Professional practice updates 2012
Apportionment of price in dispositions between heritable and
moveable elements
HM Revenue and Customs (HMRC) has warned recently that "where
HMRC find property sale arrangements that have been artificially
structured to avoid paying the correct amount of SDLT, these will
be actively challenged, through the courts where appropriate. If
HMRC is successful in challenging an SDLT arrangement entered into
with the sole intent of avoiding the amount of SDLT properly
payable, purchasers could be liable to pay the whole of the SDLT
plus interest and potentially a penalty. HMRC can currently
challenge SDLT "schemes" up to four years after the effective date
of the transaction and this can be extended if there has been a
careless or deliberate error in the submission of the SDLT return.
The whole climate is clearly moving against tax avoidance,
artificial or otherwise.
Conveyancers need to bear in mind that under the SDLT regime,
the buyer's solicitor is submitting a formal tax return, as agent,
on behalf of his client. If you knowingly provide information in
support of a tax return that is incorrect, HMRC could impose a
penalty on you of £3,000 per submission. Furthermore, your
papers in relation to any client may be
open to inspection on a notice given by HMRC.
When considering the apportionment of the price in missives
between heritage and moveable, members are reminded that HMRC will
consider allocations of the price to moveable items in conveyancing
transactions solely or mainly on the basis of reducing the charge
to Stamp Duty Land Tax as potentially fraudulent. The Finance
Act 2003 Sch. 4 para 4(1) requires any apportionment between
heritage and moveables in the price paid for a property to be done
"on a just and reasonable basis". HMRC is likely to look very
closely at those apportionments which have the effect of reducing
the percentage band of SDLT payable or indeed those that bring the
price attributable to the heritage within the nil rate threshold.
This type of arrangement could result in missives being considered
unenforceable as being contrary to public policy, as was stated in
the case of Saunders v Edwards [1987] 2 ALL E.R. 651 by
Nicholls L.J.
In the past it was usual for buyers and sellers to set out
the amounts to be apportioned between heritage and moveables in
missives. Whilst as a matter of contract, that is an issue
between the parties, HMRC will consider any irregular apportionment
to be the responsibility of the purchaser. It is the purchaser's
duty to pay the correct amount of SDLT due on any land transaction
and irregular apportionments pursued by HMRC will, in the first
instance, be the responsibility of the purchaser in terms of any
penalty and interest. However, agents need to be aware that HMRC
can look into a seller's involvement in facilitating an arrangement
which is conceived with the sole purpose of reducing the amount of
tax properly due. In this circumstance, sellers' agents must
also consider their duties and responsibilities as solicitors.
Sellers' agents should not agree to apportionments in missives
which are unjustifiably contrived to reduce the amount of SDLT due.
Valuations of moveable items may be advised in appropriate
circumstances.
Whilst a purchaser of heritable property is free to use honest
and proper tax planning to mitigate its tax liability, purchasers
will place reliance on you as solicitor to act with integrity,
cognisant of whether the SDLT return you make as agent is in their
interests. Solicitors must always act in a way that maintains the
trust the public places in them and the provision of legal
services.
If you act for a lender as well as the buyer, robust
consideration needs to be given to whether any arrangement could
prejudice the interests of the lender.
Finally practitioners should always bear in mind their
responsibilities for compliance with anti-money laundering
procedures. If you are asked to give effect to an irregular
apportionment conceived to avoid or artificially reduce the amount
of SDLT payable, this may bring the transaction within the ambit of
anti-money laundering legislation with all the resulting
administrative and reporting requirements.
Nationwide Building Society Solicitors Panel
Nationwide Building Society (Nationwide) has informed the
Society that it is undertaking a major review of its solicitors
panels throughout the UK, which will reduce its Scottish panel from
about 700 to 500. According to Nationwide the affected firms
accounted for less than 1% of its new business north of the border
during the past year. The review is in addition to the
ongoing "dormancy" exercise, under which Nationwide has been
removing firms which have not carried out any new security work for
it within the past twelve months.
