LSREF III Wight Ltd v Gateley LLP

  Negligence – Solicitor – Loss – Appellant solicitor providing report on title in respect of property offered as security for loan – Property consisting of lease of building – Lease containing clause permitting freeholder to forfeit in event of insolvency of tenant – Insolvency forfeiture clause significantly reducing value of the security as compared with a lease not containing such clause – Appellant admitting negligence in failing to alert lender to presence of clause – Date at which lender’s loss to be ascertained – Whether lender’s assignee unreasonably failing to mitigate loss before trial by not making deal with freeholder for removal of clause  – Whether cost of reaching such deal post-trial recoverable on appeal – Appeal allowed in part The respondent was the assignee of the rights of a bank in relation to a claim against the appellant firm of solicitors for negligence in relation to a loan transaction. The bank had retained the appellant in 2007 to provide a report on title in relation to a property over which a first legal charge was offered as part of the security for a development loan facility of £1.1m. The property in question was a 199-year lease of a building in Leicester, newly granted to the borrower company by the freeholder of the building and valued at £275,000. The loan was to be used mainly for the development of the building as commercial premises with residential flats above. Subsequently, the viability and profitability of the redevelopment was undermined by the fall in local property values which accompanied the 2008/09 financial crash. In November 2011, the bank served a notice of default on the borrower, at which point it discovered a defect in the security over the property, namely the presence in the lease of a forfeiture clause enabling the freeholder to forfeit the lease if the tenant suffered any of a number of specified insolvency events, including administration, receivership, winding up, striking off or dissolution; that clause seriously impaired the value of the legal charge as security and the marketability of the property. By 2013, the property represented the bank’s only remaining valuable security for the loan. The appellant admitted negligence in failing, in its report on title, to draw the bank’s attention to the insolvency forfeiture clause in the lease. A trial was held in December 2014 to determine the quantum of damages. Meanwhile, the freeholder indicated that was willing to agree to the removal of the insolvency forfeiture provision on payment of £150,000 plus his conveyancing costs, but no agreement was reached on that matter. The appellant contended that the respondent had unreasonably failed to mitigate its loss by failing to remedy the defect in its security at a cost of £150,000; it argued that, had the respondent taken that course, it could have recouped all its losses by realising the security. In the court below, the judge rejected that submission and awarded damages of £240,000 by reference to the difference, at the date of the loan transaction, between the value of the lease subject to the insolvency forfeiture clause and the same lease without such a clause. The appellant appealed. In the meantime, the respondent finally reached agreement with the freeholder for the removal of the insolvency forfeiture clause; the respondent later contracted to sell the property for £645,000, although the sale had not yet completed at the date of the appeal hearing. Held: The appeal was allowed. (1) In cases of negligent valuation advice, the court had to undertake two successive tasks. The first stage was to ascertain whether the lender had suffered any transactional loss from entering into the transaction, by comparing the lender’s outlay, plus its cost of funds since lending, with the amount recovered or recoverable by the enforcement of its security rights. The second stage was to ascertain what part of that loss was properly attributable to the adviser’s negligence, which depended on ascertaining the extent to which the value of the security fell short of what it would have been had the valuer’s advice been correct. The first stage was the basic comparison while the second stage estimated the deficiency in the security: South Australia Asset Management Corp v York Montague Ltd [1997] AC 191; [1996] 2 EGLR 93 and Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627; [1998] 1 EGLR 99 applied. (2) In a claim against valuers, the deficiency in the security was represented by the extent of the over-valuation, at the date when the valuation was provided; that calculation therefore had to be performed as at the date of the transaction, rather than the date of the trial. That principle applied equally to the quantification of loss caused by a negligent report on title by solicitors: Lloyds Bank plc v Crosse & Crosse [2001] EWCA Civ 366; [2001] PNLR 34 applied. Accordingly, if it was possible to quantify, as at the transaction date, the relevant diminution in the value of security offered for a loan by reason of a