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Mutual Matters – January 2018

Mutual Matters – January 2018

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Freezing order update: Recent key caselaw

In a recent issue of Mutual Matters we published our practical guide to worldwide freezing […]

In a recent issue of Mutual Matters we published our practical guide to worldwide freezing injunctions:

Freezing orders: Litigators’ lethal weapon

A freezing injunction or order is a remedy which restrains a defendant or potential defendant from disposing of or dissipating assets. A freezing order is typically obtained by a claimant or potential claimant, such as a bank or other financial institution, who wishes to ensure that a [potential] defendant’s assets remain available pending the enforcement of a court judgment. Various different types of assets can be frozen, including bank accounts, shares, investments, land, property and so on. If a respondent fails to comply with a freezer, it will be in contempt of court and can face a fine, imprisonment or seizure of assets. They can therefore be a very significant tactical weapon in a claimant lender’s arsenal.

Often, freezing orders are obtained urgently, on an interim basis and without notice of the claimant’s application being given to the defendant/respondent. That is usually because giving notice would be tantamount to tipping off, which could give an untrustworthy respondent the time they need to place assets out of reach and render the freezer useless. However, because the respondent is absent and therefore unable to make representations at the initial hearing, the applicant and its legal advisors are under a duty to ensure that all material facts are brought to the court’s attention.

Requirements and obligations

To obtain a freezing order:

The claimant/applicant must have a substantive cause of action against the respondent (the [potential] defendant);
The applicant must have a good arguable case;
There must be a real risk of dissipation of assets; and
It must be just and convenient to grant the freezing order, bearing in mind the conduct of the applicant (‘clean hands’); the rights of (and any impact upon) any third parties who may be affected by the freezer; and whether such an order would cause legitimate and disproportionate hardship for the respondent.

In addition, and particularly where freezers are obtained on an interim/without notice basis, applicants must also:

Give full and frank disclosure of all relevant information to the court; and
Provide certain undertakings to the court, including an undertaking in damages to compensate the respondent if it is ultimately decided that the injunction should not have been awarded.

The applicant’s obligations when obtaining a freezing order – in particular in relation to the giving of both full and frank disclosure and the requisite undertakings – have hit the legal headlines in several recent, key cases.

Recent key caselaw

Failure to give full and frank disclosure

In Roman Frenkel v Arkadiy Lyampert (1) and La Micro Group (UK) Ltd (2) [1] an interim freezing injunction had been granted on the claimant’s without notice application. At the return hearing, however, where the court was required to decide whether or not the freezing order should be continued, it became clear that the claimant/applicant had been guilty of material non-disclosure.

First, the claimant had not notified the court that he had also served court proceedings on the defendant in the US. That fact was highly significant because it demonstrated that the defendant had taken no steps to dissipate his assets even though it was aware that the claimant was pursuing similar claims in the US.

Second, the claimant’s lawyers had failed to make proper enquiries about, and had therefore failed to disclose to the court, the fact that the claimant had made a prior without notice application, which had been refused for lack of evidence.

Third, the claimant had not given the court the full picture about the underlying facts to the overall litigation. Had he done so, the potential impact of a freezing injunction on the second defendant would have been understood and the interim injunction may not have been awarded.

Fourth, the draft freezing order sought by the claimant was not the standard-form freezing injunction, but that had not been drawn to the court’s attention.

Finally, the claimant had not served his application for the continuation of the freezing order on the defendant as soon as was practicable after the without-notice hearing.

The claimant’s failure to give full and frank disclosure was serious and significant and the freezing injunction was therefore discharged.

Cross-undertakings in damages can be costly

The non-continuance of an interim freezing injunction and/or the dismissal at trial of the claims underlying the granting of the injunction can similarly have serious and significant consequences itself, but this time for the claimant/applicant.

For example, on an application for an interim injunction a claimant is required to provide what is known as a cross-undertaking in damages – that is, an undertaking to compensate the defendant if it is ultimately decided that the order should not have been awarded. Freezing orders are a particularly invasive and draconian remedy, which can put defendants to significant loss, cost and inconvenience. The undertaking in damages can therefore be very substantial and the claimant may, in some cases, also be required to provide security upfront. In circumstances where an interim freezing injunction is discharged, the costs and compensation which the claimant could be required to pay to the defendant pursuant to the cross-undertaking could be considerable indeed.

In SCF Tankers Ltd & Ors v Privalov & Ors [2] the Court of Appeal applied the principles governing the award of damages against the party who has given a cross-undertaking in damages in the course of obtaining an interim injunction.

