One of the most commonly asked questions by property sellers is: ‘When do I get my money after my property sells?’. However, we were recently asked a similar question: ‘Why do solicitors still settle by cheque when I could get my money much more quickly if they settled by CHAPS [same day, paid-for electronic transfer]?’. What should be a simple answer, sadly, isn’t! So we thought this question deserved its own blog post.
It may seem bizarre that conveyancing transactions are still settled by cheque in this day and age. There is, however, a bit of method to the madness, particularly in situations where there is a ‘chain’ of property sales.
If you are a seller, the first thing to note is that, if your purchaser is funding their purchase through the sale of another property, the way that you are paid the price for your sale depends on the way that their own purchaser is paying them. In other words, if the purchaser of your property has been paid by cheque for their own sale, their solicitor won’t have cleared funds for a few days after that cheque has been banked. This means that they can’t pay you immediately, on the date of settlement, by CHAPS or electronic transfer because they themselves don’t have cleared funds to pay the price on behalf of your buyer.
Perhaps more importantly, cheque settlement allows for the purchase funds to be sent to the seller’s solicitor in advance of settlement. This is typically sent along with the other, necessary pre-settlement documents. The cheque can then be ‘held as undelivered’ by the seller’s solicitor. This allows the solicitors who are involved in the transaction to know, in advance of settlement, whether they have, or do not have, the funds to allow them to settle the transaction. It also means that the solicitors don’t have to refer to their Cashroom for confirmation that they have funds to allow them to treat the sale as ‘settled’.
So what is the ‘Cashroom’ and why is it important here? In all but the smallest of conveyancing firms, the firm will have a ‘Cashroom’. Cashrooms are essential in conveyancing firms because the Law Society’s rules require that funds are paid into specific Client Accounts and held separate from the firm’s own funds. This is particularly important in conveyancing firms because of the size of the sums involved in conveyancing and high risk of fraud.
The solicitor firm’s Client Account is subject to extreme scrutiny and controls from the Law Society. The firm itself will also operate stringent controls when it comes to its Cashroom, not least because, if it gets this wrong, it may be prevented from carrying-out legal work by its regulator (the Law Society). Add to this the fact that the rules and regulations around Anti-Money Laundering and Risk Assessment are becoming ever more stringent and it means that the AML/Risk Assessment and Cashroom Controls add a huge amount of work, and therefore time, to processes within conveyancing law firms.
Before allowing a property sale to ‘settle’, not only the solicitor but also the Cashroom have to be completely satisfied that everything is in order.
With all of the above in mind, settling property transactions by cheque can actually make things happen slightly more smoothly on the day of settlement, particularly when there is a ‘chain’, even if this seems slightly archaic and unlikely. Why?
First, the solicitor firm doesn’t have to be in possession of cleared funds (i.e. funds that have fully cleared into, and appear as available in, their Client Account) to be able to settle the transaction. The firm simply has to be in possession of a valid-looking solicitor firm cheque, written from that firm’s Client Account. Because the seller’s solicitor is already in possession of the funds, in the form of the cheque being held as ‘undelivered’, the seller’s solicitor can ‘settle’ the sale just as soon as they can confirm that (a) the settlement papers, sent by the buyer’s solicitor, are in order and (b) that the buyer’s solicitor actually has the client’s funds in their Client Bank Account (this can be from the mortgage lender, the client’s own deposit and/or funds from the buyer’s own property sale). If the buyer’s own sale hasn’t gone through for whatever reason, or if the mortgage funds haven’t come through by the proposed date of settlement, the buyer’s solicitor won’t be able to confirm settlement and the seller’s solicitor will have to continue to hold the cheque as ‘undelivered’.
By contrast, if the sale is settling by CHAPS or bank transfer to the seller’s solicitor, there are several further steps, and people, added to the process. We’ll examine the possible delays that can happen on the Date of Settlement as a result of settling by CHAPS in a moment. But, to summarise, what is the main problem with settling by CHAPS, particularly where there is a ‘chain’ and a buyer might have the removal van loaded at 9am ready to move in?
In short, settlement by CHAPS versus cheque can slow things down and cause buyers to be waiting around for their keys. We routinely have buyers sitting in our reception for hours because their own solicitor hasn’t properly informed them, or the buyer hasn’t understood (or doesn’t want to understand!), the timescales that are involved in settling by CHAPS in particular.
So, what causes these delays?
