This article was originally featured in Mortgage Finance Gazette
Chris Freeman, a senior associate in Ashfords' Dispute Resolution team, explores how lenders can seek to maximise recoveries from their loan books by being alive to the red flags of professional negligence.
Types of claim
It is a fact of life that everyone makes mistakes. This is equally true in the case of professional advisors to lenders and, in some cases, those mistakes can amount to professional negligence. Lenders should be alive to this possibility when considering why a particular loan has failed and they are left facing significant losses.
The most common claims are seen against valuers and solicitors (and sometimes both in relation to the same advance), but are no means limited to those two professions. The point of bringing such claims is not for the lender to seek to punish the professional firm involved - indeed the lender will often continue to instruct that firm going forward on other matters - but to seek to recover losses suffered as a consequence of negligence on a particular occasion.
In the context of claims against valuers, a rising market can often mask overvaluations on the basis that, even if the valuer has negligently overvalued the property in question, by the time the lender comes to realise its security that property has risen in value sufficiently to cover losses that the lender might otherwise have suffered. However, when the market falls, the opposite is true - a lender facing a loss following the sale of the property, can look to recover some of that loss from a negligent valuer.
The financial crisis of 2007/8 had precisely this effect on negligent overvaluations in the same way that the recession in the 1990s did. History tells us that it is only a matter of time before the economy takes another dip and more claims come to light.
That is not to say however that even in a rising market claims cannot be caught and significant recoveries made by lenders. Indeed, some of the overvaluations we have seen in recent years have been so significant that a rising market has not helped a negligent valuer. In a similar vein, some of the mistakes made by solicitors have been so fundamental that a significant loss is an inevitable consequence of those mistakes, regardless of what the market for that particular property may be doing.
How to spot claims
Ensuring that those who might be in a position to spot potential claims are aware of how to identify them is crucial. These individuals are often based in a lender's support, restructuring or recovery departments. The sooner a claim is identified, the better. Professional negligence claims must be brought within a certain period of time and therefore being able to identify them and react is essential. Moreover, it means that claims that might otherwise fall through the cracks (because of a lack of awareness that they may exist) can be spotted and recoveries can potentially be made which would otherwise be lost.
So how do lenders go about spotting such claims? In the context of negligent overvaluations, often one of the key indicators of a possible overvaluation is a significant fall in the value of security on revaluation (for example, when a lender is considering next steps following a loan going into arrears) or following the initial advice on current value after the appointment of Law of Property Act (LPA) Receivers.
To take a relatively extreme example, where a property was valued at £1m at the time of the original lending decision but the LPA Receivers' advice some time later is that the likely outcome is a sale for around £500,000, that would be a clear red flag. That is of course not to say that there may be some other (non-negligent) reason for the fall in value (such as a market collapse for that type of property) but it does indicate to the lender that the possibility of an overvaluation at the time of the original lending should be investigated.
In the context of claims against solicitors, issues with the title or security taken, which again are often identified when the lender seeks to realise its security (for example, by the LPA Receivers), can be indicators of potential negligence and are matters which the lender should be alive to.
The key questions for the lender to consider are why has the lending gone wrong and have we possibly been let down by one of our professional advisors? That mind-set alone will help to spot claims that might otherwise be missed.
Looking to the short to medium term future, there remains much uncertainty about the impact Brexit will have on the economy in general and, of particular relevance in this context, the property market. If the market falls, this may have the knock-on effect of an uptick in the number of professional negligence claims being identified and brought by lenders. In the meantime, though, lenders would be well advised to consider whether there may be potential claims already existing in their current loan portfolio which have yet to be identified.
We work with our lender clients in providing training on how to identify potential claims as soon as possible in order to maximise recoveries. If this is something that may be of interest to you, please do not hesitate to contact Chris Freeman (firstname.lastname@example.org or on 0117 321 8066), a senior associate in Ashfords' Dispute Resolution department and expert in professional negligence lender claims.