The freezing order in question, granted in 2005, prevented the defendant/respondent from entering into shipbuilding contracts (albeit the order did give the respondent liberty to apply to the court for permission to use frozen funds for that purpose on an application-by-application basis). In 2010, after trial, the claimant’s claims were dismissed and the defendant sought compensation pursuant to the undertaking in damages. Assessing the damages payable to the defendant, the Court of Appeal confirmed:

The burden is on the party seeking to enforce the undertaking to prove that its loss would not have been sustained but for the injunction.
Once that party had established a prima facie case that its loss was caused by the injunction then (in the absence of material to displace it) the court was entitled to draw the inference of causation.
In this particular case, the fact that the defendant was given liberty to apply to release funds for the purpose of entering into shipbuilding contracts did not affect the nature of the restriction imposed by the freezing order. It sufficed for the defendant to show that the order prevented it from entering into such contracts and to demonstrate the difficulties of any application to the court for permission to release frozen funds.
Like with other damages claims, it is open to the paying party to try to minimise the level of payout by alleging failure on the part of the receiving party to mitigate its loss.
In this case, however, the failure to mitigate claim was dismissed because the defendant had faced the practical dilemma that it could not enter into shipbuilding contracts without the court’s permission, but without a concrete shipbuilding contract proposal it had nothing with which to convince a court that permission should be granted.

With an order that the claimant pay US$59.8 million in damages and US$11.04 million in interest, this case is a salutary lesson in the potential consequences for a freezing order applicant/claimant who gets it wrong.

What is the ordinary and proper course of business?

Whilst freezing orders are obviously highly restrictive, the law recognises that they should not be used oppressively. Respondents should not be forced to cease trading and they should be allowed to meet reasonable expenses. Standard form freezing orders therefore place a cap on the value of assets to be frozen and except ordinary living expenses, reasonable legal costs and dealing with or disposing of assets in the ordinary and proper course of business.

Case law [3] has previously confirmed that, in determining whether a payment or any other asset-dealing falls within the ‘ordinary and proper course of business’ exception, the court will consider:

whether the course of business in question – not the payment itself – is ordinary;
whether the payment/dealing is in satisfaction of any pre-existing liability. If it is, the transaction is one that the court would be likely to permit; and
‘the ordinary and proper course of business’ does not necessarily equate to ‘routine’ or ‘recurring’ dealings and it is not restricted to the payment of trade creditors.

The recent case of Koza Ltd & Anor v Akçil & Ors [4] also provides useful High Court guidance that the court should take into account:

what an objective observer, with knowledge of the business entity in question, would conclude was in the ordinary and proper course of its business;
what the parties could have intended on the proper interpretation of the undertaking;
that just because proposed expenditure is unprecedented or exceptional does not, of itself, mean that it is outside the ordinary and proper course of business; and
that if proposed expenditure would give rise to a breach of fiduciary duty by directors, then that might lend support to the conclusion that the expenditure would not be in the ordinary and proper course of a company’s business.

WM Comment

Whilst freezing orders are often a very valuable tactical remedy for claimant lenders, by their very nature, interim injunction applications are usually urgent and conducted in highly pressured and stressful situations. However there are significant legal and practical requirements and obligations with which applicants must comply – and failure to do so can be costly.

The best advice is to keep calm and to ensure that you have an expert team to quickly and confidently advise on, obtain and implement a freezing injunction for you.

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[1] [2017] EWHC 3121 (Ch)
[2] [2017] EWCA Civ 1877
[3] Michael Wilson & Partners Ltd v John Foster Emmott [2015] EWCA Civ 1028
[4] [2017] EWHC 2889 (Ch)

Perceived risks and potential rewards of shared ownership

Louise Power and Karl Anders explain why shared ownership mortgages might be a calculated risk […]

Louise Power and Karl Anders explain why shared ownership mortgages might be a calculated risk worth taking for building societies and other high street lenders throughout the UK.

Socio-economic context

Earlier this year the Office of National Statistics confirmed [1] that the cost of the average home in England and Wales has risen by 259% since 1997, while earnings increased only 68% in the same period. The average house now costs 7.6 times average annual earnings, compared to 3.6 times in 1997. The gulf is even wider in parts of the South East, where house prices can be 26.4 times average earnings. This affordability gap represents a real barrier to home ownership for many, and has an inevitable knock-on effect for mortgage lending.

With pressures facing borrowers of all ages and across all socio-economic groups today, it is likely that affordability concerns will continue, and even increase, over the coming months and years.

The residential mortgage market has already started to respond – to some extent. Low Cost Home Ownership schemes (such as shared ownership and shared equity arrangements) are now available, but consumer demand already outstrips supply.

