September 2018

FIBA Advantage

Dual representation in the short-term lending market

Daniel Fireman, Head of Banking & Real Estate Finance at Howard Kennedy LLP, considers the practicality of dual legal representation in the short-term lending market

The issue of dual legal representation, where one firm of solicitors acts for both lender and borrower, has recently been the subject of much debate within the short-term specialist lending industry.

On the face of it, the cost- and expedition-related benefits in just one firm of lawyers advising both parties are obvious. Dual representation has for many years worked well in the regulated domestic conveyancing market, where loan and security documentation is generally standard and borrowers’ and lenders’ interests are largely aligned. However, in the domestic market the solicitor acting is generally appointed by the borrower and is one of a vast panel of law firms acceptable to the lender, which adopts a similar approach, usually in accordance with the UK Finance (formerly CML) handbook. The scope for conflicts of interest in these circumstances is fairly limited.

In the bridging market, where dual representation does exist, it is mainly offered as an option to borrowers by larger scale lenders offering ‘vanilla’, high volume standardised products on a commoditised basis, including regulated loans, consumer buy-to-lets and some straightforward commercial buy-to-lets.

In those circumstances, the borrower is usually afforded the option of using a solicitor's firm from a panel operated by the lender who will act for both parties, at a cost to the borrower which is competitive by comparison to the cost of two separate firms, and with the added expectation of an expedited and efficient service. Here there is clearly greater scope for conflict than with domestic conveyancing, though the risk can be mitigated by using "Chinese Walls" within the law firm, guidance offered to borrowers by responsible brokers and the use of standardised documents which are not open to negotiation.

Whilst there must be some risk that if a loan goes wrong the borrower may claim its lawyer was conflicted, such a claim would be subject to objective and outcomes focused scrutiny, and the principal players in this market appear to consider the commercial risk to be minimal, and perhaps more perceived than real.

Within the unregulated short-term bridging and development lending market, loan terms are commercial, and loan and security documentation often contain fixed and inflexible terms that might be deemed onerous, or which are drafted for the lender with a view to negotiation with the borrower. It is widely accepted that dual representation cannot work in these transactions, as conflicts or potential conflicts of interest are inevitable. There is a need for a borrower to be properly and independently advised on the risks in taking on such loans, to have a good and proper understanding of the loan terms, and to have the opportunity to negotiate.  Consequently, one firm of solicitors cannot act in the best interests of each party when advising on loans of this nature.

In short, whilst the opinions of lenders and their lawyers within the short-term lending market are clearly polarised, their views appear to be fashioned by the nature of the lending operations they are engaged in. A ‘one size fits all’ approach to dual representation cannot be adopted, but most agree that for certain types of lending, dual representation does, and will continue to, have a place.