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The committee has been asked to again highlight the dangers of giving undertakings in relation to houses in the course of construction. It refers practitioners to its two previous practice notes, published in the Gazette in November 1990 and April 1999 (both of which are also republished in the committee’s Conveyancing Handbook). The necessity of qualifying title to a lender in relation to houses in the course of construction and stage-payment loans was more recently highlighted in the covering letter to the profession launching the 2009 certificate of title documentation.

The standard solicitor’s certificate of title for residential mortgage lending includes a certificate that planning matters are in order and that an appropriate certificate of compliance has been obtained. Clearly, an undertaking to furnish such a certificate of title cannot be given where a house is in the course of construction. The potential difficulties that may arise in relation to providing such an undertaking include:

• The house may not be completed at all,
• The house may be completed, but may be in breach of the planning permission,
• There may be a lack of cooperation between the client and the architect/engineer, resulting in a certificate of compliance not being forthcoming,
• There may be a lack of cooperation between the client and the solicitor, resulting in the client failing to attend to the procurement of the final certificate of compliance.

In the case of houses in the course of construction, a solicitor should qualify the undertaking to the lender before drawdown (or first drawdown if it is a stage-payment loan) to the effect that (s)he cannot undertake that (s)he will certify title as regards planning matters. The amount of the loan and the stated purpose of the loan will usually indicate to a solicitor whether the loan is for the purchase of the site only, or whether it is for the construction of a house – either on a site that the client already owns, or on a site that the client is purchasing. The solicitor should then bring the draft qualification to the attention of the lender for the purpose of agreeing it with the lender prior to drawdown. In cases where it is intended to issue the loan in stages, the solicitor will also need to insert the standard qualification regarding stage payments – as set out in the Certificate of Title Guidelines and Agreement (2009 edition).

The lender, on seeing the draft qualification to the undertaking, will usually:

• Make it a condition of drawdown/first drawdown that the solicitor ensures that there is evidence of planning permission, etc, being in place for any house to be constructed.
  
• Arrange for drawdown to take place in stages, on foot of certificates of interim compliance by an architect or engineer, which certificates usually also confirm the value of the work done at each stage. Most lenders deal directly with the client and the architect/engineer on these interim certificates, but the stage payments usually come through the solicitor.
  
• Introduce a requirement pre-drawdown that the solicitor will not release the final stage payment to the client/builder until the architect or engineer produces the final certificate of compliance with planning and building regulations.

In this way, even though a solicitor qualifies the undertaking, the lender, in effect, usually draws the solicitor back into the matter – but, at least, all sides know that it is on the basis that the lender will monitor the interim payments and that the solicitor will obtain the final certificate of compliance before releasing the final stage payment.

If there is a financial condition in the planning permission, then the solicitor would also need to either:

• Exclude the financial condition from the certificate of title – of course, this would have to be specifically notified to the lender in advance of drawdown/first drawdown by qualifying the undertaking to the lender in this regard, or
  
• Obtain from the client a receipt for discharge of the financial condition before drawdown/first drawdown of the loan.

The above principle also applies in relation to undertakings in respect of apartments and commercial property in the course of construction. The requirement for the additional stage payment qualification should not arise in relation to apartments, because a stage-payment loan in relation to a new apartment should not arise in practice.