Independent review and analysis

Buy to let lending – solicitor conflict of interest

It appears that a number of solicitor firms are just starting to test the subtlety of some of the requirements and provisions of the recent changes to the Solicitors Regulation Authority Code of Conduct 2011. One challenging area relates to conflicts of interest in respect of “buy to let” transactions.

Chapter 3 of the SRA Code confirms that “avoiding any conflict of interest is critical to public protection”. Transactions where firms are acting for both the borrower and the lender are covered by this chapter. It has always been understood that there may be a conflict of interest where a solicitor acts for both the lender and the borrower. It remains, however, possible for a solicitor to consider acting for a lender and borrower as the Code lists “indicative behaviours”, where it is potentially allowable for them to do so. One of those is that, “the mortgage is a standard mortgage (i.e. one provided in the normal course of the lender’s activities, where a significant part of the lender’s activities consists of lending and the mortgage is on standard terms) of property to be used as the borrower’s private residence”. Although “buy to let” lending is often part of a lender’s normal activity it is obviously not a loan for a borrower’s private residence.

It seems to us, therefore, that solicitors should conduct a rigorous self-assessment process before accepting instructions from both lenders and borrowers where the loan is used to purchase a property that will be used for an investment purpose such as a “buy to let”.

Solicitors we speak with appear to be challenged by the dilemma and new Code wording and looking to current lender procedures will gain little further insight. The consensus appears to remain that the lender will generally instruct the same solicitor as a borrower as long as the advance is not in the name of a limited company or the purchase is not from a connected limited company.

Although there are those, including the CML, who have concerns about the possibility of increased costs and transaction times it appears that “separate representation” may become a reality.

Clearly lenders and solicitors need to work out a common approach and intermediaries need to be on top of the debate before a client is refused joint representation.

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