A significant amount of sub-prime lending took place about six years ago and this should be an important year for lenders’ claims against professionals.
Since the global recession, borrower defaults have increased and repossessions surged. With prices still relatively depressed, lenders often suffer losses on repossessed properties. Then they review each mortgage transaction to identify whether they are able to recover losses occasioned by a professional’s negligence.
The number of lenders’ claims against surveyors and solicitors has increased in recent months. These are likely to fall into one of two categories: a claim for negligent overvaluation against the surveyor; and/or a claim against the completing solicitors, often arising from a failure to report on matters that would have been material to the decision to lend.
PRIMARY LIMITATION PERIOD
Both contractual and tortious claims may be pursued in professional negligence claims, as the lender will rely on a breach of contract and on the professional’s negligence in performing its duties under that contract. The basic limitation period in both types of action is six years.
In contract, the limitation period starts to run from the date of the breach, regardless of whether any loss has been suffered by the lender, and the date on which the lender becomes aware of the breach is irrelevant for limitation purposes.
In negligence, the lender must show it has suffered actual, recoverable damage. Determining the date on which damage occurs, when the limitation period starts, is not always easy.
The 1997 case of Nykredit v Edward Erman Group established that a lender’s professional negligence claim calls for a comparison between the amount of money lent and the value of the rights acquired. The lender’s cause of action arises when, in applying that comparison, the lender can be said to have suffered a loss due to the professional’s negligence.
In practice, this is a difficult analysis to undertake and lenders are advised to work from the earliest possible date, which will always be the date of the valuation report or the date of the solicitors’ Certificate of Title. Other possible dates should be used as a last resort as they are inherently uncertain.
Special rules apply to extend the limitation period where, at the time the lender’s cause of action accrues, it does not have knowledge of all the material facts. In that case, the limitation period is the later of six years from the date the damage is suffered or three years from the date the lender knows, or ought to have known, the material facts about the loss suffered, the identity of the defendant and its cause of action.
Where a lender’s claim is based on the fraud of the defendant, the six-year limitation period does not start to run until the lender has discovered the fraud or could, with reasonable diligence, have discovered it.
WHAT LENDERS CAN DO
Limitation in professional negligence claims is inherently uncertain. A significant amount of sub-prime loans were made in 2006-2007 and lenders should be particularly vigilant this year and next in reviewing their mortgage loans and deciding whether there is a claim worth pursuing.
Lenders should consider putting in place processes to ensure the facts of the professional’s negligence are discovered in a timely manner. Once a property is repossessed and a shortfall seems imminent, for example, lenders might consider instructing their solicitors to carry out a title check and review of the completing solicitors’ papers to rule out any negligence.
Where a property sells on repossession for considerably less than the original mortgage valuation, lenders might also do well to instruct a surveyor to prepare a retrospective valuation report at minimal cost.
Once a potential claim has been identified, lenders should act quickly to ensure proceedings are issued before the limitation period has expired. If time is tight, they can issue a protective claim form immediately. They might also consider entering into a standstill agreement with the potential defendant in order to suspend time for the purposes of limitation.
Finally, even where primary limitation has expired, lenders might be able to bring a claim by virtue of the special rules on knowledge and fraud mentioned above.
The key is for lenders to act promptly and seek legal advice where necessary to ensure they do not fall foul of the constructive knowledge test.