What is a letter of obligation?
A “Letter of obligation” is a formal, binding, written commitment provided by one solicitor to another. It is an essential tool in the conveyancing process and provides assurance between legal professionals about specific actions or matters to be addressed after the completion of a property transaction.
What is the purpose of a letters of obligation in conveyancing in Scotland?
During the process of transferring property ownership, there might be steps or tasks that can’t be completed immediately on or before settlement. A Letter of obligation typically contains undertakings (promises) that a solicitor will carry out specific post-completion tasks.
For instance, a common use of this letter might involve a solicitor undertaking to use the funds received from a property sale to repay a mortgage on behalf of the seller and to provide evidence of this repayment and discharge of a standard security to the buyer’s solicitor.
Why is a letter of useful necessary in conveyancing?
According the law society, letters of obligation were first introduced to solve the problem that there will always be a gap between delivery of a disposition and it’s and its registration in the land register. This gap might be used by unscrupulous parties to take actions prejudicial to the interests of the buyer
To solve this problem, the seller’s solicitor can issue a letter of obligation, by which the sellers solicitor guarantees that nothing will be done in the period which will prejudice the transaction as agreed. Solicitors rely on each other’s word, knowing that failing to uphold an undertaking can have significant consequences, including potential disciplinary actions from regulatory bodies.
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The use of letters of obligation has been common practice in conveyancing in Scotland. However, the Scottish Standard clauses have sought to address the underlying problem in a different way.
Instead of the sellers solicitor providing a letter of obligation to the buyers solicitor as a condition of settlement. The Scottish Standard clauses contractually require the seller to get a letter of undertaking from their solicitor that obliges the sellers solicitor to carry out the tasks that would traditionally be covered by a letter of obligation.
This has the same effect, but makes the obligation one of a) seller to buyer and b) solicitor to client, rather than from solicitor to solicitor. See section 17.6 of the Scottish Standard clauses for full details
Conclusion
In essence, a letter of obligation is a promise between solicitors, ensuring that specific tasks or actions related to a property sale will be carried out after the main transaction is completed.
For first-time buyers and sellers, it provides an added layer of assurance that all aspects of the sale, even those occurring post-completion, will be concluded as agreed.