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Limitation in the dock for claims against surveyors

Alexia Drew reviews the recent decision in Toombs V Bridging Loans Ltd [2014] EWHC 4566, where the High Court provided further guidance on the limitation position for claims against surveyors.

Facts

The Claimant-lender brought a claim against the Defendant valuers alleging that the Defendants had negligently overvalued a property.

The Claimant had instructed the Defendant to provide a valuation of the property which the Claimant proposed taking as security for a 6 month bridging loan to the borrower. On 13 September 2006 the Defendant provided a valuation of the property in the sum of £750,000, on the basis that planning permission had been granted for three three-storey detached houses. On 3 November 2006, in reliance upon that valuation, the Claimant advanced a bridging loan of £502,500 to the borrower (repayable by 2 May 2007).

The borrower subsequently failed to make any repayments and, on 11 May 2007, the Claimant wrote to the borrower stating that it might take further action if the borrower failed to make the repayments by 27 May 2007. No such repayments were made by the borrower and the Claimant therefore sought repossession of the property.

The Claimant obtained possession and subsequently sought to resell the property. However, the Claimant discovered at that stage that planning permission had, in fact, only been granted for three two-storey houses and, as a consequence, the Claimant alleged that the true value of the property was in fact significantly lower than the Defendant had indicated. 

On 11 December 2007 the Claimant’s solicitors wrote to the Defendant with a Preliminary Notice of Claim under the Professional Negligence Pre-Action Protocol (“the Protocol”) and on 25 September 2009 the Claimant’s solicitors provided the Defendant with a Protocol Letter of Claim.

The Claimant alleged that it had suffered loss as a result of the Defendant’s negligent overvaluation and subsequently issued proceedings against the Defendant on 16 May 2013.

The Defendant applied to strike out the Claimant’s claim, or have Summary Judgment ordered in its favour, on the basis that the Claimant’s claim was statute barred for the purposes of limitation under the Limitation Act 1980. It was agreed that the claim for breach of contract was already statute barred and that the issues to be decided were therefore: (1) whether the primary 6 year limitation period in tort had expired prior to issuance and/or (2) whether the Claimant could rely on s14A of the Limitation Act 1980 to extend the limitation period.

The issue came before a Master who held that damage had been suffered when the borrower failed to pay following the extension period in May 2007 but the Master did not grant Summary Judgment on the basis that there was no evidence that the value of the borrower’s covenant to repay had been reduced, since there still remained an opportunity to comply with the covenant (and thus the Master did not need to go on to consider s14A).

The Defendant appealed against the Master’s decision arguing that the borrower’s failure to make repayments was sufficient evidence that the covenant had no value or at least insufficient value to make good the difference between the actual value of the property and the sum advanced by the Claimant. The Claimant argued that no such inference could be drawn from the failure to make repayments prior to expiry of the extended date for payment; it further argued that it had not had the relevant knowledge for the purposes of s14A of the Limitation Act 1980 until it had obtained advice from a second valuer.

Findings

The Court upheld the Defendant’s application and granted Summary Judgment in the Defendant’s favour.

The Judge held that the Claimant had failed to adduce any evidence that the borrower’s covenant had any value and it was not therefore to be assumed that the borrower’s covenant had any value; the borrower’s failure to make any repayments in this case indicated that the borrower’s covenant was worthless.

The Judge considered the comments made in Nykredit (No 2) wherein Lord Hoffman stated 

There may be cases in which it is possible to demonstrate that such loss is suffered immediately upon the loan being made. The lender may be able to show that the rights which he has acquired as lender are worth less in the open market than they would have been if the security had not been overvalued. But I think that this would be difficult to prove in a case in which the borrower's personal covenant still appears good and interest payments are being duly made. On the other hand, loss will easily be demonstrable if the borrower has defaulted, so that the lender's recovery has become dependent upon the realisation of his security and that security is inadequate…Relevant loss is suffered when the lender is financially worse off by reason of a breach of the duty of care than he would otherwise have been”

Referring to those comments the Judge stated 

I think it important to understand what Lord Hoffman was explaining in that passage. It was this which is relevant to the issues in this appeal. It is not to be assumed that the borrower's covenant has any value whatsoever. It may have or it may not have. Where a borrower has made payments due in respect of a loan in accordance with the terms of the loan, the covenant of the borrower appears to be good by reason of the fact that the payments due are being made. On the other hand, if the borrower does not make payment of sums which are due in respect of the loan, that is indicative of the borrower's covenant being worthless”

The Court also rejected the Claimant’s arguments in relation to s14A of the Limitation Act 1980. The Claimant had written a Preliminary Notice and Letter of Claim (under the Protocol) more than three years prior to issuance of the claim; accordingly whilst the Claimant may not have obtained advice from a second valuer at that point (and may not therefore have been able to precisely quantify the loss), it clearly had the relevant knowledge to bring a negligence claim against the Defendant if it so wished.

Comment

This decision demonstrates the approach the courts are likely to adopt in determining the issue of the value of the borrower’s covenant. This case also reinforces the comments of Lord Hoffman in Nykredit (No 2) that there may be cases when the borrower’s covenant is worthless immediately upon the loan advance being made, if no repayments are made whatsoever.

The decision will come as welcome news to both valuers and their insurers who will be pleased to note that the Courts are prepared to grant Summary Judgment in respect of a limitation defence, rather than delaying the determination of the issues to a trial.

Contact

For further information please contact Alexia Drew, Senior Solicitor on 0117 301 7395, or Ian Welland, Partner on 0117 301 7393.

By Alexia Drew and Ian Welland

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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