Chris Freeman, senior associate in Ashfords’ Dispute Resolution team, explores how lenders can seek to maximise recoveries from their loan books by being alive to the red flags of professional negligence, and the initial steps and key battlegrounds in professional negligence lender claims
It is a fact of life that everyone makes mistakes. This is equally true in the case of professional advisors to lenders and, in some cases, those mistakes can amount to professional negligence.
Lenders should be alive to this when considering why a particular loan has failed and they are left facing significant losses.
The most common claims are seen against valuers and solicitors (and sometimes both in relation to the same advance), but are no means limited to those two professions. The point of bringing such claims is not for the lender to seek to punish the professional firm involved – indeed the lender will often continue to instruct that firm on other matters – but to seek to recover losses suffered as a consequence of negligence on a particular occasion.
In the context of claims against valuers, a rising market can often mask overvaluations on the basis that, even if the valuer has negligently overvalued the property in question, by the time the lender comes to realise its security, that property has risen in value sufficiently to cover losses that the lender might otherwise have suffered. However, when the market falls, the opposite is true – a lender facing a loss following the sale of the property can look to recover some of that loss from a negligent valuer.
The financial crisis of 2007/8 had precisely this effect on negligent overvaluations in the same way that the recession in the 1990s did. History tells us that it is only a matter of time before the economy takes another dip and more claims come to light.
That is not to say however that even in a rising market claims cannot be caught and significant recoveries made by lenders. Indeed, some of the overvaluations we have seen have been so significant that a rising market has not helped a negligent valuer. In a similar vein, some of the mistakes made by solicitors have been so fundamental that a significant loss is an inevitable consequence of those mistakes, regardless of what the market for that particular property may be doing.
How to spot claims
Ensuring that those who might be in a position to spot potential claims are aware of how to identify them is crucial. These individuals are often based in a lender’s support, restructuring or recovery departments. The sooner a claim is identified, the better. Professional negligence claims must be brought within a certain period of time and therefore being able to identify them and react is essential. Moreover, it means that claims that might otherwise fall through the cracks (because of a lack of awareness that they may exist) can be spotted and recoveries can potentially be made which would otherwise be lost.
So how do lenders go about spotting such claims?
In the context of negligent overvaluations, often one of the key indicators of a possible overvaluation is a significant fall in the value of security on revaluation (for example, when a lender is considering next steps following a loan going into arrears) or following the initial advice on current value after the appointment of Law of Property Act (LPA) receivers.
To take a relatively extreme example, a property was valued at £1 million at the time of the original lending decision but the LPA receivers’ advice some time later is that the likely outcome is a sale for around £500,000, that would be a clear red flag. That is of course not to say that there may be some other (nonnegligent) reason for the fall in value (such as a market collapse for that type of property) but it does indicate to the lender that the possibility of an overvaluation at the time of the original lending should be investigated.
In the context of claims against solicitors, issues with the title or security taken, which again are often identified when the lender seeks to realise its security, can be indicators of potential negligence and are matters which the lender should be alive to.
The key questions for lenders to consider are: why has the lending gone wrong and have we possibly been let down by one of our professional advisors? That mind-set will help to spot claims that might otherwise be missed.
Looking to the short to medium term future, there remains much uncertainty about the impact Brexit will have on the economy in general and, of particular relevance in this context, the property market. If the market falls, this may have the knock-on effect of an uptick in the number of professional negligence claims being identified and brought by lenders. In the meantime, though, lenders would be well advised to consider whether there may be potential claims already existing in their current loan portfolio which have yet to be identified.
We work with our lender clients in providing training on how to identify potential claims as soon as possible in order to maximise recoveries.
What happens once a potential claim has been identified and passed to us to review and advise on.
Once a possible claim has been flagged to us, the first step is to conduct a thorough review of the documentary evidence.
