The City of London Law Society (CLLS) Land Law Committee has released a protocol for discharging mortgages of commercial property, incorporating input from the Association of the Property Leaders and the CLLS Financial Law Committee (the Protocol). The Protocol was produced in order to simplify the very common process of discharging mortgages of commercial property. Surprisingly, lawyers can spend hours debating and negotiating completion process of discharging the outgoing mortgagor’s charge and completing the incoming funder’s mortgage despite it being something that happens on a regular basis!
Which comes first, the release or the money?
The potential gridlock arises on the redemption of a commercial mortgage because buyers will fight over which comes first, the ‘chicken or the egg’, the release or the money?
The buyer’s funder will want the seller’s funder’s (Releasing Funder) release documents to be signed prior to completion and delivered legally on completion with the original to follow shortly afterwards in line with their solicitor’s undertaking. However, the Releasing Funder will not want to hand control of the release documents to the buyer’s funder (Incoming Funder) until it has received the funds to redeem the charge.
Whether it is the Incoming Funder or the Releasing Funder who is to compromise is usually the topic of many a conversation throughout the transaction and leading towards completion. Whilst the Protocol is not a legal requirement, it is intended to be a helpful starting point when parties undergo the negotiation of the completion mechanics.
The Protocol is designed to address what the CLLS classes as a ‘standard form of transaction’ and should be adapted as and when relevant in transactions with different features. The ‘standard form of transaction’ is:
- the Releasing Funder has a first legal mortgage registered against the seller’s property which is to be discharged on the sale of the property out of the sale proceeds; and
- a new mortgage over the property is to be granted to the Incoming Funder on completion.
The Protocol suggests that prior to completion, the following requirements should be met:
- The Releasing Funder’s solicitors should hold the signed but undated release documents
- The Releasing Funder should provide a redemption statement setting out the amount required to redeem the charge
- Completion monies are to be transferred to the seller’s solicitors held to the Incoming Funder’s solicitor’s order
- At completion, all parties will be on a call whereby the Releasing Funder unconditionally releases the release documents and title deeds, and the buyer’s solicitor unconditionally releases the funds to the Releasing Funder
- The release documents, together with any other Land Registry forms and the Incoming Funder’s new mortgage, are then completed.
The Protocol also envisages a scenario whereby the process is tailored if the seller’s funder requires the funds to be held in its own solicitor’s accounts prior to completion.
The Protocol contains wording for a draft completion undertaking to assist solicitors inreaching a common ground.
Is the Protocol useful?
Some funders use electronic discharges which will now commune that there is no physical Land Registry form DS1 (filed to discharge the mortgage at the Land Registry) to hand over on completion. If this is the case, there will be a risk that the Releasing Funder will not issue the electronic discharge after completion and this Protocol thereby would not work. Further, if a party is not legally represented, as this Protocol is reliant largely upon solicitors’ undertakings, it will be difficult for it to apply.
On the flipside, if a transaction fits into the standard procedures, this will hopefully help reduce the amount of time spent negotiating completion mechanics and will provide the funders with some comfort and understanding as to the procedures being undertaken.
Time will tell as to whether the protocol proves to be a success.