At the end of 2016, despite the affordability issues highlighted, shared ownership housing represented only 0.4% of the housing stock in England (some 200,000 properties); 1.3% of total residential mortgages held; and only around 0.7% of the total value of mortgages.

By comparison, shared ownership is popular and working well in Northern Ireland, where lenders have supported the purchase of more than 25,000 shared ownership properties – a vastly greater proportion of the market.

In Scotland, in the period since 2010, there has been a reduction in owner-occupied housing generally. That is thought to have been the result of economic downturn and the difficulty that many prospective purchasers have experienced in securing a mortgage [2]. In addition, shared ownership is not as prevalent in Scotland as it is in England – there is no nationally recognised scheme and only a limited number of individual housing associations and/or developers providing some homes on a shared ownership basis.

Whilst it may be unlikely that the ambitious targets put forward in the Government’s Shared Ownership and Affordable Homes Programme 2016 to 2021 will be met, feedback in relation to shared ownership in particular is clear, with UK Finance (previously, the CML) confirming [3] that developer housing associations plan to produce 3 times as many shared ownership units per year between now and 2019 as they did in 2015/16. The UK Finance/CML research also suggests, however, that there is a real risk of the market expanding beyond the point at which there is mortgage lending capacity to support it. That, surely, would be a lose/lose situation for lenders and their customers alike.

So, why is there a reluctance on the part of lenders to enter or expand the shared ownership market? Might there, in fact, be real potential for building societies and other retail lenders taking a calculated risk to operate within that market and to reap significant financial and reputational reward?

Perceived risks

In the 2008 case of Richardson v Midland Heart Ltd [4], the High Court confirmed that a shared ownership lease is an assured tenancy to which the Housing Act 1988 (the Act) applies. That means that, if and when a shared ownership lease is terminated by enforcement of a court order for possession made under that Act, there is no option for relief for the leaseholder or its lender, with the latter’s security being irrevocably lost.

That somewhat draconian ‘worst case’ scenario has meant that, almost straight off the bat since 2008, shared ownership has had a hesitant, and sometimes even an outright adverse reception from many mortgage lenders. Even today, only around 15 – 20 lenders operate in the market, and the majority of those are small, locally-based building societies.

There is also a long list of presumed risks which many lenders associate with shared ownership, including:

the perception of a higher risk of default (albeit UK Finance/CML evidence simply does not support this assumption);
lack of knowledge and understanding of staircasing arrangements;
perceived complexity in arranging a shared ownership purchase (for example, because the purchaser’s solicitors must obtain housing association/landlord approval of the funding arrangement and consent to the mortgage offer; or because of the need to obtain a separate memorandum of staircasing; or because there are sometimes restrictions on eligible properties or purchasers and sometimes restrictions on re-sale; and so on);
perceived risks and complexity associated with dealing with a housing association landlord if/when the customer falls into rent arrears;
additional risks and complexity if/when the customer commits any other lease breach (and one which the lender cannot necessarily remedy (unlawful subletting, for example));
the fact that the closer loan:value weighting on shared ownership arrangements can make such mortgages more expensive and therefore potentially less commercially attractive; and
a potentially greater risk of exposure where there are high concentrations of shared ownership mortgages on any one particular site/housing development.

Effective risk management

Possession for arrears or breach of condition

However, in reality, the majority of the apparent risks which are highlighted above are not necessarily specific to shared ownership arrangements, and indeed are common to the majority of leasehold lending scenarios. There are therefore a variety of options open to lenders to protect shared ownership leasehold security.

For example, as an alternative to recovering possession for mortgage arrears, Walker Morris’ Banking Litigation team has recently acted for a number of retail lenders who have adopted a different enforcement policy. This involves seeking possession of leasehold properties on the basis of repeated breach of mortgage conditions where the customer fails to meet their leasehold obligations. There is a high rate of outright possession orders in such cases, which provide a resolution either due to recovery of possession or act as significant leverage to ensure customer compliance. This approach can work as a ‘wake up call’ for customers, resulting in them properly addressing lease and mortgage compliance, and affordability issues generally, where they may previously have been unwilling to do so. As well as resolving the security risk for lenders, this has enabled customers to continue living in their homes. This innovative approach can therefore be adopted as an additional protective option in shared ownership scenarios.

Notice and Mortgage Protection Clauses

Shared ownership leases typically include a provision which obliges shared ownership landlords to give any mortgage lender a certain period of notice prior to possession proceedings being brought, so as to give the lender an opportunity in which to take appropriate action to protect their security. That provision alone can, in some cases, place the lender in a better position than in other residential lease arrangements, where the giving of any notice to the lender (or not!) is likely to be entirely at the landlord’s discretion.

