles of association (check CML handbook part 2). If the company is limited by guarantee then the purchaser must become a member of the management company. If there is more then only one need become a member.

5.15 Insolvency Considerations

A solicitor must carry out a bankruptcy search (K16) against all borrowers and any guarantors. The search is against the person's name and if an entry is revealed it must be investigated to establish that it does not relate to the borrower or guarantor. One method of doing this is to telephone the Official Receiver which dealt with the bankruptcy which is the subject of the entry (you can get their details from telephoning the Insolvency Service) and check your client's date of birth against the bankrupt's. If the entry does relate then in accordance with the CML handbook this must be reported to the lender, who as a consequence may withdraw the offer. Once carried out (if clear) the search will protect the lender for 15 days, and the solicitor must ensure that the search is still valid at completion.

If a solicitor is aware that the property has been transferred by way of a gift or at an apparent undervalue within the last 5 years then he must be satisfied that the lender's interest is acquired in good faith. This is because under bankruptcy law, if a person against whom bankruptcy proceedings have commenced disposes of a property in order to prevent it from being sold to pay creditors the trustee in bankruptcy or the official receiver may set aside the transaction and take possession of the property. This can only be done within 5 years of the transaction and cannot be done if the transaction is "at arm's length and for value" i.e. the full market value was paid and the buyer is not a relative or business partner of the seller. When acting in the purchase of a property at undervalue, or the transfer of a property by way of gift, a solicitor should obtain a clear bankruptcy search against the seller and also should obtain indemnity insurance.

5.16 Powers of Attorney

Where a document is executed under a power of attorney, the solicitor must check that it is properly drawn up and executed and that the attorney knows of no reason why the power will not be subsisting at completion. If there are joint borrowers, one may not appoint the other to act as his attorney. A power of attorney cannot be used in connection with a regulated loan under the Consumer Credit Act 1974. If the power of attorney is a general power and was completed more than 12 months ago a statutory declaration confirming that the power has not been revoked must be sent to the lender on completion. Check the lender's CML handbook part 2 to see if they require the original, or a certified copy of, the power.

5.17 The Guarantee

Whether or not the borrower takes the property with full title guarantee, he must give the lender full title guarantee in the Mortgage Deed.

5.15 Affordable Housing : Shared Ownership and Shared Equity

If the property is subject to a shared equity or shared ownership scheme a solicitor should check whether the lender is prepared to lend. This will be stated in the lender's CML handbook part 2, which will also set out their requirements.

6 The Property

6.1 Mortgage Offer and Title Documents

The mortgage advance will not be released until all offer conditions have been satisfied and the certificate of title has been received by the lender. The solicitor should ensure that there are no discrepancies between the lender's instructions and the title documents and other investigations. If the solicitor becomes aware that the borrower does not intend to take up the offer he should inform the lender immediately.

6.2 Boundaries

The boundaries of the property must be clearly defined by reference to a plan or description. If the valuation report contains details as to the extent of the boundaries then the solicitor should ensure that these accord with the plan. The solicitor should also check with the borrower that the plan or description accords with his understanding of the extent of the property. Any discrepancies should be reported to the lender, in which case see its CML handbook part 2.

6.3 Purchase Price

The purchase price must be the same as that stated in the mortgage offer. If it is not then this should be reported unless otherwise stated in the mortgage offer or the lender's CML handbook part 2 instructions.

6.4 Incentives

Where the property is new build or conversion/renovation and is being occupied in its current form for the first time you must obtain a completed copy of the CML Disclosure of Incentives Form from the solicitor acting on behalf of the seller. By sending a certificate of title in respect of a property where a CML disclosure of incentives form is required a solicitor is confirming that such a form is in his possession and complies with his instructions.

Nothing in this section overrides a solicitor's duty to the lender via the instructions provided elsewhere in the CML handbook.

