Critically assess the role formerly played by letters of obligation in relation to settlement of transactions and how they have been supplanted by advance notices.

  1. Since the coming into force of the Land Registration (Scotland) Act 2012 on 8th December 2014 letters of obligation have largely been replaced by advance notices.

Critically assess the role formerly played by letters of obligation in relation to settlement of transactions and how they have been supplanted by advance notices.

The role of solicitors in the conveyancing process has drastically changed, with letters of obligation largely being replaced by advance notices which is the biggest change to conveyancing procedures since the coming into force of the 2012 Act. In Scotland, a disposition does not transfer ownership until it is registered. This means there is a gap between the transaction settling and the date on which title actually transfers. The difference now is that there is a move away from the practice of sellers’ solicitors underwriting the risk of the gap period by letters of obligation, to the new statutory advance notices.

The Letter of Obligation was introduced into the conveyancing system by lawyers to meet a problem. That problem is twofold. First, there is always a gap between settlement and registration. Unless a settlement takes place at Register House there will always be at least a few days between delivery of a Disposition and its registration. Second, the Search Sheet is out of date.

The possibility of the seller being sequestrated or going into liquidation or administration during the gap period also posed a serious risk. To provide protection against the occurrence of these risks – particularly insolvency or the emergence of a rival deed, the letter of obligation historically stepped into the breach. If you are interested in SEO, visit SEO Glasgow for more information

The obligation is limited to entries existing at settlement or made within 14 days thereafter. But so long as the buyers register their own disposition within this period, they could not be affected by later entries which derive from the seller. The letter of obligation was, in effect, a guarantee that the registers would be clear of any competing deeds or decrees and diligences affecting the seller. This was illustrated in the A & S Gorfon v Dryburgh 1896 Act where clear means clear. The defence that inhibition was ineffective was irrelevant as the search was not clear.

The consequences of a Letter of obligation were illustrated in the Johnston v Little 1960 case. It was held here that a solicitor is personally liable in terms of the letter. They can be sued for implement by solicitor of other party. There may be an issue in relation to damages as purchaser’s agent has no loss. The agent can be sued jointly and severally with the client for the principle obligation in the same action as seen in McGillivrary v Davidson 1993.

The classic letter of obligation does not need to have any specific words. To be classic, the letter must cover only two matters; a guarantee of the “gap” period, for a maximum of 14 days after settlement and an undertaking to deliver the deed of discharge in the event that it is unavailable at settlement. In recent years, solicitors have, quite rightly, questioned why they should provide such a guarantee to make the conveyancing system operate more efficiently. As Professor Rennie has said, the letter of obligation is effectively the oil that lubricates the system and enables it to work.

It appears however, that Scottish solicitors, as well as insurers, have not been satisfied with this system. The Scottish Law Commission, because of this recommended a new system of “advance notice” with respect to the registration of deeds. The system of advanced notices has now become law, as part of the Land Registration (Scotland) Act 2012.Under the new system, the risks that are covered by letters of obligation would fall within the purview of the Act. It is thought that letters of obligation will be redundant and no longer required.

The advance notice does not freeze the register in any way but it gives preference to a protected deed. The working of an advance notice may have the effect of replacing a person in the proprietorship section of the title sheet if that person transacted in the face of an advance notice entered on the application record. An advance notice can also change the ranking of a standard security shown in the securities section of the title sheet

The case law in Sharp 1997 and Burnett’s Trustee 2004 was pivotal in verifying the race to the registers. In Sharp due to a mistake, a disposition was not recorded after settlement. Receivers were appointed to the selling company and a floating charge granted over its property crystallised. Lord Jauncey held that although ownership hinges on registration, some sort of beneficial interest in the property passes on delivery and this was enough to overcome the receiver. Therefore, the advance notice system benefits both conveyancer and client as the whole problem in Sharp would have been avoided completely

This system largely covers the same risks covered by a letter of obligation but moves toward a more straightforward conveyance which will be welcomed by solicitors and clients alike. Advance notices will safeguard against the registration of another conflicting deed and the bankruptcy of the seller for up to 35 from the date of their lodging. There is also protection against inhibitions and other entries in the personal register in the gap period. These protections are not financial in the sense of claims against RoS – they actually protect the real right by ranking the protected deed ahead of the competing one.

There are some exceptions, though. Advance notices do not protect against anything non-registerable, e.g. short leases, or notices under s 10(2A) of the Title Conditions (Scotland) Act 2003.  Advance notices cannot protect deeds that will only be recorded in the Sasine Register. Unilateral deeds cannot be protected either, though as the granter remains in control of the property, there is no risk for these anyway.

Considering the above arguments, it is clear that advance notices were needed. Before their introduction, Scotland was the only country that used the system of letters of obligation. Advance notices will therefore, both appeal to the conveyancer and benefit the client as the system is now more modern and in line with the rest of Europe.

Clearly, advance notices are more appealing to the conveyancer and beneficial to the client than letters of obligation as they are straightforward, cheaper, remove solicitor’s liability and also provide a period of protection. In light of the LRA 2012, advance notices have again had a beneficial impact as they render inhibitions meaningless, during the protected period, once they have been granted.