By Tom Warrender
WHEN Heads of Terms for a property transaction are agreed, then the deal is done, right? Well, not quite; the deal has been agreed and the next step is for the parties to instruct solicitors to formalise the transaction. The immediate question that follows is, 'Well, how long will that take?' closely followed by 'How much will that cost?' then quickly followed by 'What if the other party changes their mind and withdraws from the transaction?'
The above are all understandable concerns. One solution that seems to be becoming more popular once again is to insist upon an abortive costs undertaking, but is it really as good as it sounds?.
What is an abortive costs undertaking?
The simple principle behind this is that essentially one party agrees to meet the other party's costs, should they withdraw from the transaction. The way it works is by their solicitor giving a legally binding costs undertaking (i.e. promise to pay).
That sounds great, how quickly can it be done?
Already with this first question we run into the first obstacle. In order for the solicitor to give the undertaking they must collect monies in cleared funds from their client. In order to know how much to collect they need to clarify fees with the other party's solicitor. Once that figure is known the solicitor then needs their client to put them in cleared funds before they can give the undertaking. This could be fairly instantaneous if the costs were confirmed on the day and the same day bank transfer was used. The costs undertaking could be either way or mutual, but let us take, for example, a scenario where the tenant is to give the abortive costs undertaking. Before confirming fees, the landlord's solicitor is going to want to have sight of the heads of terms and then discuss the transaction generally with their client to ascertain the full extent of work involved before providing their quote. In turn, the tenant's solicitors will need to give that information to their client and if, for example, their client did not do a same-day transfer but issued a cheque, then the tenant's solicitor would have to wait for that to clear before being able to give the undertaking.
Let us assume the costs are known and funds transferred on the same day, in that case it is straightforward, right?
Well, in terms of being able to give the undertaking then that process does in that scenario become quick. However, the next question of course is how would it be triggered? The principle - that is, if the tenant walks away from the transaction - in this example, sounds simple enough, but what about the reasons for that withdrawal? For example, what if the tenant only walked away because the landlord was dragging their heels, or the landlord was not supplying sufficient enquiry replies or title information, or what if there were adverse entries on the search results, or what if the landlord sought to materially change the heads of terms that had been agreed? Conversely, from the landlord's side, what if the tenant argues that they have not withdrawn from the transaction, they are just considering enquiry replies or search result etc. and it is taking time At what point does a significant time delay become a withdrawal from the transaction?
But you guys are the lawyers, can you not draft to cover these situations?
Yes, of course, the solicitors can consider the different scenarios that may arise and negotiate wording to attempt to cover them. However, that negotiation takes time and in turn requires the parties to agree the principles behind all of these scenarios before the solicitors agree the wording. Therefore, even if we have got to a point where the undertaking funds are ready on the very same day as requested (which quite frankly is highly unlikely) there could still then be a time delay while the terms and parameters of that undertaking are negotiated.
So, it sounds like I should not bother with an abortive costs undertaking?
Ultimately, it is your commercial decision to make. The factors to weight up in deciding whether to insist on abortive costs undertaking are (a) your desire to move forward with the transaction as quickly as possible once terms are agreed, (b) your ability to have peace of mind that all parties are acting in good faith rather than wasting anyone's time and running up unnecessary costs, but also, (c) whether or not, even with detailed negotiation, you will end up with a scenario where you firmly believe monies are payable pursuant to the undertaking, but the other party does not agree and you then have a battle to try and enforce the same. What is clear, is that taking advice at an early stage from your solicitor as well as your commercial agent/surveyor, is imperative.
For further commercial property advice, Tom Warrender can be contacted at firstname.lastname@example.org or on 01536 410014.