Unless the lender says differently in its CML handbook part 2 a solicitor must report to the lender if he becomes aware of any of the following arrangements:

  • a cashback to the buyer; or
  • part of the price is being satisfied by a non-cash incentive to the buyer or
  • any indirect incentive (cash or non cash) or rental guarantee.

Any of these arrangements might cause the lender to withdraw or amend the mortgage offer therefore you should of course first obtain the borrower's authority and should make the report prior to exchanging contracts and not exchange until you have the lender's response.

A solicitor should have full control of the purchase price. If you will not, perhaps because the buyer has paid money to the seller directly, you must report this to the lender unless it states otherwise in the CML handbook part 2 or in the mortgage offer. Two exceptions to this rule are where the deposit is held by the agents or where a reservation fee of not less than £1,000 has been paid to a developer

6.5 Vacant Possession

Unless the offer states that it is a buy to let offer then vacant possession must be obtained at completion and this must be a condition of the contract. If the solicitor believes that the property will not be vacant (which includes situations whereby the purchaser agrees to let the seller stay on, even if only for one night) then the mortgage advance must not be used and the situation must be reported to the lender.

6.6 Properties Let at Completion

If the purchaser is buying the property with the intention of letting it then you must first check that the mortgage offer is a buy to let offer. If this is not obvious from the offer then the fact that the property will be let should be reported to the lender and the lender's further instructions awaited. The mortgage offer will usually set out the lender's requirements in terms of a tenancy agreement. Each lender is different, but most will require as a minimum that any tenancy is an Assured Shorthold Tenancy for a term of no more than 6/12 months, that there is no provision allowing the tenant to stay on beyond the expiry of the term or to perpetually renew it and that the tenant is not a relative of the borrower. Some lenders will require a counterpart or certified copy tenancy agreement to be sent to them on completion - check CML handbook part 2.

Where the property is a “house in multiple occupation” as defined by the Housing Act 2004 you will need to check with the lender's CML handbook part 2 to see if it will lend and if so what its requirements are.

6.7 New Properties - Building Standards Indemnity Schemes

Where a property has been built or converted within the last 10 years it must have the benefit of a building standards indemnity scheme. The lender's CML handbook part 2 will list all the schemes which are acceptable to them. The two main schemes are NHBC and Zurich (the Zurich scheme is closed to new properties but existing cover is still valid). If the insurance certificate is not available on completion (as will be the case for brand new properties) a cover note which confirms that the property has been subject to a satisfactory final inspection must be supplied prior to release of the advance. For new build properties it should be a condition of the contract that a cover note will be supplied via the seller's solicitor at least 10 working days prior to completion.

If no such scheme is in place, and the property has been built or converted within the last 6 years, then check the lender's CML handbook part 2 to see if they will lend. If so it will be on terms that the solicitor is satisfied that the work was/will be monitored by a professional consultant, who has supplied/will supply a professional consultants certificate in the form appearing at the end of part 1 of the CML handbook. The professional consultant must have one or more of the following qualifications :- FRICS or MRICS, F.I Struct E or M I Struct E, FCIOB or MCIOB, FASI or MASI, FB Eng or MB Eng, MCIAT, RIBA, FICE or MICE. At the time that the certificate is issued he must have professional indemnity insurance for the greater of either the value of the property or £250,000 if employed directly by the borrower or £500,000 in all other cases.

Check the lender's CML handbook part 2 to see if they require the professional consultant's certificate to be sent to them on completion.

6.8 Roads and Sewers

If the roads and sewers immediately serving the property are not adopted, that is to say maintained by the highways/water authority at the public expense (as will usually be the case with newly built properties), then the solicitor must check that there is an agreement for adoption in place and that the agreement is supported by a bond paid by the developer to the authority. In the case of roads this will usually be a section 38 agreement and for sewers a section 104.

If it is intended that the roads will remain private and be maintained by the frontagers or by a management company then this is acceptable provided that in the opinion of the solicitor there are satisfactory arrangements in place with respect to maintenance and repair costs.

