May 2018
By Daniel Fireman, head of banking and real estate finance at Howard Kennedy
Professionals involved in the facilitation of secured commercial loans will be aware that from time to time, solicitors cannot act for one or more parties to a loan transaction for conflict of interest reasons. Conflicts are not always immediately apparent, and can be actual, potential or perceived.
Conflicts tend to be either professional or commercial. Where a professional conflict of interest arises, solicitors will usually find it necessary to decline to act for one or both parties. Obvious examples of professional conflicts of interest are circumstances where the same solicitor is asked to represent both the buyer and seller of a property on market terms or, as may be pertinent to readers of this column, where the same solicitor is asked to represent both the lender and the borrower in relation to a secured loan on commercial terms, as opposed to a mainstream domestic mortgage.
In the case of secured commercial loans, separate legal representation for each party is nearly always an absolute requirement. Legal advisors are duty-bound to act in the best interest of their client, and it is unlikely that this can be achieved if a solicitor acts for both lender and borrower in relation to a loan where terms – which may be onerous for either party – will need to be considered and/or negotiated. In these circumstances, a professional conflict will almost always arise. It is not possible for a solicitor to advise a borrower client that loan terms are onerous without potentially compromising the position of a lender client that may then lose the opportunity to lend, or for the solicitor to seek to include advantageous provisions for a lender client which adversely impacts a borrower client.
In general, whenever circumstances arise that signify the potential for a conflict of interest, the solicitor should decline or cease to act for one or both parties. Sometimes this means that the solicitor has to cease to act for any party at all during the course of a transaction. This would be the case where a solicitor acquires knowledge and information in relation to one client party which would be helpful to another. That knowledge could not be imparted for confidentiality reasons, notwithstanding that it would be in the other party's interest to know of it, and conversely the solicitor cannot properly represent the other party. Such circumstances place a solicitor in an untenable position and so in spite of the inevitable consequent upheaval, expense and inconvenience, the solicitor cannot continue to act.
Commercial conflicts also often arise. For instance, a solicitor may regularly act for lender clients in connection with commercial loans, and from time to time it may find itself instructed by a proposed borrower from that lender, the lender being represented by another panel solicitor. In those circumstances, the solicitor is not professionally precluded from continuing to act; however, the solicitor may consider it inappropriate to act for the sake of ensuring both that its relationship with the lender client is not compromised in the course of negotiations for the benefit of the borrower, and also that the quality of the service that the borrower is entitled to is not in any way perceived to be impaired.