Furthermore, since 2010, housing associations’ shared ownership leases must contain a mortgage protection clause, which protects a lender from significant loss should it have to take possession of the property on default.

Practical steps

There are also practical steps which building societies and other retail lenders can take to protect themselves when dealing with shared ownership lending, to address the perceived risks mentioned above. These include, staff training; the use of standard documentation and instructing specialist solicitors. These measures can overcome any perceived problems associated with a lack of knowledge or understanding of how shared ownership schemes and ancillary staircasing and other arrangements work.

From a commercial perspective, lenders may also deploy policy decisions not to lend on too many shared ownership properties within any one housing development, or adopt maximum permitted staircasing percentages. It is also open to lenders to negotiate with housing associations to refuse or remove certain onerous or unnecessary eligibility or sale conditions; and to offer interest rates on shared ownership mortgages which take into account the relevant loan:value weighting. Of the lenders who have operated within the shared ownership market to date, many have reported that there are also corporate social responsibility (and related reputational) benefits to consider.

A key area for improvement, for housing association/landlords and mortgage lenders alike, is, however, the presentation/branding of shared ownership schemes and the drafting of internal and external communications that relate to them. Thoroughly reviewing unclear marketing materials, and simplifying and streamlining the documentation and processes involved, should go a long way towards encouraging profitable engagement in the market at all levels and by all stakeholders.

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[1] Statistical bulletin, Housing affordability in England and Wales: 1997 to 2016
[2] Housing Statistics for Scotland 2016: Key Trends Summary; CML Housing in Scotland: a key political issue, May 2017
[3] CML Research, Shared Ownership: Ugly sister or Cinderella? October 2016
[4] [2008] L&TR 31

Leasehold market review: Government response

We have previously explained that the Government was consulting on perceived unfairness in the leasehold […]

We have previously explained that the Government was consulting on perceived unfairness in the leasehold market, including the sale of new leasehold houses and onerous ground rents; the recovery of possession for arrears of ground rent; and the inability of freeholders on shared estates to challenge the reasonableness of service charges. On 21 December 2017 the Government published its response.

“PPI of the property sector”

Diversity in Low Cost Home Ownership (or, Immediate Market) options, coupled with economic pressures facing borrowers of all ages and across all socio-economic groups today, is resulting in mortgages increasingly being offered on leasehold flats, retirement housing, shared ownership arrangements, and so on. While leasehold has traditionally been the appropriate form of land ownership for properties within communal buildings and estates, a recent trend has emerged over for housebuilders to sell new-build houses as leasehold properties.

Earlier this year the BBC announced that: “Almost half of all newly built properties in the UK are sold as leasehold rather than freehold properties. Some homeowners have found they are then tied into paying a ground rent that increases every year.”

The reason for this is commercially motivated. Housebuilders sell the leasehold title to the house owner and then make a further financial return by selling the freehold title to a third party – often a profit-making entity owning a number of such properties. Many homeowners in this situation are starting to discover that their lease includes a clause which provides for ground rent to increase at a significant and unexpected rate. This can lead to them being unable to buy-out the freehold owner and also unable to sell the property on because the issue is adversely affecting saleability.

One MP has described this practice as the “PPI of the property sector”. In an attempt to address these, and related, issues, the Government has consulted on various matters, including the following, in its consultation paper ‘Tackling unfair practices in the leasehold market’:

whether and how the Government should limit the sale of new leasehold houses;
what reasons are there for houses to be sold with leasehold (as opposed to freehold) tenure;
whether and how the Government should limit the reservation and increase of ground rent on new residential leases;
what effect the restriction of ground rents would have on the supply of new build homes;
whether arrears of ground rent should be exempted from ‘Ground 8’ possession orders made pursuant to the Housing Act 1988; and
whether freeholders occupying shared private estates should be given rights to challenge the reasonableness of estate service charges similar to those enjoyed by leaseholders.

Government response

The Government received some 6,000 responses, the majority of which were from private individuals. On 21 December 2017, the Government has published its consultation response. The key points to note are:

