In this post Anis Waiz, solicitor and head of commercial litigation at Curtis Law Solicitors, continues his critical review of current case law.
A recent case raised an interesting issue as to whether the "Bowerman" duty (Mortgage Express v Bowerman [1996] 1 PNLR 62) (solicitor’s duty to report to his client lender matters relevant to the valuation of the property) was ousted by the terms of CML Handbook.
E.Surv Limited sought a contribution from a firm of in respect of monies paid to a lender, the Mortgage Business in settlement of its claim for damages for negligent over-valuation of a property.
The surveyors’ alleged the solicitors failed, in breach of the express and implied terms of its contract with the lender, to advise the lender that the borrower, had been registered as proprietor of the property for less than 6 months and that the price he had paid for it as disclosed on the office copy entries, £390,000, was significantly less than the surveyors’ valuation as stated in the mortgage offer, £725,000
The surveyors accepted they could not recover all of their loss from the solicitors. However they sought a substantial contribution against the total amount paid by the surveyors to the lender in settlement (£200,000).
HHJ Stephen Davies noted that what the CML Handbook, the Solicitors Practice Rules and the certificate of title, was intended to do is to identify and set out the precise scope of the specific activities which the solicitor is being retained to do, in circumstances where the solicitor is faced with the difficult position of acting for two parties with potentially conflicting interests.
Background
The reader is referred to the judgment for the full facts. This blog will concentrate on the legal issues raised.
In brief terms the borrower applied to the lender for a remortgage, seeking a loan of £580,000, on the basis of self-certified details of earnings from self-employment. As security the lender would take a charge over a substantial detached property.
Notwithstanding the apparent discrepancies in relation to the purchase details as provided by the borrower there was no evidence before the court or any submissions that the borrower acted dishonestly as regards the transaction.
The Valuation
The surveyors were initially instructed in 2005 by a different lender to produce a valuation for re-mortgage purposes. The instructions record that the estimated value was said to be £850,000 and the loan required was £500,000. The valuer met the borrower and inspected the property. The site notes were produced. 2 entries were relevant:
(1) On p.3 the property had been purchased "around 6 yrs. ago at £600,000".
(2) On p.5 3 comparable properties, identifying that all 3 had been sold that month, in one case subject to contract, for £725,000 in two cases and £825,000 in the third. On the same page the current market value was stated to be £725,000.
The mortgage application completed by the borrower stated the purchase price and date as £450,000 October 2005. Any underwriter reading the application form could have been in no doubt that the borrower was contending that the property had accumulated in value by £275,000 in only 2 months.
The Solicitors
As is common the solicitors were instructed both by the borrower and lender. The lender’s instructions were given on the basis of the Council of Mortgage Lenders Handbook (CML) (6.5.2005) Importantly the solicitors were also provided with a copy of the lender’s mortgage offer to the borrower and a copy of the valuation report.
The following material points as to the CML Handbook and Solicitors’ Practice Rules 1990 were raised:
1. Part 1: "Those lenders who instruct using the CML Lenders Handbook certify that these instructions have been prepared to comply with the requirements of rule 6(3) of the Solicitors’ Practice Rules 1990."
2. Rule 6(3) (c) provides that the lender’s instructions must be limited to the matters specified therein. In addition
"(ii) making appropriate searches relating to the property in public registers (for example, local searches, commons registration searches, mining searches), and reporting any results specified by the lender, or which the solicitors considers may adversely affect the lender.
(v) reporting if the seller or the borrower (if the property is already owned by the borrower) has not owned or been the registered owner of the property for at least 6 months.
3. Clause 1.4: of the CML handbook "The standard of care which we expect from you is that of a reasonably competent solicitor … acting on behalf of a mortgage.
4. Clause 4.1.1.1:"You must take reasonable steps to verify that there are no discrepancies between the description of the property as valued and the title and other documents which a reasonably competent conveyancer should obtain and, if there are, you must tell us immediately."