As part of the review Nationwide is now introducing a
"minimum volume threshold", which will result in firms which have
carried out fewer than four transactions within the past year being
suspended from the panel. Firms will be able to appeal against
suspension on two grounds, either that the number of Nationwide
transactions is unrepresentative of the firm's conveyancing
activity (i.e. the firm undertakes a minimum of 50 conveyancing
transactions per year) or that the firm meets a particular need
that it is important for the local or national market to
retain.
At the same time Nationwide is undertaking a "revalidation
exercise" to update its records. This will involve the
collection of extensive data about solicitors and their firms.
Firms which remain on the panel will be required to upload this
data through a secure on-line facility. However unlike Santander,
Nationwide will not impose any charge on panel members.
Nationwide advises that it has carefully considered the impact
of these changes and has taken steps to ensure that there is not
any loss of services within any geographic area. However the
Society remains concerned about the potential effect. Ross MacKay,
the convener of the Property Law Committee commented:-"Over 20% of
existing panel firms will be removed through this complex process
and these may well include many which have provided an exemplary
service for their clients, including lenders. It would appear that
Nationwide is introducing measures which take little account of the
Scottish jurisdiction, are disproportionate to the actual risk of
mortgage fraud, could threaten the continuing viability of some
firms and will inevitably inconvenience its own customers."
Conflict of interest guidance on corporate guarantees sought by
banks
The Professional Practice Committee have considered issues
arising out of instructions by banks to solicitors in relation to
loans or overdraft facilities being provided to Directors of
Companies where the bank are seeking a Guarantee from the Company
itself. Such instructions contain requests for the
solicitors' view on whether an opinion expressed in a resolution of
the Company under Section 172(1) of the Companies Act 2006 "is
justifiable in the circumstances"; and/or state that the bank are
"entirely" relying on the solicitors to obtain all necessary
documents to ensure that there is no risk of the bank lending being
set aside and/or the transaction being deemed voidable or the banks
security position generally being in anyway prejudiced if the
transaction has been entered into in contravention of the 2006 Act
"or any associated reason". The instructions went on to say
that the bank would not be under any obligation or expectation to
make any additional enquiries or scrutinise the documentation
themselves.
The Committee agreed that imposing such terms and requirements
on solicitors creates a conflict of interest between the solicitors
and their clients, the bank or its customers. As the clear
intention of the bank is to claim against the solicitor if the bank
cannot recover from the company under the Guarantee, solicitors
will be concerned about their own exposure in the event of the
company's default.
The Society's Practice Rules on Standards of Conduct prohibit
solicitors from acting for any client where there is a conflict
between the interests of the client and the interests of the
solicitor or their practice unit (Rule B1.7).
The Committee's guidance is therefore that solicitors should not
accept instructions containing such onerous requirements.
If a solicitor is asked to confirm that a Resolution under the
Companies Act has been passed in particular terms, the solicitor
should insist on sight of either the signed written Resolution or
Notices and Minutes of the General Meeting at which such a
resolution was passed, and should not rely only on confirmation
from the Directors or Secretary that such a Resolution has been
passed
Requests by Lenders for Files where a Solicitor has acted for
borrower and lender - March 2012
Background
The issue of requests by lenders or their solicitors for copies
of files where the same solicitor had acted for lender and borrower
in a purchase was discussed recently at the Professional Practice
Committee.
When a borrower defaults on a secured loan, the lender
repossesses the property with a view to selling it. If the
lender sustains a loss on the sale it may, and often does, look to
see whether it has a remedy against the solicitor who acted on its
behalf in putting the security in place. Lenders know
that solicitors carry Professional Indemnity Insurance against
which the lender will hope a sustainable claim can be made.
In the majority of cases the lenders are looking to see whether the
solicitor has complied with the lenders' contractual instructions,
in particular the CML Handbook.
