It has been almost 20 years since the decisions of the House of Lords in SAAMCo (1996) and Nykredit (No.2) (1997) shone a light on the method for assessing loss in lender litigation. It is somewhat surprising therefore, that so little judicial guidance has arisen since on the allied issue of how to determine when loss first arises for the purposes of limitation. In this article we consider two recent decisions which do just that but firstly, we recap on the decision in Nykredit (No.2).
Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No.2) (1997)
In this valuers’ negligence case, one of several to be considered concurrently by the House of Lords, it was determined that the loss recoverable by the claimant lender should be ‘capped’ at £1.4m, being the difference between the incorrect value ascribed to the relevant property by the defendant (£3.5m) and the true value of the same property as at the date of the valuation (£2.1m).
On the adjourned question of what interest was to be additionally awarded, the House further determined that this would depend upon when the lender first sustained measurable, relevant loss. That itself necessitated a basic comparison between:
- the amount of money lent by the claimant, plus interest;
- the value of the rights acquired by the claimant, namely:
- the true value of the property; and
- the value of the borrower’s covenant.
Here, where the amount lent (£2.435m) had at all times exceeded the true value of the property and where the borrower had defaulted at once, loss was found to have been sustained immediately so that interest would accrue from the outset of the loan.
Turning to the more recent decisions
Bridging Loans Ltd v Toombs (2014)
The first source of new guidance is HHJ Seymour QC on this appeal by the defendant valuer. The background was as follows:
In November 2006 and in reliance on a valuation report produced by the defendant, the claimant granted a secured loan of £502,750 to the borrower. The loan term was six months, with repayment of the capital sum (and, according to the claimant, all accrued interest) due by 2 May 2007. In the event however, no repayment was made and so, on 11 May 2007, the claimant wrote to the borrower advising of the default and threatening court action unless it was remedied by 27 May 2007. Again however, no repayment was forthcoming and on 16 August 2007 possession of the property tendered as security was obtained by the claimant. At that stage, the claimant discovered that the property had in fact been misvalued by the defendant and was, seemingly, worth less than the advance and/or the redemption value of the loan.
On 16 May 2013 proceedings were issued. In response and on the basis that any claim became time-barred on 2 May 2013 pursuant to section 2 of the Limitation Act 1980, the defendant applied (i) to strike out the claim under CPR Part 3.4.2, as the Particulars of Claim disclosed no reasonable grounds for bringing the claim; and/or (ii) for summary judgment under CPR Part 24.2, as the claim had no real prospect of success. At first instance, the application was dismissed. This was on the basis that adopting the basic comparison enunciated in Nykredit (No.2), the borrower’s covenant could not be said to have failed (and therefore measurable loss could not be said to have occurred) until 27 May 2007. Therefore, the claim had a real prospect of success. The defendant appealed.
In allowing the appeal and granting summary judgment, the High Court held that in circumstances where the borrower had defaulted on 2 May 2007 and there was no other evidence to suggest the borrower could have made up the deficiency between the amount of the loan advanced and the true value of the security, the limitation defence was made out. It further held that the claimant was unable to avail itself of s14A of the Limitation Act 1980.
Canada Square Operations Ltd v Kinleigh Folkard & Hayward (2015)
The second source of new guidance is Recorder Halpern QC, hearing the trial of this claim in the London County Court. The background was as follows:
In March 2006 and in reliance on the defendant's valuation report, the claimant advanced c.£430,000 to the borrowers by way of an interest only re-mortgage. Regular monthly interest payments continued until January 2007, when the payments became more infrequent. The last payment was made in January 2008. Eventually the property was repossessed by the claimant and sold in July 2009 for £305,000.
On 23 October 2013, proceedings were issued. At trial, it was agreed that the true value of the secured property as at the date of the original advance was £397,500. The principle issue for the court to decide was whether or not the cause of action accrued before 23 October 2007 (ie 6 years prior to the date proceedings were issued) and so was time-barred pursuant to section 2 of the Limitation Act 1980. This, in turn, depended on when the claimant first suffered measurable loss.
Having regard to both the documentary and expert evidence, the court concluded that the value of the borrower’s covenant was insufficient in January 2007 to make up the deficiency between the amount of the loan advanced and the true value of the security, such that the limitation defence was again made out. It further held that the claimant had failed to prove it had relied upon the defendant’s valuation.
Judicial guidance to take away
Collectively, the decisions in Toombs and Canada Square provide the following clarification and guidance for assessing limitation as a defence in lender litigation:
- Confirmation that the basic comparison, utilised in Nykredit (No.2) for the purposes of determining the date from which interest accrued, should also be utilised for determining limitation under section 2 of the Limitation Act 1980;
- The "hallowed" practice of seeking relief under CPR 3.4 (on the basis that the Particulars of Claim disclose no reasonable grounds for bringing the claim) where there is a limitation defence, in addition to summary judgment under CPR 24, is intellectually defective and less than satisfactory. The Judge's preference was for such an application to be made solely under CPR 24.2;
- Where an application is made for summary judgment on limitation grounds, it is for the defendant/applicant to put before the court material which suggests there is a good defence. It is then for the claimant/respondent to adduce evidence sufficient to establish a real prospect of success, notwithstanding the limitation defence asserted;
- Where the defence of limitation is raised at trial, the onus is on the claimant to establish, prima facie, that its claim is in time. The burden of proof then passes to the defendant to show the cause of action accrued at an earlier date;
- In the absence of evidence one way or another, it is not to be assumed that the borrower’s covenant has any value whatsoever;
- In the absence of any evidence from the lender to the contrary, the non-payment of sums due in respect of a loan is indicative of the borrower’s covenant being worthless;
- When assessing the true value of the security, account should be taken of all reasonably discoverable facts, even if they were unknown at the date of the original valuation;
- When assessing the true value of the security, the reasonable notional costs of repossession and sale should both be taken into account;
- The test to apply when valuing the borrower’s covenant is whether (i) the covenant appears good; and (ii) interest payments are being duly made;
- When assessing the value of the borrower’s covenant, it is permissible to take account of subsequent events which confirm or throw light on trends or risks that were apparent at the relevant time;
- Expert evidence from an appropriately qualified accountant can be adduced to assist the court in assessing the true value of the borrower’s covenant.
The guidance provided by these two decisions is both helpful and welcomed. For both sides, it should remove some uncertainty and make it easier for the parties involved in lender litigation to resolve claims more efficiently. Where those claims cannot be resolved consensually, these new decisions provide some assurance to defendant valuers and their insurers that the courts are taking a considered and firm line when determining limitation defences against lenders.
Tactically however, defendants will still need to give careful thought to the extent to which they press claimant lenders to search for and disclose information relating to the borrower’s covenant. In seeking further evidence, particularly when contemplating a summary judgment application, there is an inherent risk that this will assist the claimant to discharge the burden of proof upon it. Defendants will also still need to consider whether the most appropriate forum for determining any limitation defence is at an interim hearing, a trial of a preliminary issue or a full trial. This will undoubtedly depend on a range of factors, including the nature of the evidence to be relied upon.