There may be an arrangement in place between the developer and the lender whereby it is agreed that no retention needs to be held. If this appears to be the case a solicitor must check with the developer that the agreement is still in force at completion.

6.9 Easements

A solicitor must check that the property has the benefit of all necessary rights and that those rights are enforceable by both the borrower and the borrower's successors in title. If the borrower owns land adjoining the property, over which access to the property is gained or services (drains, cables etc) cross, then this land must also be mortgaged to the lender.

6.10 Release of Retentions

If the lender makes a retention, that is to say holds some money back from the mortgage advance pending some action being performed (for example some repair or improvement works) then the lender is not obliged to release it if the condition is not fully satisfied, the borrower is in breach of some other mortgage condition or if the loan has been repaid in full. A solicitor should not therefore give an unqualified undertaking to pay the retention to a third party and should not rely on it for fees etc. When the lender does release the retention it may either be sent via the solicitor or direct to the borrower - this will be stated in the lender's CML handbook part 2.

6.11 - Neighbourhood Changes

If the searches or enquiries reveal that the property is in an area scheduled for redevelopment or is in any way affected by road proposals then the CML handbook states that this must be reported to the lender.

6.12 Rights of pre-emption and restrictions on re-sale

The solicitor must ensure that none of the above exist which will affect the lender's security. If there are these must be reported. Such things as a right of first refusal for the local authority in respect of the sale of a right to buy property or for a housing association in respect of a shared ownership property are often acceptable since they require that the purchaser pays the full market value for the property and there are usually reasonable time limits for exercising the rights, but they should still be reported.

6.13 Improvements and Repair Grants

If the property is subject to the above which will still apply following completion check the lender's CML handbook part 2 to see if it needs to be reported.

6.14 Insurance

Lenders require that either the buildings insurance policy for the property be taken through themselves or else that it meets certain criteria. Each lender's criteria are slightly different and the CML handbook part 2 instructions should be consulted along with clause 6.14 of part one, but basically you must ensure the following:-

  • That insurance is on risk from no later than completion (it is a good idea actually to insure from exchange)
  • That the policy will be in the joint names of both the borrower and the lender. If it is not then it may be acceptable simply for the lender's interest to be noted - check CML handbook part 2.
  • The cover must be index linked
  • The sum insured must not be less that the amount stated in the lender's instructions, or if no figure is given then not less than the reinstatement value stated in the valuation/survey report. If the property is a flat and is insured on a block policy then the sum insured should be at least the reinstatement value x the number of flats covered by the policy. That the maximum excess does not exceed the limits set out in the lender's CML handbook part 2 instructions
  • That the following risks are covered :- fire, lightning, aircraft, explosion, earthquake, storm, flood, escape of water or oil, riot, malicious damage, theft or attempted theft, falling trees and branches and aerials, subsidence, heave, landslip, collision, accidental damage to underground services, professional fees and site clearance and public liability to anyone else.

Some lenders will also require confirmation that the insurer will inform them should the policy be cancelled or not renewed, and some will require a copy of the policy to be sent to them on completion.

7 Other Occupiers

If there will be anyone aged 17 or over in occupation of the property on completion other than the borrower(s) (or tenants if the mortgage is buy to let) then unless the lender's CML handbook part 2 instructions say different, each of these people needs to sign a consent and waiver in the lender's standard form, in which they consent to the mortgage and waive any rights of occupation they may acquire in favour of the lender. This is so they cannot claim any right to remain or financial interest ranking ahead of the lender's charge should the lender repossess. Even you are told that the occupier will only be staying for the short term, a consent and waiver is still required. This includes students who spend part of the year away from home provided the property is still their main home when not at university

If you have any reason to believe that the information given by the borrower as regards occupiers is incorrect or misleading you should, with the borrower's consent, report this to the lender. If the borrower does not consent you must cease to act in the transaction, citing a conflict of interest.