5. Clause 5.1.1: "Please report to us if the owner or registered proprietor has been registered for less than 6 months …"
6. Clause 5.1.2:"If any matter comes to the attention of the [conveyancer] 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."
As is common the solicitors obtained office copy entries relating to the property, which revealed the actual purchase details. There is no evidence from the solicitors as to whether or not 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. Materially the solicitors did not report this information to the lender.
The issues
The solicitors sought to defend the claim on a number of grounds:
1. Whilst they admitted the breach of an express obligation to inform the lender that the borrower had been the registered proprietor for less than 6 months, they denied that they were obliged to inform the lender as to the purchase price paid.
2. They deny the lender would have acted differently had information been provided as the borrower had, in the application form, already informed the lender that the property was purchased for £450,000 in October 2005. That information did not provoke a reaction with the lender.
3. They denied any causative effect as between any breach on their part and the lender’s decision.
Breach
The following points were germane:
1. Whilst the solicitor’s admitted breach of clause 5.1.1 of the CML handbook to inform the lender that the borrower had been the registered proprietor for less than 6 months, they denied that they were obliged to inform the lender as to the purchase price paid.
2. The surveyors’ allege the solicitors were obliged to do so both under clause 4.1.1.1 of the CML handbook and as part of their duty to exercise reasonable care and skill. Further the surveyors allege the solicitors were obliged to advise 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. That was the "Bowerman duty", see Mortgage Express v Bowerman [1996] 1 PNLR 62 see p.69, Lord Bingham MR.
3. Counsel for the solicitors contended that clause 4.1.1.1 did not apply because the discrepancy between purchase price and valuation was not a "discrepancy between the description of the property as valued and the title documents".
4. Counsel for the solicitors sought to argue that whilst the Bowerman duty is a species of obligation which the court will ordinarily imply where a solicitor acts for a lender, it will not imply such an obligation when to do so is inconsistent with the express terms of the retainer or with the surrounding circumstances of the relationship: see Nationwide BS v Balmore Radmore [1999] 1 Lloyd’s Rep PN 241, per Blackburne J at 258.
5. Counsel for the surveyors submitted that it was clear from the terms of the Lenders Handbook that the general duty to take reasonable care was not ousted. The provisions of the Lenders Handbook were not prescriptive as to specifically what it is that the solicitors must do. Clause 4.1.1 required the solicitors to take "reasonable steps", clause 5.2.1 required the solicitors to "make all usual and necessary searches and enquiries", and clause 5.2.2 required the solicitors to carry out any other searches which may be "appropriate to the particular property".
6. There was debate as to searches at the Land Registry. Counsel for the surveyors submitted that such a search was obviously an appropriate search which the solicitors were obliged to make, and that the obligation to report any results which the solicitor considers may adversely affect the lender obviously includes the obligation to comply with the Bowerman duty.
7. Counsel for the solicitors submitted that conducting a HM Land Registry search was not capable of falling within the scope of the "appropriate searches" required by clause 6(3)(c)(ii) of the Solicitors Practice Rules, since it was not specifically referred to in it, and nor is it something which a conveyancer would normally consider to be a "search". The solicitors contend that it would more naturally fall within the obligation at paragraph (vii) to "investigate title to the property".
Causation
The reader is referred to the judgment for the key background facts. In summary:
1. It was common ground between the parties that the task for the court was to decide on the balance of probabilities what would have happened had the solicitors provided the actual purchase details to the lender.
2. That involves a consideration of what the lender would have done and also what the surveyors would have done. The surveyors bear the burden of proving that the end result would have been materially different, and that as a result the loss which the lenders sustained would have been avoided entirely or at least in part.
Decision
His Honour Judge Stephen Davies held:
1. Whilst as noted above the solicitors admitted breach of clause 5.1.1 namely the owner or registered proprietor having been registered for less than 6 months, as a matter of construction, conducting a search at HM Land Registry does fall within the category of appropriate searches in rule 6(3) (c) Solicitors’ Practice Rules 1990 relating to the property in public registers, even if the primary or, sole purpose of so doing is to investigate title to the property.
