Mortgage Express v Countrywide Surveyors (2016) EWHC 1830 (Ch)
This litigation set out as a deceit claim in connection with 64 mortgage transactions at a new development on the south coast. These were all Buy to Let mortgages for which Countrywide had provided both capital and rental valuation advice.
In 41 cases the security had been sold prior to trial, producing claimed losses of £3.3m at the point of sale. Cost of funding interest loss, at the rate of LIBOR compounded quarterly, was included in that figure. Statutory interest at LIBOR+1% was also claimed from each respective sale date. In the remaining 23 cases, whilst the security had not been sold and the borrowers continued to make repayments to the accounts, Mortgage Express argued that future losses would arise on eventual sale. Overall, the claim value was estimated to exceed £5.5m.
Shortly before the liability trial in January 2016, Mortgage Express abandoned the 23 future loss claims; no doubt recognising the strength of Countrywide's argument that with demonstrably improving capital values and rental values in excess of the mortgage repayments (reflective of the historically low interest rates since 2009) there was little if any prospect of future losses ever materialising, even on what were interest-only mortgages.
Mortgage Express succeeded in 39 cases, the Judge rejecting the surveyors argument that its warning to the lender about concerns over the reliability and accuracy of the rental valuations before the bulk of the loans completed was sufficient to correct the misrepresentation in all but two instances.
Mortgage Express revised its Swingcastle loss, to reflect the 39 transactions it had succeeded on, to £3.15. Statutory interest on that figure was also claimed which, as at 5 February 2016, uplifted the total loss claim to £3.675m.
Countrywide took issue with this approach in a number of respects:
- the lender had to not only plead but also prove entitlement to interest as damages;
- on the case as pleaded this required it to establish not only the precise source of funds used and the actual interest liability incurred on those funds, but also whether that borrowing cost was on a simple or compound basis;
- even if the lender was entitled to compound interest as damages it had to give credit, on a similar basis, for all borrower receipts as and when received;
- absent proof, the interest as damages claim should fail and the sole entitlement should be statutory interest on a simple basis from the moment that measurable loss was first sustained (in all 39 cases that was the date of borrower default); and,
- there was no convention or presumption that statutory interest should run at LIBOR+1% in circumstances where the evidence pointed toward a far lower overall borrowing cost to the lender over the relevant period.
This resulted in the quantum trial being adjourned to enable Mortgage Express to adduce further evidence in support of its interest as damages claim. This evidence asserted that Mortgage Express was charged around LIBOR+0.1% on its wholesale borrowings, but conceded that it was impossible to pinpoint the precise source of funds used to make the 39 loans in issue. As a result Mortgage Express said that if the 39 loans in issue had not been made, it would have made alternative loans which would have produced a return of around LIBOR+0.5%.
On this basis it said that the claimed rates (compound LIBOR and then LIBOR+1% as statutory interest) were reasonable.
Countrywide adduced its own evidence illustrating that the overall funding costs were far less than LIBOR, evident from its parent company's statutory accounts These revealed that its average funding cost, taking into account share capital, retail deposits, wholesale borrowing, covered bonds and mortgage back securities, prior to Mortgage Express' nationalisation, was LIBOR less 0.675%.
At the final hearing Mortgage Express changed its pleaded case, abandoning its cost of funding claim and instead pleading that its interest as damages claim was justified having regard to the LIBOR+0.5% return it said it would have enjoyed on other loans that it would have made if it had not lent on the 39 cases in issue. Mortgage Express did, however, concede that if compounding was permitted for interest as damages, then all borrower receipts should be credited on a similar basis.
Countrywide opposed this new basis of claim, contending that there was simply no evidence from Mortgage Express to show that there was any demand that it was unable to satisfy using its significant funding resources at the relevant time.
Mortgage Express argued that the average funding costs revealed by the statutory accounts were irrelevant as it had abandoned its cost of funding claim.
Instead, it sought to justify its new alternative loan claim on the basis that it had entered into interest rate swaps (designed to protect it from rate volatility when it was borrowing on variable rates and lending on fixed rates) before making the 39 mortgages in issue. As it had already committed to the swaps, it claimed that to avoid a mismatch between those swaps and the fixed rate mortgages made, it would clearly have lent the £8.2m not used in the 39 mortgages to other borrowers.
Whilst Mortgage Express accepted that it could not adduce any evidence as to unsatisfied demand, or of applicant's who met the relevant criteria but to whom it could not lend due to lack of available funds, it argued that as this was a deceit case the threshold was far lower and that it should simply be inferred that it would have made alternative loans on which the court could then assess the likely return.
Countrywide disagreed, arguing that deceit made no difference to the level of proof required and that the lost return on alternative loans claim was wholly speculative in the light of the absence of any supporting evidence. Indeed, it appeared overwhelmingly clear from the statutory accounts that Mortgage Express had been able to meet all demand from those satisfying its criteria at the time.
