Mortgage redemption statements

Problems relating to mortgage redemption statements have caused difficulties for lenders and solicitors (this expression to include licensed conveyancers) for a number of years. In 1985 the Building Societies Association (BSA) and the Law Society issued detailed advice to their respective members on this subject because of the difficulties which were apparent at that time. The advice comprised paragraphs 9 to13 of BSA Circular No. 3155 and those paragraphs are now replaced by the new guidance set out hereunder. In recent months, the Council of Mortgage Lenders (CML) has received a number of enquiries in respect of redemption statements provided by lenders to solicitors acting for the lender (who will often also act for the seller). This guidance refers to some of the circumstances which can produce errors and problems, and the consequences which this can have for the solicitor in the conveyancing transaction. It also suggests certain practical measures designed to reduce problems in this area. Accordingly, it is of importance to all lenders and covers: (a) (b) (c) (d) (e) (f) (g) (h) the function and importance of solicitors' undertakings; the general principle that lenders should seal a discharge where a redemption statement was incorrect; ways in which lenders might overcome the difficulty caused when the borrower prematurely stops payments; similar proposals as to the problem of dishonoured cheques; suggestions for overcoming difficulties sometimes presented by multiple mortgage accounts; information to be provided to banks for inclusion in telegraphic transfers; the importance of returning the sealed discharge promptly.

Terms of Reference
This guidance applies to England and Wales; separate guidance for Scotland and Northern Ireland will follow, if necessary.

Redemption on Sale
The guidance applies primarily to redemption of a mortgage on sale of the security and, consequently the lender's/seller's solicitor is required to give an undertaking to the buyer's solicitor that the charge will be discharged.

It is appreciated that an undertaking will also be given on a re-mortgage and that, accordingly, the guidance should be interpreted as including this situation.

Simple redemption
Much of the guidance is inapplicable to a straightforward redemption (without sale or remortgage) as no undertaking is given. However, even in redemptions per se, solicitors and lenders will no doubt wish to provide accurate information and deal promptly with their respective responsibilities.

Solicitors' Undertakings
The solicitor acting for the seller will need, on completion, to satisfy the buyer's solicitor that the mortgage

." Incorrect Redemption Statements Before completion of a sale. There will be a shortfall if the lender assumed.[the lender].. WE HEREBY UNDERTAKE forthwith to pay over to ..) This difficulty is less likely to arise where payments are made by direct debit because the lender is the originator of the debit and therefore has control over the raising of any future direct debits from the borrower's bank account.. In other words.... On completion.... This problem is solved by the use of the solicitor's undertaking.. However. [the lender] the money required to redeem the mortgage/legal charge dated . This leaves the buyer's solicitor with a problem in that he has to be satisfied that the mortgage will be discharged and that he will obtain the receipted mortgage or Land Registry Form DS1. If this is the case. This gives the solicitor an early chance to address his and his borrower client's ... Most lenders will not seal the discharge (this expression to include sealing the vacating receipt on a mortgage deed or sealing of Form DS1) until they receive the redemption money.... In theory the buyer's solicitor will wish to see the mortgage discharged before the purchase money is paid. the mortgage will not be discharged until the balance is received.. However. they 'freeze' the account balance at the day of the redemption calculation.. The lender might be unwilling to discharge the mortgage and. If the lender supplies an incorrect redemption statement.. Cancellation A difficulty arises if the mortgage payments are made by standing order and. Some lenders overcome this problem by excluding any future payments due when calculating the redemption figure. where the monies to repay the mortgage are being provided wholly or partly by the proceeds of sale.... then the mortgage cannot be paid off until after completion. there is no guarantee that direct debits will be honoured and they may be returned on the grounds of insufficient funds or that the customer has closed his account or instructed his bank to cancel the direct debit... shortly before completion. and the solicitor has acted in good faith and with no knowledge that a payment has been or is likely to be cancelled.on the property being sold has been or will be discharged. This is to avoid the solicitor being in breach of his undertaking to the buyer's solicitor. if it is not paid.. An alternative is for the lender on the redemption statement to make it clear to the solicitor that it is assumed that the next payment will be made and that. the seller's/lender's solicitor will provide the buyer's solicitor with a written undertaking to redeem the mortgage(s) in a form recommended by The Law Society similar to that set out below: "In consideration of your today completing the purchase of ....... The disadvantages of this are that (if the payment has not been cancelled) the borrower has to pay a higher redemption figure and the lender has to make a refund to the borrower after redemption. (The lender would then have to recoup the money from the borrower. Problem Areas Problems with redemption statements can arise for a number of reasons: (a) (b) (c) a lender might simply make a mistake in calculating the redemption figure. the borrower stops the payments without notice to the lender. the lender's/seller's solicitor will obtain a redemption statement calculated to the date of redemption..... Some of the more common practical problems are outlined in the following paragraphs. there might be misunderstanding between a lender and the solicitor.. without making this assumption clear that the next payment would be paid and made the redemption figure calculation accordingly. the solicitor is likely to forward insufficient money to redeem the mortgage. difficulties could be caused by the cancellation of standing orders or direct debit payments or by borrower's cheques being dishonoured. if the solicitor is not holding more funds on behalf of the borrower.. the view of the CML is that the lender should seal the discharge. He will sometimes request the daily figure for interest which will be added if completion is delayed. the solicitor would be in breach of his undertaking. and to forward the receipted mortgage/legal charge/form DS1 to you as soon as it is received by us from ...

