Borrowers' Liability for Mortgage Lenders’ Legal Costs

The legal profession recently divided over the issue as to whether solicitors should continue to act for both sides of the mortgage lending transaction. The conclusion has been that there should be no change to the current exception which permits solicitors to act for such apparently conflicting interests. However, on further consideration, Slas Council wonders whether the real issue here is not so much as to who acts for whom but rather the underlying assumption that the borrower is responsible for the legal costs of the lender’s solicitors. Why should that be the case? It just is. By virtue of the standard conditions attributed to standard securities (Conveyancing and Feudal Reform (Scotland) Act 1970 Section 11 and Schedule 3 paragraph 12), it is an implied/imported condition of the standard security that the borrower will be responsible for those costs. Council wonders, however, whether there may be substantial reasons why this should no longer be the case.

It seems to Council that there may be at least three reasons why this provision is now an unjustified anachronism.

In the first case, the provision harks back to the times when mortgage lending was either a benevolent undertaking or a mutual non-profit making project which led to the building society movement. In those days, interest on the loans might not have been charged at all or may have been charged at a low rate. In consideration of this benevolence or mutuality, the borrower would defray the legal expenses of the lender. In any case, it was a far cry from the profit-seeking, shareholder driven lending banks that seek to exploit the market today. Benevolence and mutuality have virtually disappeared and the grounds for the borrower meeting the lender’s legal costs may be equally out of time in this day and age.

In the second place, the practice may be anti competitive. While the lender chooses which solicitor to instruct, it is the borrower pays the bill but has no opportunity to review the market or negotiate a fee. Now, the lender may well elect to instruct the borrower's solicitor which would appear to bring the market into play. However, that is a concession by the lender which does not have to be made and which, in any case, has been largely eroded by the operation of lenders’ solicitors panels and the exclusion of many solicitors from those panels. While the lender retains the power of appointment of a solicitor for whose costs the borrower is liable, the borrower remains potentially liable for the costs of a solicitor for whom he has no competitive basis for selection.

In the third place, when this statutory provision was made, legal costs were something of a fixed quantity as a result of the operation of the solicitors’ Scale of Fees so that the borrower knew or was able to find out what he was letting himself in for when he entered the loan transaction. Now that the Scale of Fees has effectively been abolished, the borrower has no such advance notice and Council has been told of at least one case in which it would describe the fee as bordering upon exorbitant.

With these thoughts in mind, Council is considering going forward with a policy of seeking the removal of the outdated standard condition. A motion to that effect has been tabled for the AGM on 19 June this year and proxy forms have been distributed to the members. However, this is far from a done deal and Council is anxious to promote discussion and consideration around the membership. Council seeks further insight into the origins of the statutory provision and the extent to which it was fashioned for circumstances that are no longer in place. Information and opinions are invited for publication on this page. Please write to secretary@slas.co.uk . Please register your issue even if it is only to confirm your agreement that further exploration of this issue is required.

Secretary


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