Third-party loss recovery

Or: What rights does the Lender have if its Valuer or solicitor drops a clanger!

Basic background

You are a lender, making loans and taking property security. One of your borrowers defaults and some part of the loan proves to be irrecoverable even after you have realised your security and (if you have taken a guarantee) exercised your rights against the guarantor. What else might you do?

It has been well established for many years now that lenders have rights of action against their valuers and solicitors if it can be shown that some part of the professional team has been negligent. The purpose of this article is to consider what this means in practice; and also, to consider the current state of play regarding any funding arrangements and PI insurance involved.

Basic principles

In order to pursue a successful claim, the lender will need to consider the following points:

  • Whether the valuer or solicitor owed a duty of care to the lender. For example, what is the detailed scope of the retainer, and has the valuer or solicitor sought to restrict their liability through the engagement process?
  • If a duty of care did arise, has that been breached? For example, it is well established in valuation cases that the Court will apply a range of non-negligent values which, if met in the report, will mean that the valuer has not been negligent even if the report contains errors. In broad terms, the more unusual the property, the greater the potential for uncertainty and therefore the wider the non-negligent range;
  • Whether any such breach has in fact caused loss to the lender, the lender would be seen as the author of its own misfortunes and no claim would be available against the otherwise negligent advisor.

There are other issues to consider. These may include limitation, whereby a claim can become statute barred if it is not pursued within a particular period (typically six years from the date of the negligent act). Additionally, contributory negligence which involved the lender’s conduct (typically, the existence of relevant Policies and then the extent to which they were complied with in practice) will be crawled over by the solicitors acting for the negligent advisor. Any finding of major contributory negligence can substantially reduce the damages which the lender could otherwise expect to recover.

Top-up loans

It is not uncommon for a lender to make an initial loan and then for the borrower to approach the same lender to request an increase in their facility. The lender may well take advice relating to both parts of the transaction. What happens if the original loan was conducted properly, but some part of the later loan was conducted negligently?

Hot off the press, this question has been considered by the Supreme Court in the case of Tiuta International Limited v De Villiers Surveyors Limited. They overturned the Court of Appeal’s previous decision, and held that any negligence by the advisor relating to the refinancing was not causative of any loss attributable to the original loan.

Looked at instinctively, this makes sense, but the decision does create an obstacle for lenders where issues arise with a “top-up” advice.

Breach of duty

This arises particularly in claims against solicitors. Depending on the circumstances, a breach of duty claim can be available to the lender if (in particular) the solicitor has paid away an advance but where the lender is left with no security.

In summary, it may be more straightforward for the lender to pursue a breach of trust claim in such a situation. The solicitor’s room for manoeuvre is more limited. Essentially, they would have to show that they had acted honestly and reasonably in the prevailing circumstances.

Conclusion

In any case where the lender is facing a substantial loss, it will be worth considering the involvement of their valuers and solicitors in the original transaction. Was the original valuation outside any reasonable range, and can this be supported by a properly constituted retrospective valuation? Are there any problems with the title? Was the lender’s security properly registered?

Some lenders have expressed their reluctance to pursue what would otherwise be strong claims either because of their relationship with the advisor, and/or because of cost and delay. It is right to say that these can be important factors for consideration. However, although the initial correspondence pursuant to the applicable Protocol will be addressed to the advisor, that will be referred immediately to PI insurers who will take over the conduct of the claim. There is a strong likelihood that the damages payable (or the majority of them) would be met by insurers.

  • Some firms will consider some sort of Conditional Fee Agreement in order to share the costs and risk;
  • PI insurers are increasingly receptive to the use of mediation in order to dispose of claims at an early stage.

As a result, it is by no means always the case that an ongoing relationship with an advisor needs to be damaged; or that a claim will take an eternity to come to a successful conclusion. Equally however, there is a strong likelihood that a compromise will need to be considered in order to achieve early settlement, which may well be a necessity anyway depending upon the contributory negligence risk.

Richard Ellison, partner at law firm Shakespeare Martineau.