Discharging mortgages protocol—is it working for commercial properties?

Is the new protocol for discharging mortgages of commercial property proving effective? Roger Hawkins, consultant in real estate finance at Berwin Leighton Paisner, and Jenny Sargeant, senior solicitor and specialist in real estate finance in Macfarlanes’ commercial real estate team, comment on progress so far.

Original news

Guidance: Protocol for discharging mortgages of commercial property

The City of London Law Society Land Law Committee has prepared a protocol setting out a procedure to be followed by solicitors and their clients when dealing with the discharge of mortgages of commercial property. Currently there is no Law Society endorsed code for completion relating to commercial property. The Committee said it sees the protocol as providing a guide as to the steps that might be adopted, which are appropriate and fair to all parties.

What were the most significant changes brought about by the new protocol?

Roger Hawkins (RH): There has been a similar protocol for purely residential deals for some time. That had not been intended to apply to commercial deals, possibly because commercial transactions would be less routine and not suited to a single set of rules. For that reason, the new protocol does not set out to be anything more than suggested guidance, rather than a compulsory set of rules.

Jenny Sargeant (JS): The most significant change brought about by the new protocol is to hold out a ‘fair’ market standard. There is now pressure for outgoing and incoming lenders to accept the protocol requirements on the basis they represent best practice.

What issues were the protocol designed to address?

RH: The aims of the protocol are modest—namely to specify some standard wording for the contractual terms and solicitor's undertakings to cover the mechanics for discharging mortgages and repaying the loan at the point of completion. The idea was simply to avoid time being wasted in settling the required wording separately on every deal.

JS: Prior to the protocol being issued, the mechanics for releasing security for real estate transactions were frequently being hotly negotiated. There was little consistency of approach between lenders and even scope for a lender to adopt a different approach depending on which ‘hat’ (outgoing or incoming lender) they were wearing for a particular transaction. The result was much time being needlessly spent negotiating completion mechanics, often under significant time pressure when parties were working hard to drive a deal towards a specific completion deadline.

How well has the new protocol worked in practice?

RH: So far, it seems there is little explicit reference as such to the protocol in transactions, and parties generally proceed as they usually would.

JS: There is a huge time saving benefit in quoting the protocol as authority for ‘best practice’. Our experience is that referring to the protocol is highly persuasive during negotiations as it is very difficult for lenders to take issue with its recommendations without appearing to be unreasonable. The protocol is also designed to be tailored to the specifics of a transaction and where all parties have legal representation it can be applied easily to the requirements of a particular deal.

Have there been any challenges or unforeseen consequences?

RH: No, but the new protocol does not yet seem to have been widely adopted.

JS: The main disadvantage of the protocol is it is not legally binding and represents best practice only. Our experience is that the protocol has not yet reached a profile status of being the ‘market norm’ and, while it is a persuasive negotiating tool, it is something that frequently has to be ‘flagged’ to parties rather than being referred to as a matter of course.

The protocol also does not cater for circumstances where the outgoing lender is not represented (the mechanics require a solicitor to provide various undertakings). One solution here is to investigate whether there is an in-house solicitor at the lender who is able to provide enforceable undertakings.

Additionally, the protocol does not address the concerns of an incoming lender where an outgoing lender uses electronic notifications to release security to the Land Registry and so will not provide an executed release form that can be dated on completion simultaneously with release of funds.

What are the implications for lawyers and their clients?

RH: Although the protocol does not seek to regulate all the issues that can arise, it does at least urge lenders to adopt consistent practices. In other words, not to insist on something when acting as the outgoing lender, while opposing it when acting as the incoming lender.

It should be noted that the protocol does not seek to address several important issues that can arise on redemptions. For example:

  • the outgoing lender who demands receipt of the redemption money before executing any release document, or even to supply a copy or details of signatories
  • the risk of the lender's redemption statement being incorrect
  • the risk of the firm who gives the undertaking not being properly authorised

JS: The protocol has been widely welcomed by the real estate sector, as it is being used to reduce time spent negotiating completion mechanics (at a cost saving for the borrower).

Do you have any predictions for further developments?

JS: As the protocol does not apply in all circumstances, we may see demand for it to be extended to provide more detailed recommendations for best practice when parties are not legally represented and where the outgoing lender uses an electronic notification system.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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