We welcome again Mr Anis Waiz, solicitor and Head of Commercial Litigation at Curtis Law Solicitors, as he continues his critical review of current case law.
This important case raised a key issue for conveyancers as to the scope of the duty owed when acting for lender and borrower.
It will be recalled that Blackburne J in Nationwide Building Society v Balmer Radmore  PNLR 606 noted at 632:
“… there is no general duty on a solicitor to report matters which might be of commercial interest to a lender and nothing in Bowerman justifying the conclusion that there is. On the contrary, as the decision in GCA makes clear, any duty to report arises not because a matter might be of interest to the lender but if and only if it goes to a matter which concerns those of the lender’s interests to which the solicitor is engaged to attend.”
At first instance the Solicitors were found to be liable to make a contribution to the surveyors pursuant to the Civil Liability (Contribution) Act 1978 in the sum of £100,000 on the basis the Solicitors would have been liable to the lender for the loss arising from the loan. The surveyor had in fact settled the lender’s claim in respect of an alleged negligent valuation
The Solicitors appealed to the Court of Appeal.
The borrower bought buy-to-let properties with secured lending. In September 2005 he purchased a property near Buxton for £390,000. The Surveyors were initially instructed in November 2005 by a different lender to produce a valuation for re-mortgage purposes.
The instructions record the estimated value was said to be £850,000. The loan required was £500,000. On 15 November 2005 the surveyor met the borrower and inspected the property. The borrower told the surveyor that the borrower had purchased the property around 6 months previously for £600,000.
The Surveyors valued the property at £725,000.
The Solicitors obtained office copy entries which revealed the actual purchase details, (£390,000 September 2005). There was no evidence from the Solicitors as to whether they appreciated that the information disclosed that the property had been purchased within the last 6 months for substantially less than the valuation of £725,000. The Solicitors did not report this information to the Lender.
Before the Court of Appeal there were two issues. Duty and Loss. The parties’ position was as follows:
- The Surveyors argued the Solicitors were under a duty to advise the Lender in relation to facts discovered by them in the course of investigating title which a reasonably competent solicitor would realise might have a material bearing on the valuation of the Lender’s security. The discrepancy between the valuation and the purchase price and date of purchase of the property were such facts (“the Duty”).
- Had the Solicitors advised the Lender of the discrepancy, the Lender would have referred the discrepancy to the Surveyors, who would have revised their valuation. Thus the Lender would not have made the loan and would not have incurred its loss.
- The Solicitors argued they were not under any duty to the Lender to report the facts as to the date and price of the purchase of the property. Their duty was confined by the terms of their instruction to investigating and reporting on title, (save where there was evidence of fraud). The detailed provisions of the CML’s Handbook, was a comprehensive and exclusive code setting out the duties of a solicitor instructed by both lender and borrower.
- Even if they were under the alleged Duty, their failure to perform did not cause any loss. The Lender had decided to make the loan even though it had information as to the date and price of the purchase of the property that should have led it to question the Surveyors’ valuation (“Causation”)
The Court of Appeal noted the following key points:
- The starting point was the express terms of the Solicitors’ retainer. In this case the Solicitors acted for the borrower and the Lender.
- The Lender’s instructions incorporated the CML’s Handbook (6 May 2005) and included the mortgage offer and a copy of the valuation report.
- Various provisions of the CML Handbook were referred to by the Court (see below).
- The Handbook did not affect any responsibilities the Solicitors had to the lender under the general law or any practice rule or guidance issued by the Solicitors professional body from time to time.
- Lenders using the CML Handbook certify that the instructions had been prepared to comply with the requirements of rule 6(3) of the Solicitors’ Practice Rules 1990 (“the 1990 Rules”). The 1990 Rules did not expressly require a solicitor to report to a lender any discrepancy between the information provided by the borrower and that disclosed in the searches carried out by him, or information casting doubt on the value of the property to be charged
- Apart from the CML handbook the law as to a solicitors duties was authoritatively set out in Mortgage Express Ltd v Bowerman & Partners  2 All ER 836, ( “the Bowerman duty”). The reader is referred to the Judgment for the facts. Sir Thomas Bingham held (at 842) that
“… if, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender’s security or some other ingredient of the lending decision, then it is his duty to point this out.”
- The Court of Appeal held that the Bowerman Duty was not excluded or inconsistent with, the terms of the retainer, as set out in the CML Handbook. Specifically by reference to Clauses 1.3 and 5.1.2 of the Handbook
- A solicitor instructed on the terms of the CML Handbook was not required to carry out any work that was outside the scope of his instructions. It was only if, while carrying out that work, he came into possession of non-confidential information that a reasonably competent solicitor would realise adversely affected the title to the mortgage property or the value of the security that he was under a duty to report it to the lender.
The CML Handbook
In order to consider the issue of duty the Court of Appeal referred to the following material clauses in the Handbook which will be familiar to conveyancers:
1. Clause 1.3 The Lenders’ Handbook does not affect any responsibilities you have to us under the general law or any practice rule or guidance issued by your professional body from time to time.
