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Lenders and lawyers in the commercial property...

February 1, 2014

Anthony Judge

Lenders and lawyers in the commercial property market have a variety of approaches for dealing with the redemption of mortgages and the mechanics for completion of a property sale. The common factor in these approaches seems to be hassle. It will be a scene familiar to many real estate lawyers: the day before completion, the completion statement is settled and the seller’s solicitor communicates to the buyer’s solicitor that it should rely on the “usual undertaking” regarding the redemption of the mortgage. The buyer’s solicitor goes back to its client’s bank, which raises its metaphorical hands in horror and exclaims that the buyer must have an executed DS1 before completion. “No fear,” says the seller’s solicitor, “and we would like completion monies in our client account by 1pm on the day, otherwise your client will be charged interest.” Removing the hassle The City of London Law Society Land Law Committee (the “committee”) has responded to concerns raised by members over the hassle described above when selling commercial property. Unlike residential conveyancing, there is no Law Society -endorsed code for completion that relates to commercial real estate transactions. The committee, with input from the Association of Property Lenders and the CLLS Financial Law Committee, has published the Protocol for Discharging Mortgages of Commercial Property (the “protocol”). It sets out a preferred procedure that the committee considers may be appropriate for use in a typical situation involving the sale of a property including the discharge of an existing mortgage and new mortgage finance for a buyer. It assumes that each of the parties is separately represented by a different solicitor, although it can easily be adapted if this is not the case. The protocol addresses a number of areas, including: ? the transfer of completion monies between the various parties; ? the release of title deeds and other completion documentation; ? the completion (electronically or in paper form) of a discharge of the mortgage and the manner of its release to the buyer or the Land Registry; and ? suggested form of contract provisions and undertakings that might be appropriate. Modus operandi The protocol is not intended to be adopted wholesale on every transaction in the way that the code for completion for residential property is; and no contract provision or undertaking is implied if solicitors agree to comply with the protocol. It is a framework that suggests a course of dealing in certain typical circumstances, but recognises that commercial transactions come in all shapes and sizes and it may not be appropriate wholesale in every case. One of the key recommendations of the protocol is that the completion requirements of the parties are addressed before exchange and, where necessary, appropriate provisions included in the contract. This is intended to avoid the familiar problem of completion day arguments over how to satisfy the parties’ completion requirements. The involvement of the Association of Property Lenders has been key and it is hoped that banks (and solicitors advising banks) will accept the protocol’s suggestions. The committee considers that it is not appropriate for any organisation to insist on something when it is on one side of a transaction (for example, the seller’s side) that it would not accept on the other side. Nor should its solicitor. An appendix to the protocol provides some sample contract provisions and a separate appendix showcases some sample undertakings that might be relevant. Where appropriate, practitioners ?may wish to circumvent the blood pressure-raising “negotiations” described above, adopt the protocol and advise clients accordingly. The protocol is available at ? Anthony Judge is a partner in the real estate department at Travers Smith LLP The protocol’s key points ? The sale contract should require the seller to provide an executed DS1 on completion and evidence of authority of the signatories, if appropriate. This means that the seller’s bank will have to arrange for the DS1 to be signed and made available either to its solicitors or the seller’s solicitors (held to order on an appropriate undertaking) so that it can be delivered on completion. ? At the point of completion, the purchase monies will be in the seller’s solicitor’s bank account and they will give an undertaking to the seller’s bank or its solicitor to remit the redemption monies to the bank after completion. If appropriate, this may need to be by reference to a particular time and this should be set out in the redemption statement. The protocol identifies an alternative scenario where the amount of money required to redeem the mortgage is paid before completion to the seller’s bank’s solicitor (held to order). The protocol recognises that occasionally a seller’s bank may want to insist that the money is held in the bank’s account itself, but the committee does not regard this as being a preferred approach and it should be necessary only in very unusual circumstances. ? In light of there being a number of distressed (or quasi distressed) sales in the current market, the protocol recommends that it is appropriate for a seller to be asked to confirm before exchange whether the sale proceeds are sufficient to discharge the mortgage. If the buyer does not ask the seller (or if the seller does not, when asked, provide confirmation) then confirmation should be requested before exchange of contracts that the seller’s bank has approved the terms of the contract and the completion mechanics required by it. ? Separate sections of the protocol deal with execution of DS1s, treatment of electronic discharges, and other practical matters.

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Source: Estates Gazette (UK)

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