Dear Colleague,
You have received many eBulletins from me, beginning in December 2009, in relation to the risks created by solicitors giving undertakings in commercial property transactions. The Society has consulted very widely with the profession – I refer in particular to my eBulletins to you of 1st April and 27th May, 2010 – and with interested parties outside the profession in relation to this.
No less than 184 separate submissions were received from members of the profession. The submissions were overwhelmingly supportive of the proposed prohibition on commercial undertakings.
I write now to inform you that at its meeting on 16th July, 2010, the Council of the Law Society made new regulations to prohibit the giving of such undertakings. The new regulations will come into effect on the commencement of the next professional indemnity insurance year, namely on 1st December, 2010.
I attach for your information a link to the new regulations, Statutory Instrument No. 366 of 2010.
Although the giving of commercial undertakings will not be legally prohibited until 1st December, 2010, in the meantime the Society’s strong advice, as set out in previous eBulletins from me as far back as 14th December, 2009, is that solicitors should not give commercial undertakings.
The Council’s reasons for making these new regulations are summed up in my earlier correspondence to you and in particular I would refer you to the memorandum of 31st March, 2010, written by the Society’s Immediate Past President and Chairman of the Commercial Undertakings Task Force, John D Shaw. In summary, the experience of the Society’s regulatory committees, in particular the Professional Indemnity Insurance Committee, in recent years is that the banks' ad hoc ‘system’ (with no agreed basis or consistent usage) under which solicitors gave certain types of undertakings in order to complete commercial property transactions exposed the public interest to an unacceptable level of risk. It was essentially flawed and beyond regulatory control with a range of damaging consequences for the public interest, as experience has demonstrated.
The frailties of the commercial undertakings ‘system’, which has been the subject of critical comment by members of the judiciary, has been reviewed by the Society in the light of its capacity to facilitate reckless lending and fraud – with massive losses to lenders as in the Lynn and Byrne cases. The conflict of interest in which solicitors can find themselves, acting for both the borrower and the lender in the same transaction, is at the heart of the problem.
During the boom years solicitors were pressurised, both by borrowers and by lenders, to give letters of undertaking to lenders in commercial property transactions. This frequently led to situations where the undertakings were not complied with and many substantial loans were not properly secured.
An essential part of any banking system is to ensure that proper security is in place where loans, particularly of a substantial nature, are advanced. The risk of failure in this regard is greatly reduced if lenders retain their own solicitors to take responsibility for ensuring the security is put in place.
A detailed analysis of the new regulations and explanation of their practical effects will appear shortly in the Society’s Gazette. Precedent documentation, to assist solicitors to comply with the regulations, will be supplied.
I want to thank the members of the Society’s Commercial Undertakings Task Force, together with all of the solicitors and other interested parties who very helpfully responded to the consultation process, for their assistance. In both policy and drafting terms the regulations are much the better for the direct contributions, made by so many people, through the Society’s unprecedentedly extensive consultation on this important issue.
With kind regards.
Yours sincerely,
Gerard Doherty
President