Restrictive covenant - if in doubt, lender should be notified; the costs risk of insolvency proceedings; interim payments; service of claim form; Wragge & Co's banking and finance experts bring you the latest on the cases and issues affecting the lending industry.

Restrictive covenant - if in doubt, lender should be notified

Failure to advise a lender about a restrictive covenant that might adversely affect the value of a property and its future marketability is a breach of contract and duty of care.

This was the finding in Platform Funding Ltd v Miller Parris Solicitors. Miller acted for the borrower and Platform homes in a buy-to-let remortgage of a leasehold property. Miller failed to advise upon a restrictive covenant that the Land Valuation Tribunal held restricted occupation of the flat to the borrower, his family or members of his household.

The borrower was in arrears of ground rent and service charge and had sub-let the property to a member of the general public. The tenant had caused problems. The landlord served notice of intention to forfeit for breach of the restrictive covenant on occupation. Platform agreed to pay the outstanding arrears. Platform then sought that sum on a summary judgment basis against Miller for failing to report or warn about the effect of the restrictive covenant.

The defendant alleged that the correct construction of the covenant did not restrict occupation so as to affect the property's value or that would have influenced Platform's decision to lend; they had not been negligent in dismissing the possible restrictive interpretation of the covenant if it could be so interpreted; the loss was not caused by the failure to report as Platform could not prove that it would not have lent had it been advised of the alleged interpretation; and it was not reasonably foreseeable that costs would be incurred in seeking to prevent forfeiture so the damages claimed were too remote.

The court found the correct interpretation of the covenant to be that the property could be let to any sub-tenant but for use only as a private residence for the sole occupation of that sub-tenant or his family or household. However, there was sufficient ambiguity that the covenant might impose the material restriction that the Land Valuation Tribunal had found. A reasonably competent solicitor should have recognised and advised upon this. Miller was in breach of contract in failing to do so. There was limited underwriting evidence available as to what Platform would have done had it been properly advised and Miller had real prospects of successfully defending this point. The court further held that the loss was reasonably foreseeable where the threat of forfeiture arose from breach of the covenant that Miller had failed to advise upon.

Miller was therefore in breach of contract and breach of duty of care. The sums claimed were not too remote. However, leave to defend was given on the issue of causation and the extent of the loss actually suffered.

Things to consider

The defendant should have advised the lender of the possible interpretation of the covenant and allowed the lender to decide, given its underwriting criteria, whether it was prepared to take any potential risk of lending.

The costs risk of insolvency proceedings

The court has recently reaffirmed the position that, other than in exceptional circumstances, where a creditor issues a statutory demand or winding up petition in relation to a debt that is subsequently disputed, the creditor is at risk of having to pay the debtor's costs.

In Sykes & Son Ltd v Teamforce Labour Ltd, Teamforce presented a petition. Part of the debt was paid shortly after presentation of the petition and before an application was made by Sykes to restrain advertisement and to strike out the petition on the basis there was a genuine and substantial dispute. The petition was withdrawn but the issue of costs had to be determined. Teamforce submitted that had Sykes made its case known and produced satisfactory evidence earlier it might have concluded that winding up proceedings were not appropriate. It sought its costs from Sykes. Sykes agreed it should pay Teamforce's costs up until payment of the undisputed part but that otherwise, costs should follow the event and it should recover its costs.

The court held that there was considerable merit in adhering to the general principle that other than in exceptional circumstances, a petitioner whose petition failed on the grounds that the debt was genuinely disputed should pay the costs of the failure.

In determining whether there were exceptional grounds, the court could look at the parties' communications prior to the presentation of the petition. Here, Teamforce had given Sykes every opportunity to set out why the debt was disputed but Sykes had failed to do so in any meaningful way. Production of relevant documents had been very late in the day and it was that evidence which tipped the application against Teamforce. Those circumstances were sufficiently exceptional to justify departure from the general rule.

