Solicitor's Undertaking: How It Moves Money at Settlement

A secured loan is only as good as its place in the queue. An incoming bank wants its first mortgage registered with nothing ahead of it, which means the outgoing lender's mortgage must come off the title. The outgoing lender wants its money before it lets go. If each waited for the other, nothing would settle. The undertaking breaks the deadlock: a lawyer, usually the one acting for the borrower or the seller, receives the funds and promises to apply them in a stated way and to deliver what the other side needs.

Lenders accept it because the promise is backed by something stronger than the lawyer's goodwill. In England and Wales, the regulator's code requires solicitors to perform every undertaking they give, within the agreed time or a reasonable one. New Zealand's conduct rules require a lawyer to honour all undertakings, written or oral, given in the course of practice. Australia's conduct rules require a solicitor to honour an undertaking and see that it is performed on time unless the recipient or a court releases it. A breach is a disciplinary matter in each, and can also be pursued through the courts.

Three features make it work. It is personal: unless it clearly says it is given only on the client's behalf, the lawyer and the firm are bound, not just the client. It is unconditional on the client's later wishes: a change of instructions, or a client who wants the money sent elsewhere, does not release it. And it is read for what it says, so wording matters. A promise to pay the outgoing lender a stated sum is narrower than a promise to do whatever is needed to obtain the discharge, and a careful lawyer gives only a promise whose subject matter is within their control.

At a commercial settlement the undertakings run in several directions: to pay the outgoing lender and deliver its discharge, to hold title documents or signed security to the incoming bank's order, to lodge the new mortgage for registration, and to hold surplus money until the discharge is confirmed. Each closes one gap between the money and the paper.

A joinery business, constructed for this page like every figure in it, is refinancing its workshop to a new bank. The new bank lends US$1.8m. The outgoing lender's payout figure shows US$1.62m on the term loan. The business's lawyer undertakes to the new bank's lawyer, in the absolute form common on an English completion, to apply the advance first in paying the outgoing lender, to obtain and lodge its discharge, and to hold the balance until both mortgages are dealt with.

On the day, the outgoing lender declines to release its mortgage. Its security is all-monies, and the payout figure covered the term loan but not the overdraft. Because the lawyer undertook to obtain the discharge, not merely to pay US$1.62m, the obligation is not met until the mortgage comes off. The balance still held in trust pays the US$45,000, the discharge is released, and the new mortgage is registered first. Had the balance already gone to the business, the lawyer would still have been bound.

For the new bank, the undertaking did what it was for. Its money was paid out before its security was in place, and the gap was covered by a professional promise rather than by trust in the borrower.

In New Zealand, settlement runs through lawyers' trust accounts and the electronic land registration system, and lawyers exchange undertakings about when funds are paid out and when the electronic dealing that carries the discharge and the new mortgage is released. A disciplinary decision reported by the New Zealand Law Society concerned exactly that: settlement funds disbursed before the dealing was released, contrary to an undertaking.

In England and Wales, the seller's or borrower's solicitor commonly undertakes on completion to redeem the existing mortgage and send evidence of its discharge, under the Law Society's recommended code for completion. In Australia, practice has moved further from undertakings. The conduct rules forbid a solicitor to seek an undertaking from another that would need a third party's co-operation, so the example's promise to obtain a discharge would not be sought there, and most settlements now run on an electronic platform that pays the outgoing lender and lodges its discharge and the new mortgage in one transaction. Undertakings remain in use there for other steps, such as holding documents or funds.

DEFINED IN ONE PARAGRAPH → · THE PAYOUT FIGURE → · THE BANK'S LAWYER AND YOURS →

An undertaking appears in the settlement statement as a line that can be easy to tick. The bank's lawyer reads three things before releasing funds on it: who gives it, and whether that person is a lawyer bound by the conduct rules; exactly what it promises, and whether that covers every security that must come off; and when it must be performed. A promise from someone who is not a lawyer, or one that turns on a third party's co-operation, is a weaker thing, and the file should treat it as such.

It also decides what the bank does when settlement does not go cleanly. If the discharge does not arrive, the bank's first call is to the lawyer who gave the undertaking, and the undertaking defines what the bank can demand. A condition precedent that reads 'discharge to be provided at settlement' depends on someone having promised it.

REFINANCING A BUSINESS LOAN → · THE ALL-MONIES CLAUSE → · THE QUESTION ON IT →