The first step lenders take in looking at a possible claim is to
ask for a copy of the solicitor's file. In the context of such a
request the crucial question is to establish what the lender is
entitled to demand to see, and whether solicitors are contractually
obliged to send a copy of their file to a lender in such a
situation.
Counsel's opinion
The Committee agreed that Senior Counsel's Opinion should be
obtained on this important matter, and that is now available.
In summary, counsel was asked to advise on three separate
situations -
a) Where the terms of neither the CML Handbook nor the BSA
Mortgage Instructions apply (the basic case);
b) Where the CML Handbook (or the BSA Mortgage Instructions)
does apply; and
c) Where the purchaser/borrower client has given consent to
disclosure of the whole file to the lender.
Counsel's preliminary comment is that such a request from a
lender is undoubtedly a "fishing expedition" which would not be
permitted by the Court in a petition brought under section 1 of the
Administration of Justice (Scotland) Act,1972.
He then confirmed the Society's position published in the Guideline on
Ownership and Destruction of Files that in considering a
request from a lender for the contents of the file, the solicitor
has to divide up the documents into three categories: documents
that are the property of the borrower client, documents that are
the property of the lender client and documents which belong to the
solicitor himself. The timing of instructions from the lender is
relevant, as no documents in the file can belong to the lender
until the lender instructs the solicitor, although the lender may
have a valid right to sight of some of them.
The initial instructions from the borrower will belong to the
solicitor himself as the addressee of the letter or email. So also
do private notes and memoranda written for the solicitor's own
benefit; not by way of a record of material events, but as
preparatory work designed to put the solicitor in a position to
provide advice or draft the necessary documents.
In Counsel's view, much of the conveyancing work in the file
will be work in which both the lender and the borrower will
have a legitimate interest.
The basic case
The lender will own only the correspondence
(including e-mail) into which it entered with the solicitor, any
documents it sent the solicitor with its instructions,
correspondence between third parties and the solicitor directed to
the constitution of the standard security, any notes of meetings or
telephone conversations on that subject, the drafts of the standard
security (as also the drafts and engrossments of any other
securities it was to receive to secure its lending) and a copy of
the appropriate Land Certificate to show the requisite entry in the
Charges Section of that Certificate.
The documents concerned with the conclusion of the contract of
sale of the heritage and the transfer of that heritage (in the
condition, and with the validity of title thereto, for which the
borrower had contracted) are in counsel's view documents owned by
the borrower client who has the primary, and greater, interest in
them. The lender has a legitimate interest in matters relating to
the purchase which may affect its position and about which the
lender needs to know for the purpose of protecting its security. It
should be informed about such matters by its solicitor, but that
that does not entitle the lender to sight of the underlying
documentation, which belongs to the borrower.
In counsel's opinion, no implied authority is deemed by the law
to exist by which the borrower is held to grant the lender
permission to receive, or even to see, all the underlying legal
material which belongs to the borrower and the contents of which
are confidential to him.
Where the CML Handbook/BSA Mortgage instructions apply
The material provisions are clause 14.3.2 of the C.M.L. Handbook
and clause E28 in the B.S.A. Mortgage Instructions, which are in
the same terms.
Counsel states that these clauses do not amount to a contractual
permission to the solicitor (still less a contractual obligation on
him) to disclose the whole file to the lender on the footing that
all the documents comprised therein are as much the lender's
property as they are the borrower's. In counsel's words "It is
critical to the construction of the common clause to bear in mind
that it forms part of the contract between the solicitor and the
bank, and that the borrower is not party thereto. It cannot,
therefore, detract from the property rights of the borrower."
He adds "In short, I do not think that these two provisions
widen the rights of the bank to see contents of the solicitor's
file which the bank does not already have the right to inspect as
their owner. They make no material difference to the position
outlined in the basic case."
Where the borrower client has consented to release of the
file, or a copy of it.
