With the property market picking up across the country and interest rates remaining low, property development may seem like an attractive opportunity to make some profit. However, a recent case decided in the Supreme Court might make you think twice about loaning money for such schemes. The Supreme Court clarified the extent of losses that can be recovered from professionals instructed to act in such transactions, and the investor did not fare well as a result.
This article considers the implications of the decision in BPE Solicitors v Hughes-Holland  UKSC 21.
In November 2007, Mr Gabriel agreed to lend his friend, Mr Little, £200,000 in connection with a disused heating tower which Mr Little intended to develop. Mr Little estimated that development costs of the tower would be about £200,000. Accordingly, Mr Gabriel assumed that his loan would be used towards those development costs. Mr Gabriel did not instruct a valuer, but viewed the tower himself and concluded that the development project would turn a profit sufficient for repayment of his loan.
In fact, Mr Little’s intention (and ultimate action) was to set up a new company to use Mr Gabriel’s loan to buy the tower from the company that owned it, pay off the bank’s charge of £150,000 on the tower, and discharge his company’s VAT liability. Mr Gabriel was unaware of this when he agreed to lend Mr Little the money.
Mr Gabriel instructed solicitors, BPE, to draw up a facility letter and a charge over the tower for his loan. Unusually, the instructions were given to BPE via Mr Little and so BPE knew of Mr Little’s intentions but Mr Gabriel remained unaware. BPE used a precedent document for the facility letter, which erroneously indicated that the loan would be used for development costs. BPE did not notice this error and Mr Gabriel advanced the loan based on his incorrect assumption. The facility letter provided that the loan would be repaid in 15 months, with an additional £70,000 ”return”.
Various delays were encountered in respect of planning permission. Scant progress was made on the development and, ultimately, Mr Little defaulted on repayment of the loan. In July 2010, the tower was sold at auction for £13,000, all of which went towards the costs of sale. Mr Gabriel recovered less than £10,000 from Mr Little personally.
Mr Gabriel sued Mr Little, the companies and BPE. All but the claim against BPE were dismissed by the trial judge. The judge held that BPE had no duty to advise Mr Gabriel about the commercial risks the project. However, they should have explained to him the true intended use of the loan, which they knew about. The judge found that Mr Gabriel would not have made the loan had his misunderstanding about the intended use of the money been corrected. He further concluded that the development project was not necessarily doomed to fail (as BPE argued) and Mr Gabriel may have been repaid, so the loss he ultimately suffered was foreseeable and therefore recoverable. The judge awarded Mr Gabriel just over £191,000.
The Court of Appeal reversed this decision, on the basis that there was no evidence development expenditure of £200,000 would have enhanced the value of the tower and ensured Mr Gabriel’s repayment. The Court held that this was a matter for Mr Gabriel to prove, and not for BPE to disprove. They reduced Mr Gabriel’s damages to nil.
Mr Gabriel’s trustee in bankruptcy appealed the decision to the Supreme Court, arguing that (1) the Court of Appeal was not entitled to substitute its own assessment of the viability of the project for the judge’s; and (2) that even if it could, Mr Gabriel was entitled to the whole loss flowing from the transaction, as he would not have entered it but for BPE’s negligence.
The Supreme Court upheld the decision of the Court of Appeal. Lord Sumption, who gave the leading judgment, concluded that the Court of Appeal were entitled (on the evidence) to conclude that expenditure of £200,000 would not have enhanced the value of the tower. It was clear that the redevelopment would cost far in excess of that amount. Lord Sumption’s comments on the second ground of appeal are what has really sparked interest in this case though.
In assessing the loss to which Mr Gabriel was entitled to, Lord Sumption referred to a case known as “SAAMCO” (South Australia Asset Management Corpn v York Montague Ltd ). In SAAMCO, the House of Lords limited a lender’s damages to the difference between the negligent valuation they had received and the true valuation of the property at that time. They were not entitled to claim from the valuer losses they had suffered due to a subsequent drop in the market post-lending.
Why was the valuer’s liability limited in this way? The valuation was only one of many factors that the lender considered when deciding whether to provide a loan. As such, the valuer was only under a duty to provide information for a single factor. Even if the valuer had not been negligent with his valuation, the drop in the property market would still have occurred. As such, the valuer could not be held responsible for those losses, which would have occurred even if the valuation was not negligent.
To distinguish the difference in scope of duty, the House of Lords in SAAMCO categorised advisors as follows:
1. An advisor under a duty to provide information; and 2. An advisor under a duty to provide advice.
Lord Sumption provided clarity on these categories in his recent judgment:
1. Advisors of Information - these simply provide information which the advisee will use to decide upon a course of action. Accordingly, their duty does not extend to the decision itself and, like the valuer in SAAMCO, they are only liable for the foreseeable consequences of the information they provide being wrong. This is so even if the information is critical to the decision to take a certain course of action;
2. Advisors of Action - these take into account all factors which will impact on a decision and advise which particular course of action to take. Accordingly, they are be liable for all foreseeable losses flowing from the given course of action being taken.
The House of Lords in SAAMCO held that the Claimant had to prove that he had suffered loss, and that the loss fell within the scope of the duty he was owed. Lord Sumption’s judgment concurred with this approach.
The Supreme Court’s decision
The Supreme Court held that BPE did not assume responsibility for Mr Gabriel’s decision to lend money to Mr Little. They were an advisor of information, and not an advisor of action. BPE did not have enough information about other elements of the transaction (e.g. development costs, nature of the development, Mr Little’s financial circumstances) in order to be an advisor of action.
As such, they could not be liable for losses which would have occurred even without their negligence. Since it was already decided that, had the loan had been used towards development costs, the value of the tower would not have been enhanced, BPE’s negligence caused no loss. One of Lord Sumption’s concluding remarks sums this up well – Mr Gabriel’s loss “arose from commercial misjudgments which were no concern of [BPE’s]”.
What does this all mean?
This case is a welcome confirmation that the SAAMCO principle remains good law, and provides guidance on how to apply it. To the potential Claimant, this case serves as a useful reminder that you cannot expect a professional to foot the bill for all losses arising out a transaction in which they happened to be involved. The first stage to any successful negligence claim is to establish a duty of care being owed. The scope of that duty is key to what you might ultimately be able to recover.