defect in marketable title on which the solicitor had failed to advise, then the quantification of the solicitor’s liability at the second stage should generally be ascertained as at the transaction date. In both cases, the lender would have advanced its money on the strength of an assumption about the value of the security which it would not have made if careful advice had been given. (3) However, that did not mean that the first-stage comparison should also carried out as at the date of the transaction. On principle, and as a matter of common sense, the court should not blind itself from knowledge of relevant facts that had occurred thereafter; “relevant”, in that context, meant facts that demonstrated what, if any, transactional loss the lender had suffered. Generally, the lender’s transactional loss would be most easily identified once it had crystallised by realisation of the security and the application of the proceeds of sale to the reduction of the outstanding debt. In the instant case, the respondent had not crystallised its transactional loss by the time of the trial. Nonetheless, uncertainties as to transactional loss could narrow over time. For example, in 2007, when the report on title in the instant case was provided, it would have been little more than speculation as to what the value of the property might be, with or without the defect in the lease, at the time when, if at all, the charge needed to be enforced. The uncertainty had now been reduced as a result of the contract for the sale of the property. Accordingly, in cases where the transactional loss from lending on negligent advice remained un-crystallised at the date of trial, it would rarely be appropriate to calculate that loss by reference to any earlier date than the trial date. The judge below had therefore erred in assessing the respondent’s loss as at the transaction date in 2007 rather than the trial date in December 2014. (4) The respondent had unreasonably failed to mitigate its loss by the date of the trial. The damage to the respondent consisted of an unusual provision in a lease that, by 2014, represented its only security for repayment. That damage could be completely cured by the payment of £150,000, plus conveyancing costs, to the freeholder. The benefit to be derived from such a payment precisely coincided with the damage caused by the breach, because it offered a complete cure for it, and was not a purely collateral matter: Swynson Ltd v Lowick Rose LLP [2015] EWCA Civ 629 and Fulton Shipping Inc of Panama v Globalia Business Travel SAU of Spain [2014] EWHC 1547 (Comm) distinguished. Neither the large passage of time between the breach in 2007 and the potential for its cure in 2014, nor the fact that payment for a variation of the lease was not part of the ordinary course of the respondent’s business, displaced the obvious and very close connection between the cost and benefit of varying the lease and the damage caused to the bank, and later the respondent, by taking the lease in its unvaried form. Regardless of whether the respondent could add the £150,000 cost to its security, it still stood to double its money, since the value of the lease with the insolvency forfeiture clause removed was more than twice its value with the clause still in place. The respondent had unreasonably failed to mitigate its loss by failing to attempt that deal in circumstances where, as later events had shown, the attempt would rapidly have proved successful. (5) Had the respondent mitigated its loss by the time of the trial, the variation of the lease would have ensured that it recovered the whole of its transactional loss, namely the outstanding advance and cost of funds, in the sum of £653,820, and would consequently suffered no recoverable loss. However, it would be inappropriate for the appeal court now to carry out an artificial historical assessment as at the trial date, based purely on the judge’s findings about the then value of the security, without taking into consideration what it knew about relevant subsequent events. The appeal court should instead assess the respondent’s loss on the basis of all the reliable information known to it. The respondent had now fully mitigated that part of its loss which was attributable to the appellant’s negligence, namely the diminution in the value of the security attributable to the presence of the insolvency forfeiture provision. Any shortfall in recoveries now experienced on the sale of the property was a risk that the respondent undertook and not a consequence of the appellant’s advice being wrong. However, the respondent was entitled to recover the £150,000 cost of mitigation, with interest at 2% from January 2015 when that cost was incurred, resulting in an award of £157,100. Michael Pooles QC and Paul Mitchell QC (instructed by Berrymans Lace Mawer LLP) appeared for the appellant; Roger Stewart QC and Nicholas Trompeter (instructed by Ingram Winter Green LLP) appeared for the respondent. Sally Dobson, barrister Click here to read a transcript of LSREF III Wight Ltd v Gateley LLP