New legislation will prohibit new long leases being granted on residential houses (whether new-build or existing houses).
The Government will work with UK Finance to address any misunderstanding of lending criteria in relation to leasehold property.
The legislation will ensure that ground rents on new leases of houses and flats are set at a peppercorn rate only.
The Government has written to developers to discourage the use of ‘Help to Buy’ equity loans for the purchase of leasehold houses.
A number of developers have already introduced schemes to compensate existing leaseholders with onerous ground rents. The Government wants to see such support accelerated and extended to all affected leaseholders (including second-hand buyers) and for all developers to proactively contact customers.
The Government will work with redress schemes and Trading Standards to provide leaseholders with comprehensive information on the available routes to redress, including where their conveyancer has acted negligently, and the Law Commission will consider whether unfair terms apply when a lease is sold on to a new leaseholder.
The Law Commission will also consult on introducing a prescribed formula that makes it easier for leaseholders to buy the freehold of their home, while providing fair compensation to the landlord.
The Government will consider what it can do to get commonhold [1] off the ground across the property sector, including working with mortgage lenders. (Commonhold was not successful when first introduced because of the financial incentives for developers in building leasehold.)
Where ground rents exceed £250 per year or £1,000 per year in London, a leaseholder is classed as an assured tenant. This currently means that leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent, even where arrears are minimal. The Government has committed to action to address this, to ensure that leaseholders are not subject to unfair possession orders.
New legislation will give freeholders who pay charges for the maintenance of communal areas/ facilities equivalent rights as leaseholders to challenge the reasonableness of service charges. The Government will also ensure that, where a freeholder pays a rentcharge, the rentcharge owner is not able to take possession or grant a lease on the property where the rentcharge remains unpaid for a short period of time.

The response also states that the Government is committed to improving the situation of leaseholders more generally, and the proposals outlined so far are a starting point only. The Government is now working to help professionalise managing agents, tackle unfair service charges and give consumers greater choice over who their agent is, and a call for evidence on this closed on 29 November. The Government also wishes to ensure that all landlords are signed up to redress schemes and will be consulting on whether this should also be extended to landlords who grant long leases, and will look at ways to modernise the home buying process, including addressing the particular challenges faced by leaseholders. A call for evidence on these issues closed on 17 December.

WM Comment

This leasehold market review and response is likely to result in some significant market and practice changes for housebuilders/developers, mortgage lenders and homeowners alike. Walker Morris will continue to monitor and report on key developments.

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[1] Commonhold is a type of freehold ownership which is created by a further registration at the Land Registry. Commonhold combines freehold ownership of a single property within a larger development, with membership of a company limited by guarantee that owns and manages the common parts of the development. It allows the owners of each unit within a development to be in control of the development, without a landlord or other party able to make decisions about how the development is run.

Is there a duty to warn?

Professional Negligence specialists Sandip Singh reviews a recent case which highlights an additional aspect to […]

Professional Negligence specialists Sandip Singh reviews a recent case which highlights an additional aspect to a solicitor’s duty to its client.

Applicable duty of care?

For over sixty years the test for the standard of care expected of a professional has been that set out in the Bolam [1] case – that is, whether the adviser acted in accordance with practice accepted as proper by a responsible body of professionals (the ‘reasonably competent practitioner’ test). In an earlier issue of [Banking Matters][Mutual Matters] we highlighted the cases of Montgomery and O’Hare v Coutts [2] in which Bolam was not applied and instead a new standard of care, which was concerned with whether the adviser has taken reasonable care to ensure that any material risks involved in, and any alternatives to, a proposed course of action have been fully explained to and understood by the claimant, was adopted. In another, even more recent case, Barker v Baxendale Walker Solicitors [3], the question of the appropriate standard of care for professionals has arisen again.

Case

In this case the client was considering selling shares in his company. He sought advice from his solicitor, who recommended an employee benefit trust, modelled on section 28 of the Inheritance Tax Act 1984 (the ITA), whereby the client would gift his shares to the trust in return for tax exemptions for himself and his family. The client followed the solicitor’s advice, but years later HMRC assessed the client as liable for tax arising from the trust to the tune of some £11.2 million. HMRC relied on its interpretation of subsections 28 (4) (a) and 28 (4) (d), which differed from the solicitor’s interpretation. In the subsequent claim against the solicitor, it was not alleged that the solicitor was negligent to take the particular view that he had as to the interpretation of the relevant sections; rather, the question was whether the reasonably competent practitioner would have failed to warn the client that there was a significant risk that the trust arrangement could be fiscally ineffective because of uncertainty surrounding the relevant legislative provisions.

Decision and guidance from the Court of Appeal

The Court of Appeal explained that what advice should have been given by the reasonably competent practitioner in the particular factual circumstances at the time turned partly on the view that the professional took as to the provisions in question, but it also turned on whether contrary arguments as to interpretation were significant enough to merit mention. It offered the following guidance:

The question of whether a solicitor is in breach of a duty to explain the risk that a court may come to a different interpretation from that which he or she advises, is highly fact sensitive;
The test is whether there is a “significant risk” of a court reaching a different interpretation;
If the construction of the provision is clear, it is very likely that the threshold of “significant risk” will not be met and it will not be necessary to caveat the advice given and explain the risks involved;
However, depending on the circumstances, it is perfectly possible to be correct about the construction of a provision or, at least, not negligent in that regard, but nevertheless to be under a duty to point out the risks involved and to have been negligent in not having done so;
It is more likely that there will be a duty to point out the risks (i.e. that a reasonably competent solicitor would not fail to point them out) if any question or dispute about the point has already arisen, although this need not necessarily be the case; and
The issue is much more nuanced than one of percentages or whether opposing possible constructions are “finely balanced”.

