The Conveyancing Protocol as outlined by The Law Society

Article written by Laetitia Ponde Nkot

The Law Society has recently declared the implementation of a draft Conveyancing Protocol, set to be enforced in August, to facilitate the transition of residential and commercial lawyers towards a modernised digital contract exchange process in the 21st century. 

An explanation of The Law Society Conveyancing Protocol

The Law Society’s Conveyancing Protocol issued a structured framework for solicitors to follow when handling the sale or purchase of a property. This protocol is specifically tailored for residential freehold and leasehold real estate transactions, excluding the acquisition of newly constructed homes. 

Practitioners accredited by the Conveyancing Quality Scheme (CQS) are required to adhere to the Conveyancing Protocol. Although solicitors are not obligated to utilise the protocol, it is highly recommended to follow it as closely as feasible. 

What is the reason behind The Conveyancing Protocol 2019? 

Following the Court of Appeal’s ruling in Dreamvar [2018] EWCA Civ 1082, the Conveyancing Protocol of 2011 was substituted by the 2019 protocol, incorporating various changes. 

The case of Dreamvar (UK) Ltd v. Mishcon de Reya (MdR) involved the buyer taking legal action against their solicitors (MdR) for negligence and breach of trust. Furthermore, the buyer pursued a claim against the seller’s solicitors (Mary Monson Solicitors Ltd (MMS)) for breaching the warranty of authority, failing to fulfil an undertaking, and breaching trust. 

On 1st September 2014, Mr. Vardar conducted an inspection of a property. He initially offered £1 million but was informed that another developer had already made an offer. Subsequently, Mr. Vardar increased his offer to £1.1 million, which was welcomed. He then appointed MdR to represent Dreamvar in the purchase process. 

Mr. Vardar made MdR aware of the limited time available for completing all required research. He inquired about the possibility of proceeding with the project and the associated risks. 

On 3rd September, MdR notified MMS that they have been directed to represent Dreamvar in the purchase. MMS informed them that they had not yet received evidence of the seller’s identity or formal instructions for the sale, therefore preventing them from sending a contract pack to MdR. 

MdR sent Dreamvar a retainer letter regarding the purchase on that very day, however, the retainer letter failed to specify the conditions for MdR to hold and transfer the purchase funds to the seller or their solicitors. 

MdR was responsible for reviewing the contract pack, submitting pre-contract inquiries, and conducting essential searches.  

Before the 10th of September, MMS requested the seller to certify his identity and address. The seller presented copies of a driving licence and a TV licence, which were authenticated with the original documents by a solicitor from MMS. The seller happened to run into a MMS’ solicitor in the waiting room of Dennings, another law firm. 

Emitted just a short while ago on 28 August, the driving licence was only valid for 3 years. Nevertheless, it does provide the address of Broadfield Road. 

The TV licence was not part of the list of documents approved by the Law Society’s Anti-Money Laundering Practice Note for verifying the identity of UK-based clients. The judge deemed that no additional measures were taken to confirm the seller’s identity, and that no one from MMS had ever meet him. 

Preceding the trial, MMS admitted that they had not been efficient in obtaining the driving licence and TV licence as proof of identity. They accepted that they should have stood firm in meeting with the client and demanding valid proof of identity and address from him. 

The draft transfer was delivered to MMS by MdR on 16 September, along with a claim for title concerning rights of way over the property. 

MdR submitted their report on title deeds to Dreamvar, mentioning that only searches conducted by local authorities were still pending. Mr. Vardar expressed his willingness to proceed without these searches. Notably, the report did not raise any concerns regarding the possibility of identity theft by the seller. 

MdR asked for an indemnity insurance policy to ensure protection against any potential issues regarding rights of way on the property. The transfer has been confirmed, and MMS communicated to MdR that the contract had been dispatched to the seller for signing. 

On 17 September, MdR forwarded the purchase money to MMS. The simultaneous exchange and completion were conducted over the phone later the same day. 

It was the duty of MdR to retain control over the funds until the terms for MdR to hold and transmit funds were concluded. 

The seller requested on 16 September that MMS transfer the payment for the purchase to a different law firm, ‘Dennings‘, which was also his legal representative. 

Just a couple of days before, MMS had solicited the seller to furnish the essential information for the bank account where the funds from the transaction would be deposited. 

MMS viewed the order as atypical, nevertheless, they chose to continue in accordance with the instructions given in an email from Dennings‘ lawyer, advising on the seller’s actions regarding the procurement of machinery and equipment in China. 

After commencing work on the property, Dreamvar applied to register their title deed. The Land Registry managed to reach out the legitimate Mr. Haeems, thereby exposing the fraudulent activity. 

The Court of Appeal decided to uphold the appeals of MdR and Dreamvar, reversing the judge’s decision that MMS did not violate trust. Moreover, the Court chose not to grant relief to MdR under s.61 Trustee Act 1925, which at discretion, allows to excuse a breach if it is the court’s view that the trustee has ‘acted honestly and reasonably and ought fairly to be excused’ for the breach. Additionally, the Court sided with MdR and Dreamvar in their appeals against the judge’s dismissal of their claims against MMS related to a breach of the undertaking. 

Solicitors, estate agents, and other relevant individuals must comply with the Money Laundering Regulations (MLR), which enforces the adoption of customer due diligence measures when establishing a business relationship or carrying out occasional transactions. This obligation remains applicable, irrespective of any suspicions regarding the client’s involvement in money laundering or doubts about the accuracy of the identification documents or information given by the customer. 

In situations where the customer cannot be physically present for establishment of identity, it becomes imperative for the person in charge to take additional measures to minimise the heightened risk. This may involve the solicitation of supplementary documentation and details to validate the customer’s profile, while also ensuring that all submitted documents are meticulously verified. 

