BORROWER meeting lender’s legal costs unjust, says Michael Sheridan
Within relatively recent times, we have moved on from the legality of refusing mortgages and accommodation on grounds of race or gender and from imprisonment by reason of sexual orientation, and also from hanging people in certain circumstances. Among the unjust anachronisms which have not been resolved, however, is the statutory presumption that the mortgage borrower will be liable for the legal costs incurred by the mortgage lender. This is set out in the Conveyancing and Feudal Reform (Scotland) Act 1970 and, although the feudal system itself has since been abolished, the statutory presumption remains firmly in place. Apart from the fundamental query to which the intervention of parliament in private legal relations must give rise, there are four principal reasons as to why this provision is unfair, anachronistic and probably even contrary to law.
In the first case, the provision harks back to the times when mortgage lending was either a benevolent undertaking or a system of mutual non-profit-making projects which led to the building society movement. In those days, interest on the loans might not have been charged at all or may have been charged at a low rate. In consideration of this benevolence or mutuality, the borrower would meet the legal expenses of the lender. In any case, it was a far cry from the profit-seeking, shareholder-driven lending banks that seek to exploit the market today. Benevolence and mutuality have virtually disappeared and the grounds for the borrower meeting the lender’s legal costs may be equally out of time.
In the second place, the practice appears to be anti-competitive. While the lender chooses which solicitor to instruct, it is the borrower who pays the bill – but that borrower has no opportunity to review the market for solicitors’ services or to negotiate a fee with the appointed solicitor. Now, the lender may well elect to instruct the borrower’s solicitor which would appear to bring the market into play. However, that is a concession by the lender which does not have to be made, and which, in any case, has been largely eroded by the operation of lenders’ solicitors’ panels and the exclusion of many solicitors from those panels. While the lender retains the power of appointment of a solicitor for whose costs the borrower is liable, the borrower remains potentially liable for the costs of a solicitor for whom he has no competitive basis for selection. Therefore, the mortgage agreement between the borrower and lender, by virtue of the statutory presumption, may be seen as preventing or distorting competition for legal services.
In the third place, when this statutory provision was made, legal costs were something of a fixed quantity as a result of the operation of the solicitors’ scale of fees, so that the borrower knew or was able to find out what he was letting himself in for. Now that the scale of fees has effectively been abolished as anti-competitive, the borrower has no such advance notice. It would be counter to human nature if there were not at least some occasions on which service providers charged exorbitant fees where they held a virtual monopoly on the instructions of a customer and their costs were not subject to any specific control. At least one such case has been reported to the council of our society. In any case, the borrower has no right to know what costs he will incur until the bill from the solicitor appointed by the lender arrives on his doorstep.
In the fourth place, since the statutory presumption was enacted, regulations have been created to protect clients who are not properly served by their solicitors, even where no legal wrong has been done. Hence we have the concept of compensation for inadequate professional service. The individuals who pay for the solicitors engaged by their mortgage lenders are not clients of those solicitors and may be excluded from at least some of that protection.
This statutory intervention in private contract may or may not have been philosophically defensible when it was created but it now appears to be entirely out of time and should be removed from the statute book, which is why the Scottish Law Agents Society passed a motion to that effect at their annual general meeting on 19 June.
• Michael Sheridan is secretary of the Scottish Law Agents Society scottishlawagents.org