Winter '18/19 Scotland

Winter 2018/19 ISSUE

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FIRST COMMENT IN THIS ISSUE: • REFLECTIONS AND PROJECTIONS • PORTFOLIO COVER: WHAT IS INCLUDED AND WHAT ARE THE BENEFITS? • PRODUCT FOCUS: REAL ESTATE PORTFOLIO REFINANCING

Leading Title Insurance

Welcome to the Winter edition of our newsletter for 2018/19.

In this issue we have a contribution from our regular writer. Professor Stewart Brymer looks at what might lie ahead for residential property lawyers in 2019.

Our underwriter contribution for this quarter comes from Liana Di Ciacca who outlines the benefits of a Portfolio Insurance Policy.

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FIRST COMMENT

Reflections and projections

by Professor Stewart Brymer Brymer Legal Ltd

Introduction As a new year dawns it is always useful to reflect on your achievements and set out your aspirations for the year ahead. With that in mind, this article looks at what might await residential property lawyers in 2019, or shortly thereafter, by reference to what has happened to date.

The year ahead It has been said (with good cause) that the pace of change in conveyancing law and practice has been glacial. Looked at over an extended period, this is undoubtedly correct. However, the same cannot be said about the first two decades of this century. If the current pace of change continues, we will likely see a number of important developments which, in turn, will have consequences for the role that solicitors play in home-moving transactions. In no particular order, these are considered to be: ScotLIS

ScotLIS is with us and will continue to be enhanced by Registers of Scotland now that it

has replaced Registers Direct. See https://scotlis. ros.gov.uk/service. It is anticipated that ScotLIS, alongside the Land Register, will ultimately provide all information regarding land and property for all those interested in the same; be they purchasers, sellers, lenders or valuers. The next step might be to have a register of digital assets which can be searched electronically.

Such a register could be created using blockchain technology – see below.

Digital Transformation

Both HMLR and Registers of Scotland (‘RoS’) are progressing with their respective digital transformation programmes. Both are working on digital standard securities and the next step will be full digital transfer. We have all heard about the plans for Digital Street in England and Wales. Hopefully this year will see some evidence of life on the street.

Completion of the Land Register

Once again, both RoS and HMLR are progressing towards completion of their respective Land Registers. Once that has been achieved, a raft of other opportunities will arise.

To reach its target of 2024, RoS will require to expedite Keeper Induced Registration and / or

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increase the concession for voluntary registration.

In addition, further guidance on how boundary overlaps etc. will be dealt with will require to be discussed. Will this involve title insurance?

Smart Contracts

The concept of smart contracts is older than the blockchain protocol mentioned below, but the latest blockchain platforms feature more advanced smart contract functionality that will likely be very attractive. If a transaction were to be conducted using a digitally-signed smart contract stored on a blockchain platform, conclusion of missives and then completion, should be able to occur faster because the payment of the purchase price will trigger the automatic transfer of title – assuming, of course, that there is a system in place to facilitate the settlement process so that no party in the transaction is holding both title and the money at the same time. So far, there has been a lot of hypotheses on the subject via Fintech and Proptech but little in the way of concrete proposals. That will change.

As the understanding of the potential of blockchain technology has evolved, and the focus has shifted from debate over virtual currencies, it has become evident that its impact will be significant for many industries. The technology can be utilised to digitally record virtually anything of value, including both moveable and immovable assets, in a way that is more trustworthy, transparent and verifiable than any other system that exists today. Many private blockchains are under development and many commentators constantly describe blockchain as being the solution to all problems, but to fully realise the benefits offered by blockchain technology, collaboration amongst a large number of industry participants is necessary as blockchains, both public and private, have limitations and will face obstacles.

Current AI software usually operates to streamline processes - most commonly in litigation and due diligence type work where a degree of disruption has already taken place. Could the same principle be applied to a conveyancing transaction? That is the proverbial 64,000 bitcoin question.

Mortgage market

“Surely it is about time that contracts were more balanced between seller and purchaser?”

In recent years, lenders have invested heavily in what they call ‘pre-offer’ stage of the lending process. This was driven by FCA compliance and other pressures. Now they are turning their attention to the post-offer stage this being the stage in which solicitors are involved in the secured lending transaction. As noted above, the first digital security transactions have been completed in England and Wales. I suggest that progress from those first steps is likely to be swift.