On that basis Countrywide said that the claim for interest as damages must fail altogether, leaving Mortgage Express with a statutory interest claim which, in accordance with the House of Lords authority of Nykredit v Edward Erdman No 2  1 WLR 1627, did not run until loss was first suffered. In this case that did not occur until each of the borrowers defaulted on their repayment obligations.
As for the appropriate rate of statutory interest, Mortgage Express said that the conventional commercial rate was one per cent over base rate and that, accordingly, the rate claimed (LIBOR+1%) was entirely reasonable. Countrywide again disagreed, pointing out that where there was actual evidence before the court of the lender's overall borrowing costs it should not be ignored; that evidence pointing to an average borrowing cost since nationalisation in 2008 of only LIBOR+0.22%.
The Judge rejected Mortgage Express' submission that he could merely infer that it would have lent to other borrowers and found that it had to prove, on the balance of probabilities, that unsatisfied demand existed which, but for the subject loans, would have been satisfied.
He also found that Mortgage Express, on the evidence adduced, had not established that it would have made alternative loans if it had not lent on the 39 loans in issue. In his view, it had "not come within a measurable distance of succeeding in that task". He therefore concluded that the claim for interest as damages must fail.
In so far as statutory interest was concerned, Mortgage Express did not challenge Countrywide's argument that this could only run from each borrower default in accordance with the Nykredit case.
As far as the appropriate rate was concerned, the Judge rejected Mortgage Express' contention that LIBOR+1% should be presumed and accepted that the evidence as to overall borrowing costs pointed to a lower rate. Making allowance for the inability to award compound interest, and having regard to Mortgage Express' actual average borrowing costs, the Judge awarded statutory interest at LIBOR+0.5%.
A recovery of £1.921m against what, at the start, had been a claim in excess of £5.5m.
This decision provides arguably the most significant judicial guidance on the issue of 'interest as damages' in the context of lender claims against property professionals since the framework was set out by the House of Lords in Swingcastle Ltd v Alistair Gibson (a firm)  2 AC 223, some 25 years ago. It could have a major impact on the level of damages that lenders are able to recover in future negligence claims.
All familiar with secured lending claims will know that so called no-transaction loss claims always include claims for interest losses on the loan between the date of the advance and the security's sale. This is invariably based on the alleged cost to the lender of funding the loan.
The surveyors in this case recognised this was a valid head of special damage but contended that it had to be proved in order to be recovered. Perhaps aware of the difficulty of proving the precise source of funds used for these loans, or that interest restricted to its overall pooled funding costs would be far lower than LIBOR, at the eleventh hour the lender abandoned the cost of funding approach and instead claimed what it said was the return on alternative loans that would have made had it not made the 39 loans in issue.
The Judge accepted the surveyor's argument that this required the lender to show that there was an unsatisfied demand for loans from individuals meeting its lending criteria, not an easy task given the profligate rate of lending at the time. Similarly, lenders who stick to the more usual cost of funding approach may well find themselves in difficultly if they are unable to establish the precise source of funds used to make any particular loan (or at the very least risk a far lower rate of interest than is often claimed).
The following points should be borne in mind whenever a lender seeks to pursue a recovery against a property professional arising out of a failed secured lending transaction;
- if a claim for interest as damages is being made, is it on the basis of the cost of funding the loan in question?
- if so, is the lender able to justify the rate of interest being claimed via proof of the precise funding source used to make the loans in question and, if not, is there any evidence of that particular lender's overall funding cost throughout the period in question?
- if the lender is seeking to advance an alternative case; be it the lost return on an alternative loan, interest that would have been earned if the money had been placed on deposit or the lost opportunity to invest elsewhere; what proof is being offered?
- if absolutely no proof is being offered, or that being provided is insufficient, using Nykredit as a reference point when can it be said that measurable loss was first suffered (the starting point for entitlement to statutory interest)?
- is there any evidence of the lender's overall or pooled funding cost and what might the impact of the lost ability to compound that rate be, so as to produce a fair simple rate?
It is also worth flagging that wherever a lender is able to adduce sufficient evidence to justify a claim for interest as damages, in every case where the claim involves compounding (whether on a monthly, quarterly, bi-annual or annual basis), all borrower receipts should be set off against the capital advanced during each relevant period to minimise the compounding effect prior to default. At the very least, this should neutralise the compounding effect for as long as borrowers maintain repayments on the account.
Beyond that, there is now a question mark over whether lenders will be able to sufficiently prove interest as damage losses going forward. Absent proof these heads of claim may well fail or, even if pooled borrowing costs were to be permitted, these could well be a rates well below those most frequently claimed by lenders (whether as interest as damages or statutory interest).