20th June 2016
The Court of Appeal has clarified the correct approach to the calculation of damages in professional negligence claims where losses have not crystallised. Banking Litigation specialist reviews LSREF III Wight Ltd v Gately LLP and explains the implications for lenders and legal advisors.
The point at which losses are assessed in a professional negligence claim brought by a mortgage lender can be crucial, both in terms of establishing when the limitation period begins to run (and therefore the point at which a claim becomes time-barred) and in relation to the calculation of any damages.
In an earlier briefing we reviewed a useful case which provided a worked example of how, in accordance with the Nykredit case , the courts take into account both the true value of the charged property and the borrower’s covenant strength to ascertain when a lender claimant suffered loss. In this briefing we look at LSREF III Wight Ltd v Gately LLP  in which, leading on from Nykredit, the Court of Appeal confirmed the correct approach to the calculation of damages in those cases where the security has not yet been realised and the lender’s loss has therefore not yet crystallised. This recent case provides the latest piece of the puzzle in this complex area.
The defendant solicitors had failed to draw their client bank’s attention to an insolvency forfeiture clause in a lease of a property which was charged as security for a loan in 2007. The clause impaired the value of the property, which became clear when the bank subsequently took action to enforce its security. The bank issued a negligence claim against the solicitors and assigned its cause of action to a special purpose vehicle (the claimant). The solicitors did not dispute liability and in fact offered to pay the sum of £150,000, which the freeholder had confirmed it would accept in return for a variation of the lease to remove the offending clause.
The claimant did not pursue the lease variation and a hearing on quantum took place, at which the judge held that the loss had occurred immediately the charge had been granted in 2007, and awarded damages for the full diminution in value of the property attributable to the offending clause (£240,000), plus interest.
The claimant subsequently used £150,000 of its damages to vary the lease and agreed a sale of the property. The solicitors appealed the damages award. At the date of the appeal hearing the sale had not yet completed, and so the loss had still not crystallised.
The issues before the Court of Appeal were the solicitors’ arguments that:
Finding for the solicitors, the Court of Appeal held:
As well as providing helpful, authoritative guidance as to the correct approach to the assessment of damages, this case is clear confirmation that lenders definitely can sue for non-crystallised losses. This means that they do not have to wait for buyers to be found and sales to be completed before taking action against negligent advisors, especially when doing so could risk the claim being time-barred. In an area in which pinning down limitation deadlines can be difficult, being able to take pre-emptive action as early as possible is likely to be of significant assistance to lenders, as it will minimise the risk of otherwise valid and valuable claims becoming time-barred.
 Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2)  1 All ER 305
  EWCA Civ 359
 Nykredit; South Australia Asset Management Corp v York Montague Ltd  AC 191; Lloyds Bank Plc v Burd Pearse EWCA Civ 366