15 Sep 2011

Should the same Solicitor act for both borrower and lender in a residential property transaction?

Should the same Solicitor act for both borrower and lender in a residential property transaction?

Richard Street, Partner, considers the case for separate representation.

Richard Street, Partner, considers the case for separate representation.

It has been common practice for the same solicitor to act for both the borrower and the Lender in a residential property transaction in Scotland for many years. However following two recent Court of Session decisions - Cheshire Mortgage Corporation Limited v Morna Grandison and Blemain Finance Limited v Balfour & Manson – discussion has arisen as to whether this system is archaic in nature.


In both of these cases the lenders were the subject of mortgage fraud by fraudsters. The fraudsters had applied for a loan pretending to be the actual owners of heritable property over which the lenders offered a security. The loans were approved and the standard securities executed. The money was advanced by the lenders and the fraudsters subsequently disappeared. It then emerged that the fraudsters did not own the property and the lenders were left without any security.

The fraudsters had produced evidence of their identities in the form of utility bills and driving licences to the solicitors and the lenders. In both cases the fraudsters firstly approached the lenders before instructing the solicitors. The lenders each raised actions for breach of warranty of authority, arguing that the solicitors warranted that they had the authority of the real owners. The solicitors argued that the warranty they had received did not extend that far and they only warranted that they had authority from the persons already known to the lenders.

The Court dismissed the lender’s claim and found that the circumstances in which the solicitors came to be involved in the transaction were of particular importance. The Court took the view that the solicitors were instructed by the borrowers for a limited purpose namely to draw up the security. Furthermore the Court dismissed the lenders’ arguments that they had relied upon the fact the solicitors would have carried out identity checks. It was found that the fact that a solicitor is required to do this does not mean that the solicitor automatically warrants to the other party the accuracy of the information with which he/she is provided by his/her clients.

Separate Representation

The decision in these cases highlights the issues arising in a residential property transaction where the solicitor acts for both the borrower and the lender. This is one of the exceptions to the principle against conflict of interest. The solicitor certifies that the title is valid and marketable for both parties, thus keeping costs down for both the borrower and the purchaser. However discussions now focus on whether or not the underlying conflict of interest merits the respective parties having separate legal representation.

In times where mortgage fraud and claims of professional negligence are on the increase, for their own protection it is argued that lenders need to be more explicit in setting out their panel solicitor standards. Yet changes to the current practice would most likely require the solicitors acting on each side to have a clear understanding of the division of responsibilities between them. It is suggested a specific version of the CML Handbook to apply only separate representation transactions would be issued. A specific version for English and Welsh transactions is expected to be released early this year. The debate will no doubt continue. Ultimately it will be up to each individual lender to decide whether or not having a bespoke solicitor’s panel is the way forward.

Richard Street, Partner

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