It is suggested that the solicitor should if possible. This has the disadvantages described above.g. However. When mortgages are being redeemed the telegraphic transfer which a lender receives is often difficult to identify and to match to a particular account. on certain re-mortgages. On a sale.mind to this situation and to ensure that sufficient monies will be available to redeem the mortgage. . provided that the solicitor acts in good faith and without knowledge that the cheque would be or is likely to be dishonoured. in a note on the statement. For example. unless there is good reason for the delay. the lender should seal the discharge. it is possible. Exceptions to this are if the lender: (a) prepares the redemption statement on the assumption that the cheque will not clear and informs the solicitor of this. Uncleared cheques This is a very similar situation to that of standing orders and direct debits. that it is the intention of the borrower and the lender that not all mortgages will be discharged and replaced. This would enable the buyer's solicitor to lodge an application with the Land Registry pending receipt of receipted mortgage or sealed Form DS1. The administrative difficulties which are caused by the inability to identify the money would be overcome if solicitors provided to the bank the information to be included in the telegraphic transfer. as all mortgage accounts will be repaid. lenders will no doubt deal promptly with this important procedure. send a copy of the redemption statement to the borrower to check agreement on the amount shown as due to the lender. although it is hoped that this would only be necessary in exceptional circumstances. or notifies the solicitor that a cheque has been received and that. there will be more than one account number. the borrower's mortgage account number and the firm's name and address. the solicitor should make it clear to the lender which mortgages the borrower wishes to redeem. for example. a solicitor sending the form to the wrong office of the lender. e. there could be a secured personal loan which is a regulated agreement under the Consumer Credit Act 1974 and/or a further advance conducted on a separate account basis. Telegraphic Transfers Lenders could request that solicitors adopt procedures to assist in the identification of telegraphic transfers. the mortgage will not be discharged until the balance is received. probably. Solicitors should be encouraged to ask for a statement at the earliest possible date. The solicitor should also quote all relevant account numbers if known as far as possible and ensure that the redemption statement received from the lender includes all the mortgages which are intended to be redeemed. Delay Lenders are sometimes criticised for delay in providing a form of discharge after redemption of the mortgage.e. and time permits. If so. The CML's view is that if the lender does not notify the solicitor that it is assumed that the borrower's cheque will clear then. i. However. Indeed. after all. (b) Separate loan account The lender may have more than one loan secured on the property. when requesting the redemption statement. It is suggested that lenders should aim to return the receipted mortgage or Form DS1 within 7 days and if there is likely to be a delay beyond that period they should notify the seller's solicitor. this would also serve as a reminder to the solicitor to warn the borrower client of the importance of continuing the payments in the normal way up to completion. if it does not clear by the date of redemption. be acting for the lender in most cases) is as clear as possible about the mortgage account(s) being redeemed. The lender should have its own internal cross-checking system but it is vital that the solicitor (who will. The solicitor should inform the lender of any mortgages of which he is aware which are outstanding with the lender but which are not being redeemed. It is recognised that most lenders can and do return the receipted mortgage or Form DS1 promptly and that solicitors can apply for registration to protect priority. multiplicity of accounts should not present a problem unless the solicitor does not know and is unable to specify every account and has no notice or cause to query the matter and the lender fails to cross-check the matter internally. In such cases. in addition to the principal mortgage.

It is hoped that some of the practical measures referred to above will be implemented to avoid difficulties on redemption. Nevertheless. it is generally because of a clerical or administrative error on the part of the lender. It is the CML's view. could not reasonably have believed in the accuracy of the statement. This might prevent the borrower from successfully claiming estoppel against the lender. if there is such a major discrepancy in the redemption figure that the The Law Society and the Council for Licensed Conveyancers agrees with the views expressed in these paragraphs. relying on an incorrect redemption statement provided by the lender.cml.) Such cases do not occur frequently. the solicitor should immediately draw this to the lender's notice and should pursue his borrower client actively for any shortfall. the lender might wish to make it clear that the release was not intended to discharge the borrower from his outstanding personal liability. and the amount is usually small. Very rare cases could arise where general guidance of this kind is inapplicable. (However. in such cases. when they do. such as by omitting one month's interest or an insurance premium.. where it appears that there has been an . and lenders. the account number(s). perhaps. for example. the lender should discharge the mortgage. in turn. the property.The CML view Many of the difficulties described above would be reduced if as a matter of course solicitors gave lenders correct information about the borrower. and. operated internal cross-checking systems and provided accurate and complete redemption statements showing clearly the last payment to be taken into account and. etc. The undertaking given to the buyer's solicitor is a vital part of the conveyancing process. it is unreasonable that a solicitor should be put in breach of his undertaking. systems permitting. If the solicitor. March 1992. sends insufficient money to redeem a mortgage. which is clearly due to an error by the lender or lack of clarification. updated February 1999 © Copyright March 1992 Council of Mortgage Lenders address North West Wing Bush House Aldwych London WC2B 4PJ telephone 0845 373 6771 fax 0845 373 6778 website www. his solicitor. Conclusion Where there is an incorrect redemption statement. details of all the borrower's accounts relating to the property which represent mortgages to be discharged. that the lender should seal the discharge.