Acting for buyer and lender when the buyer hides a cash-back from the lender (Code 1.4, 6.2)
A firm acts for Ollie Brennan on his purchase of a house for £300,000 and also for his mortgage lender. The lender's instructions, which the firm has accepted, require it to report any price reduction, cash-back or other incentive. Shortly before exchange, Ollie tells the solicitor that the seller has privately agreed to pay him £15,000 in cash after completion. The lender has been told only that the price is £300,000. Ollie says the solicitor must not tell the lender.
Which of the following best describes the solicitor's position?
Choose one answer to see the reasoning.
Worked answer
Correct answer E: She must tell Ollie the payment must be disclosed to the lender; if he refuses, she must stop acting for the lender (and in practice Ollie) and consider her reporting obligations.
THE RULE TO REMEMBER
A solicitor acting for buyer and lender must not mislead the lender about price incentives; if the buyer forbids disclosure, the solicitor must cease acting for the lender and, usually, the buyer.
Acting for buyer and lender when the buyer hides a cash-back from the lender (Code 1.4, 6.2)
When acting for both buyer and lender, the solicitor owes each client duties. Under para 6.4 the lender is entitled to all information material to its matter, and its instructions expressly require price incentives to be reported. Ollie's information is confidential to him (para 6.3) and he refuses consent to disclosure. Paragraph 1.4 prohibits misleading clients 'or others', including by omission or by being complicit in a client's acts. Carrying on and reporting a £300,000 price to the lender would mislead it. A conflict has now arisen between the two clients, and no exception in para 6.2 applies. The solicitor must advise Ollie that the arrangement must be disclosed. If he still refuses, she cannot continue to act for the lender and, in practice, will have to stop acting for him as well. An undisclosed incentive concealed from a lender is a classic mortgage fraud warning sign, so she must also consider her money laundering and reporting obligations.
Why A is wrong: The lender has expressly required incentives to be reported; staying silent would mislead it about the true price.
Why B is wrong: By then the lender will have advanced its money on a misleading basis; a report after completion does not prevent the lender being misled.
Why C is wrong: Consent from one client cannot authorise misleading the other; the conflict between buyer and lender has no applicable exception.
Why D is wrong: Using the other side to pass on the information does not resolve her own conflict or her duty not to mislead her lender client, and would itself involve disclosing Ollie's confidential information.
A little more practice done.
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