The Court of Appeal considered the Montgomery case, in which the Bolam test was not applied, but decided that the situation here was different. The court decided that the Montgomery case was concerned with a duty to ensure that material risks associated with a particular course of action was an entirely separate duty to that of treating a patient or advising a client with reasonable care. In the current case, legal advice was to very service being sought and relied upon and so there could be no separate between the giving of advice an appropriate caveats – they were one and the same. In such circumstances, the Bolam duty applied, and it incorporates a duty to explain and warn of significant risk.

WM Comment

This case seems to demonstrate that the Bolam and Montgomery/Coutts tests are not necessarily strictly ‘alternatives’. Instead, the case suggests that the duty to give specific warning is an aspect of a solicitor’s fundamental duty in appropriate cases, depending on the facts – it may therefore represent a subtle re-working of the existing Bolam duty to include some emphasis on the explanation and client understanding-aspects of the Montgomery duty? There is therefore a potential blurring of the lines as to exactly what is the applicable standard of care and scope of duty.

Much will, of course, depend on the nature of the retainer and the work that the solicitor (or indeed other professional) is being asked to do. In the banking context, where a solicitor is simply being asked to complete a transaction, it is likely that the Bolam duty will apply. In a matter where a solicitor is instructed more widely, not only will the BPE information/advice distinction [4] be crucial (as we have reported previously), but it also seems that Montgomery places the professional under an additional or enhanced duty to ensure that any material risks involved in, and any alternatives to, a proposed course of action have been fully explained to and understood by the client.

Walker Morris will continue to monitor and report as the law in this area continues to develop.

What is immediately clear is that solicitors face a dilemma between complying with their duty to provide advice to the requisite standard of care whilst giving confident advice to clients which is not so peppered with caveats as to be unhelpful. Hopefully the Court of Appeal’s guiding principles, set out above, will assist.

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[1] [1957] 2 All ER 118
[2] [2015] UKSC 11 and [2016] EWHC 2224 (QB)
[3] Barker v Baxendale Walker Solicitors & Anor [2017] EWCA Civ 2056
[4] which distinguishes between cases where a professional is under a duty to provide information to enable someone to decide upon a course or action (in which case the professional is under a duty to make sure that the information provided is right); and where a professional is under a duty to advise someone as to what course of action to take (in which case the duty on the professional is much wider). BPE Solicitors v Hughes-Holland [2017] UKSC 21

Privy Council limits lenders’ duty to disclose

A recent Privy Council case will be of interest to building societies and other mortgage […]

A recent Privy Council case will be of interest to building societies and other mortgage lenders, as well as borrowers and legal advisers. It persuasively limits lenders’ duties to disclose information to experienced borrowers. Andrew Beck and Richard Sandford explain.

The case

In Deslauriers v Guardian Asset Management [1] the lender loaned money to the borrower to finance a property development. When the borrower defaulted and the lender brought recovery and enforcement proceedings, the borrower alleged that it had been unable to complete the development and had suffered loss when the lender failed to advance a subsequent loan. The lender had refused the subsequent loan application on the basis that it would exceed its lending limits. The borrower argued that in failing to disclose its lending limits prior to completion of the first loan, or in discussions thereafter when it made clear to the lender its additional borrowing needs, the lender had misrepresented and/or had breached a tortious duty of care to avoid misrepresentation.

The decision

Misrepresentation claims are concerned with representations which induce a party to enter a contract, and which therefore occur before the contract is completed. In fact, there had been no discussion about any possible subsequent lending prior to completion of the loan in this case, and so the misrepresentation claim failed.

If there had been any tortious duty of care, however, that would be a continuing duty which could potentially found a claim when the borrower made clear to the lender in ongoing discussions that it required further funding. The Privy Council considered the leading case of Hedley Byrne & Co Ltd v Heller & Partners [2] and concluded that whether the lender owed a duty depended on whether it had assumed a duty for giving professional advice to the borrower. As the relationship here was an arm’s length relationship between two experienced and commercial parties (as opposed to a relationship of adviser and client), there was no duty on the lender to disclose its lending limits to the borrower. Refusing the breach of duty claim, the Privy Council made the following observations, which are likely to be of wide application and interest:

It would very unusual for a lender/borrower/non-adviser relationship to give rise to a duty on the lender to disclose to the borrower its internal lending policies or approaches to applications for loans – still less any external influences, regulatory or otherwise, which applied to it; and
In such a scenario, in particular where the parties are experienced and commercial and each seeking to further its own interests, it would be extremely difficult to envisage such a duty arising – even if a borrower had indicated its potential future borrowing needs from the outset.

