The Law Society interest rate can change, but it is currently (November 2023) calculated as the Barclays Bank base rate, plus 4%. It is the standard rate applied in property transactions where there is a late payment.
The Law Society interest rate was devised as a by-product of creating standardised contracts for residential property transactions to make conveyancing easier. These contracts are known as the Standard Conditions of Sale.
Here, we look at the interest rate in more detail by exploring what The Law Society is, what standard conditions of sale are, and why the rate is important in practice.
How is the Law Society interest rate used?
The Law Society’s interest policy is part of the Standard Conditions of Sale. It sets the contract rate for any default or late payment. However, the policy itself may be implemented in many different ways, depending on the situation, despite the Standard Conditions of Sale intending to make property purchases uniform and consistent. The rate will, therefore, have uses during residential conveyancing, but there could also be some instances where it is required to be used within family law or leasehold transactions.
Why is the Law Society interest rate important?
The Law Society interest rate acts as a deterrent for late completion of property purchases – on either side of the transaction. Given the sums of money involved, even being a day late can add up to a hefty amount once the Law Society’s interest rate has been applied.
The amount payable is calculated at the contract rate and is payable on an amount equal to the purchase price, less the deposit paid for the default period. This is why solicitors and legal services teams are so clear on when client funds need to be transferred from client accounts to solicitors’ accounts – even a small delay can have significant ramifications.
Before the transfer, solicitors or conveyancers will conduct their money laundering checks to ensure the money they hold is not ‘dirty money’. The process will include verifying a client’s identity by going through some of their relevant personal data.
What is the Law Society?
The Law Society is a professional association representing solicitors in England and Wales. It was established in 1825 and helps promote its members’ interests by setting professional standards and providing support and guidance. It’s an incredibly important association in the UK as it helps to maintain the ethical standards of the legal profession as a whole. It does so by offering training and in-depth resources as a platform for lawyers, solicitors and other legal professionals to engage with one another over legal issues. The law develops more efficiently as a result.
The use of The Law Society interest rate within standardised property contracts is a prime example. House purchasing can be an incredibly complicated and long process in the UK – something that these standard conditions, championed by The Law Society, can improve.
What are the Standard Conditions Of Sale?
The Standard Conditions of Sale, set by The Law Society, are primarily designed for solicitors to use in residential conveyancing transactions. Solicitors can incorporate the standard conditions into a formal document designed to create legal rights and legal obligations. While they are intended mainly for use in residential conveyancing transactions, there are some instances where it may be appropriate to use them in the sale of small business premises. It is the Standard Commercial Property Conditions (SCPC) which are intended for use in commercial transactions.
Not all the Standard Conditions will be appropriate for use in every transaction. The functionality of the conditions is such that solicitors can amend those not appropriate to their client’s specific transaction. It is best, though, for amendments to be restricted only to essential ones. These Standard Conditions of Sale can be purchased from a number of providers.
The Law Society interest rate and the Bank of England base rate
Law firms can legally earn interest on the sums of money they hold for clients until completion day. Given the large sums of money involved, law firms have been able to make money on the deposits they made on behalf of clients. However, until recently, with the Bank of England base rate being close to zero, law firms have not had to pay clients in lieu of interest earned.
Now, though, as of November 2023, the Bank of England has increased their rate of interest to 5.25%, so client monies held in a general client account have been missing out on interest that would have otherwise earned interest in a high street bank savings account, where higher rates are available. Understandably, that has the potential to concern customers.
The Law Society has said that while firms may continue to earn profits in this way, they must do so only when complying with the requirements set out in the Solicitors Accounts Rules from the Solicitors Regulation Authority (SRA). The rules have told law firms, “[you must] account to clients or third parties for a fair sum of interest on any client money held by you on their behalf. You may by a written agreement come to a different arrangement with the client or the third party for whom the money is held as to the payment of interest, but you must provide sufficient information to enable them to give informed consent.”
The Law Society interest rate
Knowing what The Law Society interest rate is and why it is important is crucial if you are part of a property transaction. As the rate is used for late completion, the amount owed if you are found at fault can add up to a significant amount. It’s why solicitors are such sticklers for details about how and when you are transferring funds to them. They are acutely aware of the ramifications of late payments.