You must not provide the occupier with legal advice (see below)

8 Separate Representation

The solicitor must not give advice to either a guarantor, an occupier who will be signing a consent and waiver or any borrower who will not personally benefit from the loan. Some lenders will allow advice to be given to such people (check CML handbook part 2), on the condition that they have first been advised, in the absence of anyone else interested in the property, that they should seek independent legal advice. Any advice then given should be in the absence of anyone else interested in the transaction.

Even though some lenders allow advice to be given to guarantors and occupiers etc. there is it seems a great potential for a conflict to arise in these situations and in my view at least, a solicitor should not agree to give advice, beyond advising that the person in question should seek independent advice but that they are not obliged to do so (unless the lender specifically requests that any documents they need to sign are witnessed by a solicitor, in which case the solicitor must be independent).

9 Indemnity Insurance

Please see the separate chapter on Legal Indemnity Insurance for a fuller discussion on the subject. When obtaining insurance where there is a mortgagee you must approve the terms of the policy on the lender's behalf - only send a draft policy for approval is specifically requested by the lender. You must ensure that the policy is obtained without cost to the lender and that the limit of cover meets its requirements. Cover should be for at least the full purchase price but some lenders will require it to be 110% or 115% and the CML handbook part 2 should be consulted. A full disclosure of the facts surrounding the defect which is being insured should be made to insurer and the policy should not contain any conditions which would make it void or would prejudice the lender's interests.

You must explain to the borrower that he take any further lending against the property an additional policy may be required and you must explain the conditions and that he must comply with them. The policy should always cover the lender. It may not cover the borrower in some cases and if it does not then the borrower must be informed of this.

10 The Loan and Certificate of Title

The certificate of title is a certificate confirming to the lender that, in the solicitor's opinion, the title to the property is good and marketable (see the section Mortgage Offers for more information). It should not be submitted unless either it is unqualified or else you have been authorised to proceed in writing by the lender notwithstanding any issues you have raised with them.

The certificate will be treated as a request for the advance to be released and you must check the lender's CML handbook part 2 to see whether the funds will be released electronically or by cheque, what standard deductions the lender will make and crucially, how much notice the lender requires from receipt of the certificate to release of funds. If a proposed completion date is too soon to allow time for the lender to be given the required notice then contracts should not be exchanged until the funds are received. It is sensible for a solicitor to request funds for the working day before completion so that any delay in receiving the money on the day (it will usually be sent by CHAPS and so could arrive any time before close of business) will not delay completion. It should be noted that some lenders automatically send funds one day early and the solicitor should check this.

The mortgage advance should not be used unless the solicitor has all that is necessary in order to register the transaction and the lender's charge - that is to say funds to pay the stamp duty and registration fees, either a correctly completed and executed Stamp Duty Land Tax return or authority from the borrower so that the solicitor may complete the form on his behalf, undertakings (given in replies to requisitions) by the seller's solicitor to forward a signed transfer deed and to redeem any existing charges and a mortgage deed correctly executed by all borrowers.

If, after requesting the advance, you learn that completion will be delayed, you must inform the lender immediately and advise them of the new completion date if known. If the advance has already been released check the lender's CML handbook part 2 to see how long it can be held before it must be returned. If it needs to be returned the solicitor should check with the lender' CML handbook part 2 how this must be done. Some lenders will have a specific account for funds returned, others will only accept a cheque. You should also ask the lender how long it will be before the funds can be re-released. If completion is delayed but the lender is not informed they will assume that completion has taken place and will begin charging interest to the borrower and debiting payments.

11 The Documentation

The mortgage deed which the borrower must sign will incorporate the lender's standard mortgage (and if applicable loan) conditions, and this should be explained to the borrower as should the implications of taking a charge against property. If a conditions booklet is supplied by the lender this should be given to the borrower.

The CML handbook states that it is good practice that the borrower's signature to any document associated with the mortgage is witnessed by a solicitor, legal executive or licensed solicitor, however this is rarely done unless the lender specifically requests it (in which case it will be clear from the document). Generally any adult, who is neither related to the borrower nor an interested party in the transaction nor anyone who will after completion go into occupation of the property, will be sufficient as a witness.