When settling by CHAPS, the buyer’s solicitor must first be satisfied that they themselves have the funds to allow them to settle. If they are, they will at that point, on the Date of Settlement, have to instruct their Cashroom to set up the CHAPS payment.
Someone else in the firm will usually have to authorise that CHAPS payment, once it has been keyed into the banking system, to add an anti-fraud measure and prevent the Cashroom simply sending the funds to themselves, if they were so minded! This adds a further two people into the process before the solicitor is then able to confirm that the funds have been sent to the seller’s solicitor.
After that, the seller’s solicitor will have to receive confirmation from their own Cashroom that the funds have been received. Only then can they say that the sale has settled and allow keys to their client’s property to be released to the buyer.
If you multiply this process by several transactions in a ‘chain’ and, if you are the poor soul who is at the end of the chain, you are waiting for this process to happen multiple times throughout the day and you will likely be waiting for several hours before you finally receive confirmation that you are able to move into your new property that day.
If, on the other hand, everyone was settling by cheque, the chain goes like this:
Solicitor 1 confirms to Solicitor 2 that they have got funds to allow them to settle, Solicitor 2 confirms they have a valid cheque and the right paperwork and Transaction 1 is ‘settled’;
Solicitor 2 confirms to Solicitor 3 that they have got the funds (cheque) to allow them to settle and Solicitor 3 confirms that they have a valid cheque and the right paperwork from that buyer’s solicitor and Transaction 2 is therefore ‘settled’;
Solicitor 3 confirms that they have funds to settle and Solicitor 4 confirms that they have a valid cheque and the right paperwork from that buyer’s solicitor to allow them to settle, so Transaction 3 is now settled.
This whole process can happen in just three phone calls with only the solicitors having to be involved.
So, what is the downside to settling transactions in this way? The downside is that the final seller in the chain, if they are not making an onward purchase, doesn’t receive the funds from their property sale for a few days, because that final cheque in the chain is still waiting to clear clear into their selling solicitor’s Client Account.
The long and short is that it is an imperfect system and one that probably requires overhauling, though that is something that is beyond our own control as a law firm.
Cheque settlement has its strengths in that it allows for a much smoother settlement on the actual Date of Entry, allowing for the buyer to get their keys sooner. If you are a seller and a buyer, this is probably desirable. If you are only selling and not buying too, it’s a huge frustration, though your buyer is likely to be happier!
CHAPS settlement lead to a bumpier experience on the Date of Settlement, particularly for the buyer, but the main advantage is that the seller’s solicitor receives cleared funds into their Client Account the same day which means that the seller is likely to get their money more quickly.
Unfortunately, neither solution is likely to be ideal for both seller and buyer.
As to the timing of when you are likely to receive the sale proceeds after they have cleared into the solicitor’s Client Account, our own Terms of Business provide for payment by the end of the working day following settlement.
Sellers sometimes ask why we can’t guarantee payment the same day that we receive the funds. Unfortunately, it’s not as simple a process as it might seem to make a CHAPS or electronic banking payment to a client and it’s certainly not as simple as making a payment via your bank’s iPhone App (and we would love if that were the case!).
It again comes down to Cashroom processes having stringently to be followed before funds can be paid-out to anyone, following Anti-Money Laundering regulations and Law Society of Scotland rules. We also have to consider that the person who does these checks and who ‘keys’ the electronic payment can’t be the same person who authorises that payment (with further checks required by the person authorising, to prevent fraudulent payment if the Cashroom were not acting legally).
In all of the examples above, transactions can settle very late in the day. For a Friday settlement, our main priority has to be to get the seller’s mortgage paid-off that same day, if possible, to avoid a further two or three days of interest becoming payable on the mortgage. This can save the client a few, or quite a lot, of pounds depending on the size of the mortgage.
Depending on the time of the month, there can be 10 or 40 transactions settling on one day, with the end of the month traditionally being far busier than the beginning and middle of a month. The result is that, on some days of the month, you scarcely need any staff in your Cashroom and, on the busiest days, you would need five simply to allow for every transaction to be checked and processed as well as 36 hours in the day to allow the (often one) senior member of staff who is authorising these payments to get through the list.
By saying that we endeavour to pay by the end of the working day following settlement, it provides a more realistic timescale in which to make these payments in a legal and compliant way.
If you have any questions why not give our team of legal experts in our Conveyancing Department a call on 0131 297 7999 or by emailing [email protected] and one of our expert team will be delighted to help.