Better information

Blockchain

By changing the way that information is digitally stored and exchanged, blockchain technology will likely alter (or at least have an effect on) the way real property is recorded, transferred, financed and managed globally. Bitcoin, the popular virtual currency based on blockchain (or distributed ledger) technology, was released in response to the financial crisis and as a result of advances in software, communications and encryption.

The distributed database or ledger records transfers (each transfer is recorded in a block of information) which resides on a virtual network that uses encryption and secure keys for access.

Each block includes a time stamp and is linked to the block immediately preceding it thus creating a permanent record of events that is extremely difficult to alter.

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The Westminster Government is committed to improving what it describes as the home-moving process. Various industry groups are now working towards delivering systems which will enable prospective purchasers to have better information on properties. This may include Property Logbooks (I hesitate to refer to Home Information Packs) and other developments. So far, there is not a similar group in Scotland to the Home Moving Group in England and Wales and, to the best of my knowledge, the Scottish Government has not yet engaged in the process. I do not understand why not.

Vendor Disclosure

There is now a growing debate as to the benefits of moving away from caveat emptor towards vendor disclosure. This works well in other jurisdictions – often backed by legislation. Surely it is about time

FIRST COMMENT that contracts were more balanced between seller and purchaser?

So what if property lawyers had been given one wish for Christmas?

Speeding up the process

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Some would spend it on turning the clock back by at least 25 years!

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Others would want a smoother, more efficient relationship with lenders – possibly without the involvement of panel managers.

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Some would wish for there to be a clear time limit on historic alteration issues and the return of ‘cheapish’ bridging finance.

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Some would want to embrace digital technology.

This, to many, is the proverbial Holy Grail. However, we are where we are – whether that is due to delays in processing loan applications and loan papers; unwillingness to conclude for a purchase until a sale is arranged or whatever. The focus on ‘speed’ of process is often misguided – most clients need time to make a move. In reality, it is certainty that clients wish to see and that is the missing link in procedures we have now – if buyers wish to buy they have to make a commitment of some sort and, for now, we do not have that. The bottom line is that whether we like to claim otherwise, we, in Scotland, have the same system as operates in the rest of the UK – albeit with different terminology and at least, in theory, the ability to complete a transaction much quicker. The use of Reservation Agreements with non-returnable deposits may assist in this regard.

Something which shows real financial commitment by the purchaser can only be a good thing and can hopefully help speed the process up. This would also be helped by vendor disclosure.

Real Time Settlement

The Bank of England has embarked on a review of its money transfer systems which is a good thing. Hopefully this can be allied to a scheme whereby real time settlement can be achieved. There are companies out there working on new systems in one shape or another: Thirdfort, Shieldpay, PEXA and SETL. Whoever can deliver ‘joined up’ thinking and create a fully linked and iterative process will win the day.

What does all this mean?

There is a huge amount of innovation in this space at the moment. Obviously, not all of the innovations will work but there is a real momentum building towards making positive changes to the homemoving process.

The foregoing examples are no more than a description of possible uses of new technology. It is important that we look to adopt such technology as it will assist us – and not necessarily simply make the wheels of a transaction run ever faster just for the sake of it.

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Might we also wish for a system where clients can receive a message on an App on their phone when passing a property for sale confirming that, subject to audit etc., they would qualify for a loan in principle? Such an App already exists in Australia. That is probably for a lender or an estate agent to wish for however.

Wishes aside, the central point must surely be what is in the best interests of the client. What do they want and how do we, as property lawyers, help them achieve their goals? The phrase ‘trusted adviser’ has been used many times but that is what has worked in Denmark and can work here. Not all clients necessarily need, or want, instant messaging and having to react to the ping of a phone at every minute of the day. Is there not a case for pausing; reflecting on what we do and how we do it and then moulding our service accordingly? We, as solicitors, do need to adapt, but it should be a considered response to innovations from others coupled with innovations created by ourselves.

If we do nothing and sit back, systems and habits will change and we run the very real risk of being left behind.

We do have to be careful what we wish for. There will be a lot of promises, but it is best to remember that all that glisters (the correct reference to Shakespeare’s Merchant of Venice) is not necessarily gold.

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Portfolio cover: what is included and what are the benefits?

by Liana Di Ciacca Senior Underwriter & Solicitor

What is portfolio insurance?

Our portfolio insurance can assist in circumstances where you are dealing with a number of properties within a portfolio either being sold / purchased or refinanced, and time / cost is of the essence. Carrying out a full due diligence on all of the portfolio can be a challenge due to time constraints and often resources are not available to complete all the diligence required.