Counsel saw this in a different light. With the exception of
those documents in the file which belong to the solicitor, (to
which the consent of the borrower client to release does not
apply), the solicitor is obliged to allow the bank to see the whole
contents of the file. It is a client's prerogative to waive
his rights to confidentiality. As such a waiver must be "voluntary,
informed and unequivocal" [Millar v Dickson 2002 SC(PC) 30], the
solicitor has a duty to both clients to advise the borrower about
the meaning and possible consequences of the waiver.
Counsel added however "Aside from material in which the lender
has a proprietary interest, it can be entitled to see material
belonging to another person only with the consent of him to whom
the material belongs. Since actual (as opposed to deemed)
contractual arrangements are very variable in their terms, on a
basis which would be of general application, I can only advise that
the solicitor consider carefully the correct construction of any
arrangement said to embody or imply such consent in order to judge
whether it does in fact convey such a consent, and, if it does, to
determine its scope."
Finally on this aspect, the solicitor must check through the
whole file to satisfy himself that in exhibiting the contents to
the lender he will not disclose material which does not fall within
the ambit of that consent.
Proposed Scheme for Determination of Legal Fees to be
Administered by The Law Society of Scotland - March 2012
Background
At a meeting with the Scottish Government Justice Directorate in
2011 the Society was advised that from 30 April 2012 all Sheriff
Court Auditors who are employed by Scottish Court Service will be
barred by the Court Service from undertaking assessment of fees
and/or extra-judicial taxations on a joint remit from solicitor and
client. About six court Auditors who are not employed by Scottish
Court Service, including those in Edinburgh and Glasgow, will
continue to be able to carry out such work, as will the Auditor of
the Court of Session.
All Sheriff Court Auditors will continue to tax judicial
accounts and solicitors accounts remitted to them by the Sheriff
where the solicitor is suing for payment of fees.
Assessment of Fees
From the end of April 2012, solicitors wishing to outsource the
preparation of fee notes will only be able to use one of the court
Auditors who is not in the direct employment of Scottish Court
Service, or a firm of Law Accountants. The Law Society of Scotland
will play no part in this process. Members are reminded however,
that the Society's Practice Guideline on Form of Business Accounts
and Taxation states in Para 1(b) -
"A solicitor may submit his file to a Sheriff Court Auditor or a
law accountant for assessment of the fee either before or after the
note of fee is issued, but it is stressed that a unilateral
reference of this kind does not constitute a taxation. Such an
assessment of a fee must never be represented as a taxation; as
having any official status; or as being final and binding. The fee
for such a reference is not chargeable to the party paying unless
that has been included in the terms of business intimated to the
client at the outset."
Taxation on Joint Remit
Where a solicitor's fee note has been challenged by the client
or where the solicitor and client have agreed a joint remit for
taxation, it was made clear to the Society that from 30 April 2012
this will not be done by Auditors employed by Scottish Court
Service, but should be done by an Auditor who is not so employed or
by the Society under the supervision of its Regulatory
Committee.
The Society's Practice Guideline on Form of Business Accounts
and Taxation states in Para 3 that when the party paying, whether
client or third party, requires that the solicitor's account be
taxed, the solicitor cannot refuse to do that unless there is a
written fee charging agreement under S61A of the Solicitors
(Scotland) Act 1980 in which the actual fee has been agreed, not
just the basis on which the fee is to be charged such as an hourly
rate. If a note of fee which has been assessed by an auditor or law
accountant requires to be taxed, it should be taxed by a different
Auditor from the one who originally assessed it.
New Scheme
The Society's Remuneration Committee proposes that the following
arrangements be put in place to implement this decision of the
Scottish Court Service. It is impossible to ascertain in advance
how much demand there will be for a scheme administered by the
Society. However, a scheme will clearly be necessary and it must be
self funding.
1. Name of Scheme
The scheme will be called "Legal Fees Determination Scheme" and
will be administered by The Law Society of Scotland". It will
result in a Fee Determination Certificate being issued in each
case.
The persons carrying out the Determinations under the scheme
will be called Adjudicators to avoid confusion with Auditors of
Court.
