A recent Court of Appeal case highlights the need to bring claims in professional negligence in good time, this time in the context of lender claims against professionals. Bridging Loans Limited v Toombs  EWCA Civ 205 was a valuer negligence claim brought by a lender which failed on limitation grounds. The valuer was awarded summary judgment.
Where a lender dealing with a default situation waits too long for possession or other recovery proceedings to play out, any potential good claim in negligence against a professional adviser (e.g. a valuer involved in the original transaction), will become time-barred if not brought within the applicable limitation period. For further information on limitation periods, please see Claims in negligence: a limitation reminder.
Lenders must ensure that they have carried out as much due diligence as possible about the borrower at the outset and during the loan agreement so that the true value of the borrower’s covenant can be ascertained. If it later transpires that a claim against a valuer is necessary, this financial information is key to proving the actual loss suffered by the lender, and to showing when time for a negligence claim started to run. Without borrower’s covenant detail, a claim in professional negligence may fall at the first hurdle.
The valuer provided a valuation of a property in Lydbrook, Gloucestershire, at £730,000 on 2 November 2006. The lender made a bridging loan of £502,750 on 3 November 2006 to the borrower which was repayable in full after 6 months, on 3 May 2007. The borrower defaulted on the loan and the property was sold in possession. The lender suffered a loss on sale.
The lender claimed that the valuer had provided a negligent over-valuation because, amongst other things, the valuation was on the basis that the property could be developed into three three-storey houses, whereas the planning permission was only for three two-storey houses. It was alleged that the correct value of the property at the time of the transaction was £450,000. The lender issued its claim in negligence against the valuer on 16 May 2013.
The case of Nykredit v Erdman  1 WLR 1627 established that the cause of action for lender claims against professionals arises for limitation purposes on the date at which the debt owed to the lender exceeds the value of the property combined with the value of the covenant of the borrower.
The lender in this case had issued its claim beyond six years from the date of the loan advance. It argued that its claim was not statute barred because of Nykredit and/or s14A Limitation Act.
At first instance, the court dismissed the valuer’s application for summary judgment on the basis that no evidence had been adduced about the value of the borrower’s covenant. The judge considered that he was therefore unable to decide whether the lender could realistically defeat the limitation arguments.
On appeal, the Court considered that the burden to prove limitation lay with the lender and that, as they had not provided any evidence of the borrower’s ability to make repayments, and that the borrower had not made any repayments at all (albeit with the first repayment only due six months after the loan), Nykredit did not apply.
Added to that, the lender had sent a preliminary notice of claim and letter of claim to the valuers which showed that it had knowledge to bring a claim more than three years before the claim was issued.
As a result, the lender could not show that the value of the property and the borrower’s covenant exceeded the debt owed to the lender at the time the loan advance was made. Limitation had passed in respect of the lender’s claim for professional negligence. The valuer’s appeal was upheld and summary judgment was given in favour of the valuer.
A claim in negligence is safely within limitation if brought within six years of the completion of the loan. However, far more likely is that the negligence of a valuer or solicitor at completion is not revealed until far later once a loan has gone into arrears, forbearance allowed, then repossession and sale taken place. Once the shortfall loss is crystallised there has to be a risk that limitation will have passed. This risk is particularly acute when arrears have been tolerated for many years in the current FCA climate.
Where a lender has received a negligent valuation of an intended loan security, a valuer may try to apply for summary judgment on limitation grounds. For lenders to avoid summary judgment against them, they must adduce evidence to show the value of the borrower’s covenant. The value of the borrower’s covenant is key to determining when the cause of action in negligence accrued (i.e. when the lender first sustained measurable relevant loss). The question as to when the cause of action accrued will determine whether a lender’s claim is, in fact, time-barred.
This case makes it clear that a court will not hesitate to give summary judgment if no evidence is produced by the lender to show the value of the borrower’s covenant. We may contend for a range of values bearing in mind the limitation problem when obtaining expert evidence and pleading a lender’s case.
Lenders should give early priority to an assessment of the likely outcome on a loan in arrears and, if in any doubt about the need to bring a claim in negligence, take advice on limitation soonest. Steps can be taken to manage the limitation risk without full blown court proceedings that might (if the loan recovers) not be needed.