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FIRST COMMENT Our portfolio insurance takes a fresh approach to the due diligence process.

Instead of individual assessment of each title within the portfolio, a general assessment is made by sampling a selection of titles within the portfolio. We choose the sample by considering location, value and class of title ensuring that we have a good spread throughout the portfolio.

Provided we are satisfied on all of the sampling carried out, we are able to put our portfolio insurance in place which protects all of the properties within the portfolio from unknown risks and risks identified during the sampling process.

What type of risks are covered under the policy?

Our portfolio insurance essentially acts as a good and marketable title guarantee for every asset / loan in the portfolio. This is because it protects the insured against unknown risks such as any defect in title, lack of access rights to and from the property and / or fraud / forgery, which results in a defect in the title.

We are also able to include additional cover where local authority searches are not being obtained or updated due to time constraints.

What is excluded from the policy?

There are of course some standard exclusions within the policy which include the rights of any person in occupation, environmental contaminants or hazardous waste on or under the properties and risks which the insured creates, allows or agrees to at any time. This list is not exhaustive and it is important to check the policy terms to ensure that it meets all of your client’s requirements.

The use of portfolio cover for distressed assets The process of selling distressed property assets can often be challenging, especially because of the lack of title representations and warranties, which can undermine the marketability and price of distressed properties.

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Procuring portfolio insurance for distressed assets can offer assurance to any prospective purchaser and thus facilitates a quicker and easier sale.

What are the benefits of our portfolio insurance?

There are a number of benefits to our portfolio insurance which can be summarised as follows: 1. The seller can provide the purchaser with a good title guarantee in respect of the full market value of all of the properties within the portfolio. A separate policy is also available for the lender in relation to the full loan amount.

2. By procuring a good title guarantee, the buyer or lender avoids having to take a view and is able to reduce their level of risk.

3. It can be particularly useful in distressed portfolios where there are a lack of representations and warranties being given and the purchaser and / or lender does require some further comfort.

4. Our policies can be structured in a way to assist in future onward sales which can make the policy more appealing to any prospective purchaser and / or lender.

5. Our approach to the due diligence process, can facilitate a quicker purchase / refinancing, which benefits both the seller and the purchaser.

Please do not hesitate to contact me or any of our team at First Title, should you wish to discuss our portfolio insurance.

Taking the headache out of property transactions for 35 years

Call: +44(0)141 413 8800 Email: scotinfo@firsttitle.eu Visit: www.firsttitle.eu

Leading Title Insurance

First Title Insurance plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

First Title Insurance plc is registered in England under company number 01112603.

Registered office: ECA Court, 24-26 South Park, Sevenoaks, Kent, TN13 1DU.

FIRST COMMENT

Product Focus:

Real estate portfolio refinancing BACKGROUND

CHALLENGE

By definition, the due diligence process for any commercial real estate transaction can be complex and lengthy. The challenges are exacerbated when the process involves multiple properties across a mixed portfolio.

The First Title underwriting team analysed an agreed sample of our client’s reviewed property titles, and then provided a ‘good title and security wrapper’ around each of the properties within the portfolio, thus protecting the bank from any known and unknown title risks as well as ensuring the validity, priority and enforceability of their security.

Our client managed the legal due diligence process in the refinancing of a mixed portfolio of 230 commercial and residential properties on behalf of a major UK bank. They overcame these challenges whilst meeting their client’s expectations on transaction costs and timescales by putting in place an innovative solution involving bespoke insurance provided by First Title. By employing a sampling approach to the due diligence, First Title enabled our client to avoid the time-consuming process of reviewing every title document.

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Ultimately, this meant that our client provided their client with a streamlined, cost-effective solution to, in turn, offer their new customer refinancing of their property portfolio.

The breadth of skills and experience within First Title’s underwriting team played a key role in structuring an effective solution, and their first-hand knowledge of the commercial lenders’ approach to risk management was vital in providing the Mortgage Lenders’ Protection Policy.

To find out more about our products and services email scotinfo@firsttitle.eu or call +44 (0)141 413 8800

www.firsttitle.eu

First Title Insurance plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. First Title Insurance plc is registered in England under company number 01112603.

Registered office: First Title Insurance plc, ECA Court, 24-26 South Park, Sevenoaks, Kent TN13 1DU.