2. Creation of the Panel of Adjudicators
The existing Auditors of the Sheriff Court Districts where the
Auditor is not currently employed by Scottish Court Service, and
the newly appointed Auditor of the Royal Faculty of Procurators in
Glasgow, who has recently retired from the post of Sheriff Court
Auditor there, will be grandfathered in without the need for formal
applications, references etc. if they wish to participate.
In the future, other people such as law accountants will require
to fill in an application form with details of their experience of
assessment of fees and/or taxing accounts; provide the names of at
least two solicitor referees to allow the Society to obtain
references from them; pay an application fee to meet the cost of
considering the application; undertake training and obtain a
satisfactory assessment at the end before being appointed; and
agree in writing to abide by a Code of Practice (see 6 below). The
Auditor of the Court of Session should also be grandfathered in to
act in an appellate role (see 8 below).
3. Administration and Supervision
The scheme would be administered by the Professional Practice
Department at the Society and supervised by a Sub-Committee set up
by the Society's Regulatory Committee for the specific purpose of
this scheme.
4. Charging for Fee Determination
Certificate
The Adjudicator will have discretion to decide whether the cost
of the Certificate is to be met by the solicitor or the client or
both of them, and in what proportions, but with specific criteria
set out to achieve consistency, and subject to a maximum percentage
of the amount of the account.
The current "rule of thumb" appears to be that if an Auditor
taxes 20% or more off the account, the solicitor pays for the
taxation, but if it is less than 20% then the client still has to
pay. The Committee feel that is unfair on the client and the
threshold for the client being successful will be set at the higher
of £300 or 10% of the account. £300 is chosen as that is 10%
of the current Small Claim limit, and it would be unreasonable to
require a solicitor to achieve a degree of accuracy of 90% or more
when the total account is £3,000 or less.
The maximum that the Adjudicator could charge for the
Certificate will be the higher of £100 or 5% of the amount of the
account.
Finally there will be a cancellation fee, payable by the parties
equally, if a hearing which has been fixed (see 6 below) is
cancelled less than 7 days beforehand. The cancellation fee will be
50% of the normal charge based on the amount of the account as
rendered. If the parties wish the adjudication to be based on
written submissions, the cancellation fee will be payable at the
same rate if the request for the Certificate is withdrawn more than
21 days after being submitted.
5. Practice Guideline
The practice guideline will be amended be to take account of the
Scheme. Failure to comply with a guideline may still be
treated as either unsatisfactory conduct or professional
misconduct, but is not automatically a conduct matter in the same
way as breach of a rule.
6. Code of Practice for Adjudicators
There will be a short Code of Practice to achieve some
consistency, including matters such as declaring an interest and
the avoidance of conflicts of interest; confidentiality; complying
with a timescale of four weeks if written submissions are made and
the need to advise promptly if the timescale could not be adhered
to; the return of documents submitted; notice to be given if an
oral hearing is to be allowed and the circumstances in which that
should take place. Either party will be entitled to request an oral
hearing but the decision will rest with the Adjudicator.
7. Binding Contract
The solicitor and client seeking a Certificate will both be
obliged to sign a binding contract with the Society agreeing to
meet the Adjudicator's fee subject to the criteria set out at 4
above, including the cancellation fees.
8. Appeal/Review
There will be a right of appeal by either party to the Auditor
of the Court of Session against the Adjudicator's decision in the
Certificate, but not on a decision to allow or refuse an oral
hearing.
9. Solicitor as Sole Executor or as Attorney where
Granter Incapable
The existing Practice Guideline states that a solicitor who acts
as an administrator of a client's funds under a Power of Attorney
where the grantor is no longer capable, or as a sole executor, may
consider having a fee note prepared or taxed by an Auditor of Court
with an appropriate certificate. This scheme will also be available
to determine fees where a solicitor or a firm's Trustee Company act
as as executor or as an attorney.