This includes reviewing contemporaneous documentation from the time of the lending in question (such as lending applications and sanctioning decisions); as well as documents and correspondence generated since that time showing the lifecycle of the loan – including any steps taken to sell the security and recover outstanding sums due from the borrower.
As part of this review, we also assess whether there are any pressing time limits which require urgent action to be taken – for example, whether the potential claim is approaching the expiry of the applicable limitation period (i.e. the deadline by which a claim has to be brought at court).
In claims against valuers, this initial investigatory stage usually then leads to instructing an expert to advise on whether the original valuation was negligent. It is a question of asking the expert to metaphorically transport him or herself back in time to the date of the valuation to put themselves in the shoes of the original valuer to determine whether that original valuation was negligent.
It is worth bearing in mind that whilst an expert may consider that the original valuer had overvalued a particular property or site, this does not automatically mean that the original valuation was negligent.
To amount to negligence, the valuation has to fall outside the permissible margin of error, usually somewhere between 5% and 15% depending on the particular property in question.
Subject to the nature of the claim against a solicitor, expert evidence may be required at the investigation stage to determine the strength of the case in these types of claim as well.
The next stage (assuming there are no pressing limitation issues) is to comply with the Pre-Action Protocol for Professional Negligence under the Civil Procedure Rules.
This involves putting the professional on notice of a claim (if this hasn’t already been done) and then setting out the lender’s claim in detail in a Letter of Claim, including the financial loss the lender has suffered.
The professional has 21 days to acknowledge the Letter of Claim and then up to three months from the date of that acknowledgment to investigate the matter and provide a Letter of Response or Letter of Settlement (or both).
In the majority of cases, following the Letter of Response, the parties will enter further negotiations and correspondence in order to try to resolve matters, which often involves discussions and (if agreed) arrangements about mediation.
The key battlegrounds with the defendant professional (and its insurers) tend to be on liability, causation and contributory negligence.
As a general rule, it is usually accepted that the professional owed a duty of care towards the lender and therefore defendants tend to focus on attacking the other pillars needed to build a successful professional negligence claim.
Overcoming the liability hurdle is achieved by obtaining good quality, independent expert evidence.
Cases stand and fall on the quality of the expert evidence a party is relying on and failure to establish that there has been a breach of duty on the part of the professional means that the claim will fail.
Disputes around causation in these types of claims – that is to say did the negligence by the relevant professional cause the lender’s loss – tend to involve allegations that the lender has not truly relied on the professional’s advice when making its lending decision.
Clear documentary and witness evidence of reliance by the lender is therefore helpful in defeating such arguments.
As for contributory negligence, lenders have been operating tighter lending controls given the lessons learned from the financial crisis a decade ago.
The consequence of this is that it is likely to prove more difficult for defendants to professional negligence claims brought by lenders to seek to reduce their liability by alleging that the lender has caused or contributed to its own loss by making poor lending decisions.
However, lenders would be well advised to ensure that lending proposals are carefully analysed, and sufficient checks made on affordability and repayment in particular, with supporting documentary evidence retained, in case that decision is later subject to scrutiny. Finally, allegations that the lender has failed to adequately mitigate its loss are also often made by defendant professionals. This is usually an allegation that the security should have been sold for more than it was sold for, or that the lender has failed to take sufficient steps to pursue its borrower for repayment.
These are things which the lender should be mindful of when conducting its recoveries process.
Chris has extensive experience in advising lenders on professional negligence claims, primarily against solicitors, valuers and project monitors. Having specialised in this area for a number of years now, he has built up a wealth of expertise in this sector. In addition, Chris also advises in relation to commercial disputes in the professional practices and technology sectors.
Chris advises clients throughout the litigation process, including the Pre-Action Protocol phase, and has substantial practical expertise in Alternative Dispute Resolution, having been involved in a significant number of successful mediations and negotiations in recent years.
These articles were originally featured in the Mortgage Finance Gazette, many thanks for permission to reprint them.