Gardner Leader

Testing Times

A new trend has emerged recently in property transactions, with a worrying proportion of property chains faced with a party in the chain dropping their offer last minute. This practice of gazundering leaves their seller, and possibly other parties in the chain, in a quandary over whether to take the financial blow or go through the hassle and the inevitable delays of putting the house back on the market. Fiona Tighe, Residential Property Solicitor at Gardner Leader LLP, takes a closer look at just one of the impacts of this practice.

The issue of a last minute price reduction brings to light the not commonly understood fact that the buyer’s solicitor acts both for the buyer and their lender. Accordingly, the price reduction in most circumstances must be reported to the lender and may have the knock-on effect of reducing the buyer’s mortgage advance.

Most solicitors and licensed conveyancers are on the authorised panel of all the major lending institutions and, therefore, unless your lender has instructed a separate lawyer to act on its behalf, your conveyancer owes a duty both to you and the lender and must act in the best interest of both.

This can be a very difficult situation for a client to understand, particularly when the elation of having secured a substantial price reduction is considerably diminished once it has been translated into the lender’s loan to value lending criteria.

Your solicitor, as part of his duties to all lenders, is required to observe the regulations laid down by the Council of Mortgage Lenders (CML) in the Lenders’ Handbook. The Handbook includes a duty to report to the lender any alteration in the purchase price (and any other information which the Lender’s Mortgage instructions identify).

As your solicitor also owes a duty of confidentiality to you, this means that if you do not consent to your solicitor notifying the lender of the price reduction, he must not do so and there is then a conflict of interest between you and your lender.

In this situation, as you are both clients of your solicitor, he will no longer be able to act for both of you and, given the circumstances, it is highly unlikely that he will be prepared to continue to act for either of you. This is because a solicitor can be guilty of conspiracy to defraud by undertaking conveyancing work for a client involved in a fraudulent transaction. If you fail to inform your lender of the price reduction and you obtain a mortgage based on the higher purchase price, this is mortgage fraud.

Another area where the risk of conflict arises is in the purchase of new build properties, where numerous discounts and incentives are offered by builders which again fall under the conveyancers reporting duties.

Any undeclared discount or incentive is likely to cause the valuation of the property to be inflated, resulting in an incorrect higher loan to value ratio. The actual cash investment required to purchase a property is thereby reduced and the mortgage may even exceed the amount the borrower actually pays for the property. The Financial Services Authority has recently identified the risk of fraud against new build flats as a growing concern and the confidence of many lenders in new build properties has been undermined, even before the current market crisis.

In a move to restore lenders’ confidence, from 1^st September 2008 Conveyancers will be required to have received from the builder/developer of any newly built, converted or renovated property, the new CML Disclosure of Incentives Form before requesting mortgage funds.

The form which has been developed in conjunction with lenders, valuers and developers contains twelve questions designed to disclose details of all financial and non-financial incentives and third party interests in a transaction.

As part of the new process, all valuers will be required to request a copy of the form when valuing new build properties. It is hoped that this will make the Conveyancer’s life far easier in the future as mortgages will be offered on the basis that the lender is fully aware of the disclosed incentives. 

Further details of our conveyancing team can be found by clicking here.

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