As the tide turned in the property market following the end of year on year rising property prices in the earlier part of this century, both valuers and solicitors have faced a wave of claims from lenders trying to recover their losses. In many cases lenders have been slow to pursue their claims, and with contractual claims now largely sunk, limitation in tort has become a critical concern. Identifying when a cause of action has accrued in tort – an exercise which necessarily involves assessing the constantly fluctuating combined value of the lender’s security and the value of the borrower’s covenant – is notoriously complex.
The recent county court case of Canada Square Operations Ltd v Kinleigh Folkhard & Hayward Limited (judgment 17 September 2015) provides invaluable guidance for those involved in defending claims against professionals as they navigate this process to determine whether a credible limitation defence is available.
Mr and Mrs Slee applied to the claimant for an interest-only mortgage to fund a self-build project. Mr Slee self-certified his income as £165,000 from his building company. In January 2006 the defendant valued the property at £500,000. The claimant advanced £427,500 in March 2006. During 2007 there were sporadic repayments, with the last payment in January 2008. In August 2008 the borrowers surrendered possession and were later declared bankrupt. The property was sold in July 2009 with a shortfall.
The claimant advanced its claim pre-action in December 2009 but the claim form was not issued until 23 October 2013, meaning a claim in contract was clearly statute barred. The proceedings therefore asserted a claim in tort only.
The defendant admitted the valuation was negligent. The claimant was not able to rely on s14A of the Limitation Act 1980 (given that pre-action correspondence was underway almost four years prior to proceedings being issued) and therefore had to establish that it had not suffered any measurable, relevant loss until after 22 October 2007.
To assess that loss, it is well known that the court must (in considering a ‘no transaction’ case) determine when the lender becomes worse-off as a result of proceeding with the advance. Based on the principles in Nykredit, the court is required to value both the security and the borrower’s covenant over time and pinpoint when their combined values first became less valuable than the amount then outstanding under the mortgage. The cause of action in tort accrues at that point and the clock for limitation purposes starts to tick.
The judgment is well worth a read on a variety of issues in lender claims but most helpful was the judge’s approach to assessing the value of the borrowers’ covenant, with previous judicial guidance being sparse.
Whilst valuing the security is relatively straightforward, the judge’s interpretation of Nykredit highlights a distinction which may be of importance in marginal cases between the value of the security and the value of the property which stands as security, in that the true value of the security must be reduced to allow for the notional costs of repossession and sale. He proceeded to deduct 3% of the property’s value in respect of such costs, before applying an increase in its value over time up until the day before the start of the limitation period to reflect increasing property prices
As to valuing the borrowers’ covenant and the burden of proof, the judge concluded that when faced with a limitation defence, the burden fell to the lender to establish a prima facie case that the cause of action accrued within the limitation period. Following Nykredit, that requires the lender to show that the interest payments were being met and that the covenant appeared good.
The judge then closely analysed the borrowers’ payment history throughout 2007 before pinpointing the time when the value of the security as compared with the mortgage balance then outstanding revealed a deficit which the value of the borrowers’ covenant could not bridge. He concluded that the claim became statute barred by at least February 2007 (when the first payment was missed) and dismissed the claim. In so reaching this conclusion, the judge considered that it was appropriate to take into account a degree of hindsight where subsequent events (including bankruptcy) served to throw light on the true state of the borrowers’ financial circumstances at an earlier point in time: one missed payment does not of itself show a worthless covenant, but subsequent events may reveal that the borrower’s position was already perilous at that point. The judge also interestingly observed that the fact of this being a non-status loan was a relevant piece of evidence in determining whether the covenant appeared good.
When faced with a lender’s claim in tort only, disclosure of all prior valuations and of the full repayment history is essential, and accountancy evidence may assist, as it did in this case, in establishing a borrower’s true financial circumstances.
Lenders who have relied on previous woolly guidance giving a degree of flexibility on limitation in this area when bringing claims may increasingly see such claims being unravelled.