Society engages with HSBC over separate representation
documents - March 2012
The Society has been in contact with solicitors representing
HSBC to raise concerns about the most recent version of the
documentation issued to solicitors acting for purchasers obtaining
a mortgage from the Bank, where the Bank is separately represented
by an HSBC panel firm. The latest version still contains a number
of unacceptable requirements, including undertakings to guarantee
vacant possession of the property at settlement and to deal with
any requisitions from the Keeper within 3 working days. It also
continues to employ English conveyancing terminology. The new
procedure, which was introduced in January without any prior
consultation, has been creating difficulties for buyers and sellers
and their agents.
Ross MacKay, convener of the Society's Property Law Committee,
commented: "It is very disappointing that, a month after we
first raised the issue, HSBC's agents are continuing to issue
paperwork which not only causes a lot of additional work for
purchaser's agents, but also expects those agents to undertake to
do things which are outwith their control. This is on top of the
£192 charge imposed on borrowers who choose their local solicitor
to act for them in the purchase. We have raised our concerns with
the Bank's solicitors and await a substantive response. To avoid
delays in ongoing transactions we had called on the Bank to restore
the open panel system until these issues were resolved, but they
have decided to adhere to their flawed stance."
Agents with concerns about the documentation should contact the
secretary to the Property Law Committee, John Scott johnscott@lawscot.org.uk
In the meantime purchasers obtaining a loan from HSBC, and affected
sellers, should be warned that there may be delays while the
outstanding issues are resolved.
Law Society of Scotland issues warning over HSBC mortgage
documentation - February 2012
The Society has issued a warning to solicitors acting for
purchasers obtaining a mortgage from HSBC, where the Bank is
separately represented by an HSBC panel firm. Documentation which
has been issued by the panel firms is based on English conveyancing
law and practice and requires both the purchaser's solicitor and
the seller's solicitor to grant undertakings, some of which may be
difficult to honour. It also requires the purchaser's solicitor to
undertake a considerable amount of additional work which would not
be required if that solicitor was acting directly for a mortgage
lender under the CML Lenders Handbook. The Society's advice is that
solicitors should decline to engage with the panel firm on the
basis of this documentation, as it exposes them to unacceptable
risk.
The Society's warning follows the launch last month by HSBC of a
new panel system comprising only four firms in Scotland which
are allowed to carry out security work on its behalf and the
imposition of a charge of almost £200 on borrowers who choose
a non-panel solicitor to act in a purchase.
Ross MacKay, convener of the Law Society of Scotland's Property
Law Committee, said: "Now that we have had sight of the
documentation being issued on behalf of HSBC we have serious
concerns that buyers' solicitors are being placed in an invidious
position by being asked to deal with paperwork which is patently
not fit for purpose. This further penalises customers of the Bank
who choose their own solicitor. Regrettably it seems that a system
patently designed for England is being imposed on Scottish
practice, to the detriment of both public and practitioners. We
would urge the Bank to review their panel system immediately so
that customers currently buying properties with an HSBC loan are
not prejudiced."
Nationwide Building Society
Nationwide Building Society have confirmed their decision to
reduce the size of their conveyancing panel throughout the UK by
removing firms which have not carried out any new security work for
them in the past year. They are writing to affected firms to inform
them of this decision and to explain that there is a right of
appeal. However the relevant letter indicates that a prerequisite
of making an appeal is membership of the Conveyancing Quality
Scheme (CQS) operated by the Law Society of England and Wales.
Nationwide have assured us that this condition does not in fact
apply to Scottish firms.
Assessment of fees by Auditors of Court
From 30 April 2012 those Sheriff Court auditors who are employed
by Scottish Court Service will be barred from undertaking private
work either in relation to assessing fees at the request of
solicitors or extra-judicial taxations on a joint remit from
solicitor and client. Auditors who are not employed by Scottish
Court Service, including those in Edinburgh and Glasgow, will
continue to be able to offer such services.
All Sheriff Court auditors will continue to tax judicial
accounts.
Firms whose terms of engagement state that fees will be assessed
by the auditor of court should review those now, particularly in
relation to executry work. Files could be sent to external law
accountants for feeing.