2. 1.4 The standard of care which we expect from you is that of a reasonably competent solicitor … acting on behalf of a mortgagee
3. 4.1.1 Check part 2 to see whether we send you a copy of the valuation report or if you must get it from the borrower. If you are sent, or are required to obtain, a copy of the valuation report:
4. 5.1.2 If any matter comes to the attention of the fee earner dealing with the transaction which you should reasonably expect us to consider important in deciding whether or not to lend to the borrower (such as whether the borrower has given misleading information to us or the information which you might reasonably expect to have been given to us is no longer true) and you are unable to disclose that information to us because of a conflict of interest, you must cease to act for us and return our Instructions stating that you consider a conflict of interest has arisen.
The Court noted that Clause 5.1.2 was to be explained on the basis that if the matter that “comes to the attention of the fee earner dealing with the transaction which the fee earner should reasonably expect the Lender to consider important in deciding whether or not to lend to the borrower” and that matter is not confidential to the borrower, the fee earner should report it to the lender.
Rule 6(3)(c) of the 1990 Rules provided for “making appropriate searches relating to the property in public registers … and reporting any results … which the solicitor considers may adversely affect the lender”. It was not suggested that a search of the Land Registry was not a search for the purposes of rule 6(3) (c) of the 1990 Rules.
The search resulted in the information that the property had been purchased recently at a price which suggested that the valuation was excessive. This was clearly relevant to the value of the security.
The Court noted the unusual position in that the lender was aware from information it held that the valuation was excessive. The borrower in his application stated he had bought the property (October 2005 at a price of £450,000) It was highly unlikely the value had increased by almost £300,000 since the application
However absent evidence from the Lender (and a lending manual) as to what action the Lender may have taken if the key information as to the purchase price and date had been given to the Lender, the judge at first instance speculated what action the Lender may have taken.
The Court of Appeal observed that it was open to the Solicitors to adduce evidence on the issue of causation, but it could not be held against them that they did not do so given the burden of proof was on the Surveyors. Thus it was for the Surveyors to secure the evidence they required.
The Court of Appeal held:
- The Solicitors were under the duty that applied to them. At first instance the Judge found, a reasonably competent solicitor would have realised that the date and price paid for the property in September 2005 strongly suggested that the valuation was greatly excessive. Thus the Court rejected the Solicitors’ contention that they were not under a duty.
- Lord Justice Patten observed that the Bowerman Duty is one of disclosure. The disclosure obligation may also be confined by the fact that the solicitor in a mortgage transaction will often be acting for both lender and borrower and so face potential conflicts of duty in relation to information which is confidential.
- As to causation it was for the Surveyors to prove that the Solicitors’ breach of duty caused the Lender’s loss. The Surveyors did not prove that the Lender would have reacted to the information that the Solicitors should have provided on the purchase price and date of purchase of the property. Such information was not materially different from the information given to them by the borrower. The Solicitor’s appeal on this ground was allowed.
This case reiterates the settled law that a solicitor’s duty is framed by the terms of the retainer and is always the starting point when considering the duties that flow from the same. Crucially the Court of Appeal noted that the CML Handbook did not exclude the Bowerman Duty.
Interestingly, the contention by the Solicitors that the parenthesis in clause 5.1 of the CML Handbook was an indication that the scope of the reporting duty should be limited to cases of fraud was rejected by the Court of Appeal.
From the outset it will be appreciated that:
- The Surveyors had settled the Lender’s claim against it for negligent valuation of the property in the sum of £200,000.
- Section 1 (1) Civil Liability (Contribution) Act 1978 provides that any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)
- Here the Surveyors sought a contribution from the Solicitors in respect of that settlement on the basis that the Solicitors would have been liable to the Lender.
However on the key issue of causation the Solicitors appeal was allowed on the basis that the Surveyors did not prove that the Lender would have reacted to the information that the Solicitors should have provided on the purchase price and date of purchase of the property. Thus there was no evidence that the Lender would not have made an advance if the Solicitors had provided the key information
It is worth repeating Sir Stanley Burton observations in his judgment where he noted
This does not mean that a solicitor instructed to act for both lender and borrower must act as a detective or bloodhound. The solicitor instructed on the terms of the CML Handbook was not required to carry out any work that was outside the scope of his instructions. It was only if, while carrying out that work, he came into possession of non-confidential information that a reasonably competent solicitor would realise adversely affected the title to the mortgage property or the value of the security that he was under a duty to report it to the lender.
It is also worth recalling Oliver J in Midland Bank Trust Co Limited v Hett, Stubbs and Kemp (a firm)  1 Ch 384, (a case concerning solicitors’ liability for failure to register an option) . At 402 to 403 Oliver J held:
“The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do”
For completeness the reader should note Minkin v Lesley Landsberg (Practising As Barnet Family Law)  EWCA Civ 1152 (17 November 2015) decided by the court of Appeal 6 days later dealt with a solicitor’s duty in the context of a limited retainer.