WM Comment

Whilst Privy Council decisions are not binding on English courts, they do nevertheless carry great persuasive value. It is likely that this decision will therefore be welcomed by building societies and other lenders for its restrictive approach to the imposition of a duty on lenders to disclose information to borrowers where there has been no assumption of any professional duty to advise (in particular where each party is commercially sophisticated). The case may be relevant in loan enforcement cases such as this one, or to combat claimants’ attempts to expand lenders’ duties to provide information in mis-selling claims and the like.

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[1] [2017] UKPC 34
[2] [1964] A.C. 465 and see our related article.

Beware the prescription/limitation time-bar on claims

Whether you’re North or South of the border, the message from case law is clear: […]

Whether you’re North or South of the border, the message from case law is clear: calculating the time-bar for bringing claims is complex, and claimants prevaricate at their peril. Partner Louise Power highlights key prescription/limitation case law from Scotland and from England and Wales; and offers her practical advice.

Calculating claim deadlines

The point at which losses are discovered and assessed in a claim brought by a mortgage lender can be crucial to the determination of when the limitation period begins to run, and therefore the point at which a claim becomes time-barred.

In an earlier Walker Morris briefing, we explained how, in accordance with the leading Nykredit case [1], the courts of England and Wales 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 and, therefore, when the limitation period [2] for bringing a claim began to run.

In Scotland, the Prescription and Limitation (Scotland) Act 1973 (the 1973 Act) specifies a five year prescription period from the date on which loss, injury or damage occurred, unless (in accordance with section 11 (3) of the 1973 Act) the potential pursuer [claimant] is not aware, or could not with reasonable diligence have been aware, that loss injury or damage has been caused, in which case the period starts to run on the date when it first became so aware.

Uncertainty and unfairness

Both North and South of the border, the calculation of claim deadlines is highly fact-sensitive, often difficult and can give rise to significant uncertainty. As a recent Scottish case [3] demonstrates, these difficulties and uncertainties with the calculation of claim deadlines can bring about some seemingly unjust results.

For example, in the Gordon case, the pursuers had instructed solicitors to serve notices to evict tenants. Notices were served requiring vacant possession to be delivered by 10 November 2005, but the tenants did not vacate. A Land Court action followed (for which the pursuers had incurred expense by 17 February 2006), which concluded, on 24 July 2008, that the notices were defective. The Supreme Court was asked to determine on which of the three possible dates the pursuer had the requisite knowledge under section 11 (3) of the 1973, such that the prescriptive period had started to run.

The court held that the 1973 Act does not postpone the start of the prescriptive period until a potential pursuer is aware that it has suffered a detriment in the sense that something has gone awry which renders it poorer or otherwise at a disadvantage. As such, what mattered in this case was the objective assessment, with the benefit of hindsight, that the pursuers had suffered loss on 10 November 2005, immediately they did not obtain vacant possession – it did not matter that the pursuer did not know until much later that the loss may have resulted from another’s acts/omissions/negligence.

WM Comment and practical advice

The Supreme Court in Gordon acknowledged that its strict interpretation of section 11 (3) of the 1973 Act may be hard on potential pursuers/claimants, and even that it may lead to hard results being common. However the court stated that, to find otherwise, would be to increase uncertainty in this already tricky area, and potentially to contradict earlier case law [4]. The Scottish Law Commission has, however, published a draft bill which proposes to amend section 11 (3) to provide that the time period for bringing a claim will start to run when a pursuer/claimant becomes aware that (a) loss/damage/injury has occurred; (b) the loss/damage/injury was caused by a person’s act or omission; and (c) the identity of that person. That proposal, if enacted, would bring the law of Scotland more in line with that of England and Wales. Walker Morris will monitor and report on any developments.

In the meantime, the best advice remains that whenever any potential lender claimant – whether North or South of the border – gets any inkling at all that it may have suffered loss, specialist local legal advice should be sought at the earliest possible time. It may be safer and more cost-effective in the long-run to issue protective proceedings and guard against litigation time-bars, than to delay and miss out on a recovery or other remedy altogether.