The updates have been developed with the purpose of reminding solicitors about their obligations, reducing the risk of fraud, and improving the overall efficiency of the process. 

Why the introduction of the Code for signing and exchanging property contracts 2024? 

The primary objective of the Code is to eradicate any uncertainty by empowering conveyancing services to utilise cutting-edge technology for transactional purposes. It consists of three protocols that address the process of ‘hold to order’ for documents or deposits, offer clarification on the handling of deposit funds when they are ‘held to order’, and ease the ‘immediate exchange’ and ‘release’ of contracts. 

The protocol specifies the information and documentation that sellers are required to gather, in addition to the research specifics that the buyer’s conveyancer needs to examine. Recommendations for conveyancers representing sellers include promptly conducting digital identity verification and anti-money laundering checks upon receipt of instructions, as well as thoroughly verifying all gathered information for potential discrepancies. 

It is recommended that the buyer verifies if the client has a smartphone for digital signing, inquires about the essential information that formed the basis of the offer, understands the buyer’s intended purpose for the property, and promptly provides a preliminary financial statement outlining the estimated completion expenses. 

According to Digital Property Market Steering Group (DPMSG), individuals who took part in the collection and provision of initial information have observed a 50% reduction in transaction times and a substantial decrease in failed transactions. 

The Society has acknowledged that while the traditional practice of exchanging physical copies of contracts signed with wet ink on paper is still common, alternative methods such as PDF scans of wet-ink-signed contracts, electronic signatures, or signing contracts on electronic devices have gained popularity. Consequently, the prevalence of digital conveyancing transactions has significantly raised. 

Freedman, consultant in the real estate department, former chairman of Mishcon de Reya, and member of the Law Society’s Conveyancing and Land Law Committee described the code, emphasising that solicitors must reach an accord on key aspects before exchanging contracts. These comprise settling the contract text, deciding on the deposit amount, and determining if it will be paid or ‘held to order‘. They must also discuss whether the contract will be signed on paper or electronically, and establish the signing method, like wet ink, on-screen writing, or an electronic secure signature. Moreover, they should agree on the process for exchanging contracts, whether through paper originals or dating on an electronic platform. 

Solicitors should make sure that contracts employing this type of contract conform to the legal standards outlined in section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 and the Law Society’s guidelines on executing a document with an electronic signature accepted by HM Land Registry. Non-compliance with section 2 in a contract for the purchase of a land interest will render the agreement null and void. 

It is imperative to recognise that the signing process of electronic signatures does not signify the finality of any contract. Before the exchange occurs, a mutually arrangement on how to determine the exact moment when the contract becomes legally binding must be constituted.  

The exchange of contracts is a critical step in a property transaction, solidifying the deal legally binding between the buyer and seller. Should either party decide to back out, they could face penalties for breaching the contract. 

The process of ‘hold to order’ for deposits 

The seller’s solicitor must hold any deposit money received from the buyer’s solicitor before the exchange of contracts to the order of the buyer’s solicitor, as per the Hold to Order Protocol 2024, unless agreed otherwise. This arrangement remains in place until the exchange of contracts or until the money is returned to the buyer’s solicitor. 

When a solicitor has actual possession of a sum of money, such as a deposit, on behalf of another solicitor, it is deemed that the solicitor holding the money is providing an undertaking for that particular amount. This understanding remains valid unless there is an explicit agreement between the solicitors or any applicable provision in a relevant existing contract. 

In the event of an undertaking involving a monetary amount, a solicitor shall not be considered in violation of the undertaking or held accountable to any individual due to any action, omission, failure, fraudulent activity, delay, negligence, insolvency, or default of any bank, financial institution, clearing or payment system, or regulatory, governmental, or supra-national entity or authority (except in cases where such default or misconduct originates from the solicitor themselves). 

In my perspective, in the Dreamvar case, while Dennings firm bears sole responsibility, had the bank verified the transaction to China prior to authorising Dennings’ transfer, the fraud could have potentially been identified. Banks hold a significant responsibility in enabling secure conveyancing exchanges of funds. 

Immediate Exchange and Release of Contracts Protocol 2024 

The Immediate Exchange Protocol 2024 is designed to replace formulae A and B, where either a single solicitor holds both parts or each solicitor holds their own client part of the contract until the exchange occurs. Conversely, the Release of Contracts Protocol 2024 will assume the role of formula C in the Society’s contract exchange formulae, where there are several transactions. 

The Immediate Exchange Protocol 2024 is designed for the prompt exchange of contracts. The Release of Contracts Protocol 2024, on the other hand, allows one party’s solicitor to release a contract to the other party’s solicitor for exchange at a later time on the same day, as in the case of a chain. 

The protocol introduces post exchange obligations, outlining the responsibilities that arise after the exchange. For example, where any deposit money is to be paid to the seller’s solicitor, the buyer’s solicitor is to pay that money to the seller’s solicitor’s bank using the pre-set mode of payment. 

The protocol encompasses a comprehensive set of guidelines that conveyancers can follow to safeguard their organisation and clients from the potential risks posed by transaction fraud, phishing, and email scams. 

In addition, the new protocol acknowledges the rising complexity of stamp duty land tax and the efforts made by HM Land Registry to lessen requisition rates. The document furnishes guidance on proactively addressing potential problems at an early stage to prevent any delays, such as lease restrictions, and introduces updated clauses related to lease terms.  The protocol advised conveyancers to consult with a tax specialist for guidance. 

While the code is presently designed for clarity, it will need updates in the future. As smart contracts and fully digital qualified electronic signatures (QES) become more widespread, further development of the protocol will be necessary, says the Committee.