However, the court was anxious to do justice between the parties. Unable to resolve crucial factual issues on the evidence before it, the court held that the circumstances of this case were sufficiently exceptional to adjourn the issue of costs generally pending the outcome of subsequent proceedings where there could be disclosure and cross examination. After judgment in those proceedings had been given, the costs of the petition could then be dealt with more fairly.

Things to consider

The usual rule is that costs follow the event and if the petition is unsuccessful the petitioner will have to pay the debtor's costs of defending it, regardless of how lax the debtor has been in providing evidence of why the debt is disputed. Creditors need to be very sure of their ground before commencing insolvency proceedings. The safer, albeit slower, course is to commence proceedings and apply for summary judgment.

Interim payments

Where a defence is struck out, consideration should be given to whether it is appropriate to apply for an interim payment i.e. a payment on account, pending assessment of the damages claimed.

Part 25.7 of the Civil Procedure Rules (CPR) sets out the conditions that need to be satisfied before the court will consider making an order for an interim payment. These include:

  • that the defendant has admitted liability to pay damages or some other sum of money to the claimant;
  • that the claimant has obtained a judgment against the defendant for damages to be assessed;
  • that the court is satisfied that if the matter went to trial, the claimant would obtain judgment for a substantial amount of money.

The court must not order an interim payment of more than a reasonable proportion of the likely amount of the final judgment and must take into account any contributory negligence, set-off or counterclaim.

In JSC BTA Bank v Ablyazov and 5 others, the bank was awarded an interim payment of US$65 million against one of the defendants. The bank had brought proceedings against the defendant company and others in relation to a purported loan of US$120 million. The bank sought invalidation of the loan and compensation for alleged misappropriation of funds or alternatively repayment from the company of interest falling due under the loan agreement. The company, in its defence, pleaded that the loan was a legitimate commercial transaction and that in breach of the terms of the loan it had failed to pay the interest due. The company's defence was later struck out due to its failure to comply with a disclosure order. At the date of the application, interest on the loan stood at US$78,000.

The court held that the company had positively pleaded that it had failed to pay interest pursuant to the agreement. The court was satisfied, on the balance of probabilities, that the bank would succeed in its primary or alternative claims against the company. It did not have to determine which would succeed but needed to be satisfied that a substantial sum would be awarded to the bank so that it was appropriate for an interim payment to be made. That the bank would succeed on one or other of its claims was clear especially where the defendant had admitted failure to pay interest and was no longer taking any part in the proceedings. The amount sought was a reasonable proportion of the sum that the bank was likely to recover at trial.

Things to consider

Where the circumstances set out in CPR 25.7 are met, consideration should be given to making an application for an interim payment, rather than having to wait for the hearing on damages to take place before any sums are recovered. This is true even if the sum sought is substantial, as in this case.

Service of claim form

The court has confirmed that service of a copy of a claim form, as opposed to the original sealed copy, is still good service.
This was confirmed in Weston v Bates and another which concerned service out of the jurisdiction. The claimant's solicitors had, pursuant to the requirements on service under the CPR, sought to serve the defendant in Monaco through local agents in accordance with the procedure permitted by the local law. They emailed the relevant papers for service to the agent who printed them out. No hard copy documents were forwarded by post and so the original sealed copy was unavailable to the agent for service. The agent had a black and white electronic copy which did show the issue date and original court stamp.

The defendant sought to set service aside as the order for service out of the jurisdiction had provided for service of the claim form, not a scanned copy of it. The claimant argued that neither the CPR nor the order for service required that the claim form served be one which the court had sealed.

The court, on appeal, held that the claim form had been validly served. All that the CPR provides is that the steps required to bring a claim form to a person's attention may be taken by any method permitted by the law of the country in which those steps are to be taken. If those steps are successful in bringing the claim form to that person's attention, there is no additional requirement that a particular hard copy of the claim form be used. The concept of "original" or "first" or "second" generation copy are not terms that can be derived from the CPR and the words "claim form" are not a reference to a particular hard copy of a document.

Things to consider

Except when serving a claim form by electronic means, service of a sealed original remains best practice to ensure that the defendant is in no doubt as to what has been served and disputes such as this do not arise.