_________________________

[1] Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) [1998] 1 All ER 305

[2] The limitation period in England and Wales is generally six years (or, in the case of claims in tort where facts relevant to the cause of action are not known at the date of accrual of the cause of action, there is a time limit of three years from the date of knowledge of such facts – section 14 A Limitation Act 1980).

[3] Gordon & Ors v Campbell Riddell Breeze Paterson LLP [2017] UKSC 75

[4] The Supreme Court commented that allowing a requirement for awareness of a head of loss would involve knowledge of the factual cause of loss, which was an interpretation that had been rejected in the case of Morrison v ICL [2014] UKSC 48.

Mutuals news – January 2018

Andrew Beck highlights some recent news and upcoming key dates of interest to mutuals. On […]

Andrew Beck highlights some recent news and upcoming key dates of interest to mutuals.

On 20 December 2017, the Building Societies (Restricted Transactions) (Amendment to the Limit on the Trade in Currencies) Order 2017 (SI 2017/1307) was published, along with an explanatory memorandum. The Order amends section 9A of the Building Societies Act 1986 (BSA 1986), to increase the maximum amount of currency that building societies can convert from £100,000 to £3 million. This should mean that, as of 6 April 2018 (when the Order comes into force), building societies should be better able to compete with banks, which do not face such restrictions, and that the BSA 1986 should be more in-step with the increasingly international nature of the UK property market.
‘Open Banking‘ will go live for Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, RBS Group and Santander on 13 January 2018. With mixed messages being cited in the media (namely, greater competition and enhanced consumer benefits on the one hand; and data handling and security concerns on the other), it will be interesting to see whether smaller mutuals, who are so far unaffected, are impacted at all as a result.
Following the introduction of the EU Payment Services Directive (PSD2) on 13 January 2018, online services that customers allow to access their account data or make payments on their behalf will be regulated by the FCA. PSD2 will bring about a number of important changes for building societies and their customers. To support these changes, the FCA has produced a web page setting out key information.
Forecasts for UK house prices in 2018 are generally muted, with many expecting prices nationally to remain flat or even in some places (including London) to fall. While for many that may seem a fairly bleak outlook, it could, of course, mean good news for first-time buyers – particularly when combined with the recent stamp duty threshold increase to £300,000.
As from 1 January 2018, as part of the UK Government’s efforts to deal with illegal immigration, banks and building societies will face new Immigration Act 2016 requirements to cross-check the details of all existing personal current account holders against a Home Office database of illegal migrants or ‘disqualified persons’. This is part of the UK Government’s efforts to prevent and discourage illegal migration. Where accounts operated by or for such persons are identified, the bank or building society must notify the Home Office and may be required to close those accounts. Failure to comply with the requirements could lead to punitive action being taken by the FCA in the form of financial penalties, restrictions on deposit-taking permissions or even criminal sanctions. Most mutuals will now have in place appropriate internal policies and procedures and it is to be hoped that the new requirements will not mean too much of an additional administrative burden.

Who we are and what we do – Mutual Matters – January 2018

In this feature we update you on what some of our team members have been […]

In this feature we update you on what some of our team members have been up to, whether it be interesting or unusual casework, personal achievements, corporate social responsibility initiatives or social and networking events!

Leasehold issues for retail lenders

Walker Morris’ Banking Litigation team has been involved recently in a number of cases involving leasehold properties, which highlight particular security risks for retail lenders. In some cases landlords had instigated forfeiture proceedings over sublease apartments over which lenders had secured mortgage loans, and in others liquidators’ disclaimer of headlease interests had similarly threatened lenders’ security and borrowers’ homes. In all cases the Banking Litigation team was able to advise on innovative ways for lenders to safeguard their security and, in turn, for them to protect their borrowers’ homes and their customer relations.

Charitable activity!

Walker Morris has been pleased to announce that its ‘Charity of the Year’ is the Children’s Heart Surgery Fund, an incredibly important and worthwhile charity that, excuse the pun, is very close to our colleagues’ hearts. After kick-starting the firm’s charity year with the Leeds Abbey Dash, colleagues from Banking Litigation and across the firm are now gearing up to get active for charity in all of the following events!

Yorkshire Three Peaks – Saturday 5 May
Leeds ½ Marathon – Sunday 13 May
Leeds 10k – Sunday 8 July
Great North Run – Sunday 9 September
15,000 ft Skydive – 16 September

The more the merrier! So, for more details, to get involved or to donate please contact Banking Litigation’s Louise Power, who heads up the firm’s Charity Committee.

Contacts

Louise Power, Partner, Real Estate & Banking Litigation at Walker Morris LLP

Louise Power
Partner
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Richard Sandford, Partner, Banking Litigation

Richard Sandford
Partner
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