12 Instalment Mortgages and Mortgage Advances Released in Instalments

Instalment mortgages are typically used for self-build projects. Generally, substantial progress will need to have been made on the project (sufficient to make it clear that the borrower genuinely intends to proceed) before any funds will be released save for a nominal sum which may be released on submission of a certificate of title to enable the mortgage to be completed.

Before any funds are released, including the initial nominal sum, the legal title must be vested in the borrower. After the first instalment, which will be paid to the solicitor, the instalments may be sent to the borrower directly.

On application for an instalment the lender will want to carry out a valuation and will therefore require 10 working days' notice.

13 Mortgage Indemnity Insurance or Higher Lending Charge

Mortgage indemnity insurance is usually obtained by a lender when they are lender more than a given percentage of the purchase price, so that there is a risk that on repossession they will not recoup all their lending and costs. The policy is paid for by the borrower, usually added to the total loan. It is a CML handbook requirement that it is explained to the borrower that the policy covers the lender only and that if the lender makes a claim the insurer has a right to pursue the borrower to recover the amount paid, so that as far as the borrower is concerned the debt is not written off.

14 After Completion

14.1 Registration

The lender's charge must be registered as a first legal charge and prior to submitting the application for registration the solicitor must take copies of the transfer deed, mortgage deed, discharge documents (such as a DS1 or DS3) and must certify those copies as being true copies of the originals. If the purchaser is a company then the charge must be registered at companies house within 21 days of completion using form 395 (or whatever form is current at the time, check with Companies House). It is absolutely vital that the charge is properly registered in time - if the deadline is missed then Companies House will only register the charge if the court orders them to do so. This would obviously be extremely costly and time consuming for the solicitor.

The application for registration must be submitted to the land registry prior to expiry of the protection afforded by the original Official Search in the case of registered title, or within 2 months of completion in the case of unregistered title. The lender may require the original mortgage deed to be sent to them after registration (check their CML handbook part 2). If so, a certified copy must be sent to the land registry along with the original - if it is not then the original will be destroyed.

14.2 Title Deeds

Following completion any title deeds, search results, enquiries etc should be held to the lender's order. The solicitor should write to the lender if the registration is not complete 3 months following completion with an explanation of the delay together with copies of any relevant correspondence. When registration is complete check the lender's CML handbook part 2 to see what documents they wish to receive, and send only those documents. The remainder should be sent to the purchaser.

14.3 Your Mortgage File

The file in respect of the transaction must be retained by the solicitor for at least 6 years before being destroyed. This can be done by taking an electronic copy of the file. If the borrower demands the file following completion (as is his right under the Data Protection Act) then full copies, certified where appropriate, must first be made. It is common practice for a fraudster to demand the file in this way in an attempt to destroy evidence.

When processing personal data, the CML handbook states that you must put in place security measures sufficient to enable you to comply with the 7th data protection principle (defined in the Data Protection Act 1998), must only process data in accordance with the lender's instructions and must allow the lender to carry out audits so that they can ensure compliance.

Except where any overriding duty of confidentiality exists you must treat any document as being jointly owned by lender and borrower and you should not part with them unless you have the consent of the lender and all borrowers. A solicitor may make a reasonable charge for providing copy documents.

15 Legal Costs

The solicitor's costs are the responsibility of the borrower and should be collected by the solicitor prior to completion. The solicitor may not allow non-payment of fees to hold up the submission of the stamp duty land tax return or application for registration. The Law Society suggests that for the sake of transparency the solicitor's costs for work done on behalf of the lender (which will be payable by the borrower) should be separately identified to the borrower.

16 Transactions During the Life of the Mortgage

16.1 Request for Title Documents

Any requests for the title documents must be made in writing to the lender and the solicitor must state that he has the authority of all of the borrowers to obtain them.

