The aftermath of the property market crash in the UK has seen a huge increase in the number of claims brought by lenders against solicitors and surveyors. As many would testify, most banks have been seen trawling through their portfolios in an attempt to recover from their professional advisers losses that were sustained during the height of the property market at a time when many commentators argue that banks’ lending was highly irresponsible.
Valuers and conveyancing solicitors in particular have faced a sharp increase in the volume of negligence claims brought against them by claimant lenders. Many insurers who provided cover for valuers and conveyancers have been hit particularly hard – and many have pulled out of the market altogether.
With fewer options, and often increased premiums, brokers continue to face real problems placing cover for some of their solicitor and surveyor insureds.
The claims have been coming in thick and fast for the past five years, but could the rules on limitation mean the end is in sight?
Limitation: The Basic Rules
In very simple terms, most claims (other than for personal injury), whether they relate to a breach of contract or an act of negligence, are time-barred under limitation rules after six years.
The basic rule is that a claim in tort or in simple contract shall not be brought after the expiration of six years from the date on which the “cause of action” accrued. A cause of action is essentially a right to bring a claim.
As the height of the property market was in 2007/8, much of the lending at the heart of lenders’ claims preceded 2007. Could this mean that those claims that have not been brought already will be time-barred? Is there finally an end in sight for these hard-hit insureds?
In some cases, this may be so. But it is never that simple.
Many lenders have worked systematically through their portfolios on a chronological basis, so many of the claims first seen related to earlier loans. While claims have slowed down and we are increasingly seeing claims relating to advice provided in 2008, the rules on limitation are complicated.
A cause of action in contract occurs when the allegedly negligent act takes place. If a valuation report was provided in March 2007, a lender will generally be time-barred from bringing a breach of contract claim from March 2013. In the majority of new lenders claims, therefore, the claimants are prevented from bringing a claim for breach of contract.
A cause of action in negligence, however, starts when the lender suffered a loss and the six-year period runs from then. This may be at the same time the lender advanced the loan (relying on, for example, a valuation report or advice provided by solicitors) but it may also be as late as when the borrower first defaulted on loan repayments (which could be, say, a mere two months ago). By way of an example, what this means is that in cases where a borrower has been diligently keeping up with repayments, a bank may have no reasons to query, for example, the valuation advice its panel surveyors provided back in 2005. In such circumstances, the bank may have a strong case that it did not suffer a loss until recently – and that their cause of action only arose at that stage.
What is more, in circumstances where the usual six year period has expired in both contacts and tort, if a claimant can demonstrate that they did not know that they had suffered a loss, the rules (known as the “Section 14a Latent Damage” provisions) may also allow for a secondary time limit of three years. This runs from the date the claimant first had knowledge of the loss. That there is a “longstop period” of 15 years is unlikely to provide much comfort to Insureds.
We are increasingly seeing claims brought under the section 14a provisions. In such cases, the onus is on the claimant to prove that they only knew enough such as to start making enquiries into whether they might have suffered a loss within the three years before starting their litigation. A variety of potential defences are available. In circumstances where lenders have been pursuing claims hell for leather for over five years now, it should become increasingly difficult for banks to argue successfully that they “did not know enough” to make reasonable enquiries.
The above are, however, only a couple of examples of some of the complicated rules on limitation.
Insurers and brokers already know how important it is to identify whether or not a claim is time-barred before incurring the time and costs of investigating it. As it is now more than six years since the crash, we as a firm are increasingly being asked to provide advice about whether or not there may be a complete defence to a claim on the grounds of limitation. If a claim is time-barred, that is very often the end of the matter.
Unfortunately, there are likely to be a number of potential claims where the lender is yet to suffer any loss and where the rules of limitation mean they may be entitled to bring a claim for several years to come.
At the time of writing (in mid-September 2014), we appear to find ourselves in yet another property bubble, with prices soaring not only in London but also in many other areas of the UK such as Birmingham, Bristol and Brighton. The “will they-won’t they” debate continues to run in relation to interest rates and whether we will see an increase on the 0.5% figure that has been in place since 2009. While it currently seems less likely that this will happen before the end of the year, when interest rates do rise, many borrowers are likely to become unable to meet their monthly mortgage payments. This will could to more repossessions and, it follows, the possibility of a further tranche of lenders’ claims.
The basic rules
- Contract: six years from the date of the contract
- Tort: six years from the date of the loss
- section 14a: three years from the date of the “knowledge” of the loss