2. Thus the obligation to report any results which the solicitor considers may adversely affect the lender was obviously both intended to and capable of including the obligation to comply with the Bowerman duty. There is no specific limitation to, for example, reporting only matters relevant to title.
3. Accordingly it is not possible for the solicitors to say that the terms of the Lenders Handbook, read with the Practice Rules and the certificate of title, exclude, on their true construction, the Bowerman duty.
4. A solicitor must perform their express obligations under the Lenders Handbook by undertaking a Land Registry search and by reading the office copies so obtained as well as by reading a copy of the valuation report provided. If in the process of so doing they discover information from the office copies about the recent purchase price which has a material bearing on the valuation of the property, then they are under an obligation to the lender to disclose it.
5. The Bowerman duty arose in this case. Thus the solicitors were in breach in failing to notify the lender of the actual purchase price as well as the purchase date.
As to causation:
1. What would the lenders have done had they been provided with the actual purchase details by the solicitors? His Honour Judge Stephen Davies held the lender would have acted on a solicitors’ letter complying with their Bowerman duty by contacting the surveyors and raising a query with the surveyor concerned.
2. What would the surveyors have done if contacted by the lender? The court was satisfied that had the valuer arrived at a revised valuation they would have discussed it with a regional manager and he would have produced a revised valuation report which would have been transmitted back to the lender. On the balance of probabilities the valuation report would have explained that the reduced valuation was due to a re-assessment based on the actual purchase price of £390,000 being different to the £600,000 reported by the borrower. That is because the surveyors would have wanted to provide an explanation for the altered valuation which would deflect any potential criticism of the original valuation.
3. His Honour Judge Stephen Davies held that the lender would have had no reason to question the revised valuation, and would have accepted it.
4. Importantly from the lender’s internal documentation the amount sought, £580,000, was 80% of the valuation of £725,000. From the mortgage offer, the maximum loan to value ratio was 85%. Thus if the revised valuation would have been no more than £500,000 the maximum which the lender would have been prepared to offer would have been 85% of that figure, namely £425,000. That would not have been sufficient for the borrower to discharge the existing bridging loan of £470,000 and, the transaction would not have proceeded.
Pursuant to the Civil Liability (Contribution) Act 1978 the court must assess contribution by reference to what is just and equitable. Thus having regard to the degree of blameworthiness of both parties and the relative causative potency of each party’s breach. In this case there was no reason to allocate responsibility anything other than equally.
The surveyors were entitled to judgment against the solicitors for £100,000.
Conclusion
At first sight this might seem a harsh decision. Whilst there were technical issues as to whether the solicitors were liable by virtue of clause 4.1.1.1 of the CML, the attempt to avoid established duties by relying on the confines of the CML was an interesting and somewhat novel point. However at the heart of the issue was disclosure by the solicitors to the lender of the purchase price. It must be recalled that the CML conditions reflect some fundamental duties of solicitors.
Clause 1.3:"The Lenders Handbook does not affect any responsibilities you have to us under the general law. Clause 1.4:"The standard of care which we expect from you is that of a reasonably competent solicitor … acting on behalf of a mortgagee."
His Honour Judge Stephen Davies outlined this very succinctly
“It follows in my judgment that a solicitor must perform his express obligations under the Lenders Handbook by undertaking a Land Registry search and by reading the office copies so obtained as well as by reading a copy of the valuation report provided to him. If in the process of so doing he discovers information from the office copies about the recent purchase price which has a material bearing on the valuation of the property, then he is under an obligation to the lender to disclose it. That is an obligation which does not extend beyond the limitations of the Lenders Handbook, is expressly preserved by clause 1.3 of the Lenders Handbook, and must be performed unless to do so would involve a conflict of interest, in which case the solicitor must act in accordance with clause 5.1.2 of the Lenders Handbook.”
E.Surv Ltd v Goldsmith Williams Solicitors [2014] EWHC 1104 (Ch) (10 April 2014)