16.2 Further Advances

The lender's charge also secures further advances made to the borrower therefore it is not normally necessary to instruct a solicitor to deal with this. If you are instructed however, then the provisions of the CML handbook will apply.

16.3 Transfers of Equity

A fuller discussion on transfers of equity can be found in the separate chapter Transfers of Equity, here we will simply discuss the CML handbook requirements.

Firstly, the lender's consent will need to be obtained by the borrower. The lender may have its own preferred form of transfer and if so this must be used. If not then when drafting the transfer the solicitor must include the following:-

  • The transfer must state that it is subject to the mortgage, which must be defined by including the date and parties. Words to the effect of "This Transfer is Made subject to a charge dated 01/01/2001 given by John Doe ("the Borrower") in favour of The High Street Bank plc ("the Lender") ("the Mortgage")" would be acceptable.
  • The CML handbook says that the transfer need not state the amount of outstanding debt, but in fact for stamp duty purposes it must. In box 9 (consideration) it should state the total outstanding debt (including the principal sum and interest) as at the date of completion. This figure should be ascertained by obtaining a redemption statement. Note that any sum paid to an outgoing owner for his share in the property will also form part of the consideration. The CML handbook states that there should be no statement that all interest has been paid to date
  • In the transfer every incoming owner must covenant with the lender to repay the mortgage. The lender's preferred form of covenant is "The new borrower agrees to pay the lender all the money due under the Mortgage and will keep to all the terms of the Mortgage". Unless the lender states otherwise in its CML handbook part 2 a certified copy of the transfer is to be placed with the title deeds
  • If a borrower is being released from the mortgage (because they are parting with their share of the property) the lender's preferred form of words is "The lender releases ... from [his/her/their] obligations under the Mortgage".
  • The consent of any guarantors of which the solicitor is aware must be obtained before the transfer of equity is completed
  • The transfer should only be sent to the lender for signing/sealing if a borrower is being released. The lender's CML handbook part 2 instructions gives the lender's preferred form of attestation clause

16.4 Properties to be Let after Completion (other than Buy to Let)

If a borrower decides that he wishes to let a property after completion and the mortgage is not a Buy to Let mortgage then you should advise the borrower that it is a breach of his mortgage conditions to do so without the lender's consent, and that if consent is granted the lender reserves the right to vary the terms of the mortgage including charging a higher rate of interest. In all cases the proposed rent must be sufficient to cover the gross mortgage payments at the time. If as a solicitor you are instructed by the lender then you must check the tenancy agreement in accordance with the CML handbook.

16.5 Deeds of Variation etc

If at any time during the life of the mortgage a deed of variation or rectification etc is required (for example to correct a defect in a lease, grant or reserve a right of way or amend a boundary plan) then provided that the solicitor can confirm that the lender's security would not be adversely affected the lender will usually consent. It is at the solicitor's discretion as to whether the lender should sign the deed or give a separate letter of consent. If the solicitor cannot confirm that the security will not be affected then the lender will need to consider the matter further, for which a fee will be charged.

16.6 Deeds of Postponement or Substitution

The position in the register, and therefore the priority, of a charge is determined by its age (oldest first). The priority order can be changed however with a deed of postponement, in which one chargee agrees that their charge can rank behind another even though it is older. When entering into any deed which alters the priority order of charges the lender's standard form of deed must be used, however if a lender originally held the first charge they will in no circumstances agree to postpone it.

17 Redemption

17.1 Redemption Statement

A redemption statement is a statement showing how much is left to pay on a mortgage or loan. When requesting a statement the initial request should be in writing, quoting the date it is intended to redeem, the main mortgage account number and other account numbers of which you are aware and stating that you act on behalf of the borrower with the borrower's written authority.

17.2 Discharge

When repaying the mortgage the solicitor should also send to the lender the discharge document for sealing. The lender will either discharge by executing a DS1 or by direct notification to Land Registry. You will need to check the lender's CML handbook part 2.