This article was originally featured in Mortgage Finance Gazette.
Chris Freeman, senior associate in Ashfords’ Dispute Resolution team, discusses the initial steps and key battlegrounds in the second part of his article on professional negligence lender claims.
In our article in the November 2018 edition of Mortgage Finance Gazette, we reported on how lenders can identify potential professional negligence claims within their loan portfolios and some of the red flags which they should be alive to.
This article discusses the next step – that is to say what happens once a potential claim has been identified and passed to us to review and advise on. We also explore some of the key battlegrounds which arise in disputes of this nature.
Once a possible claim has been flagged to us, the first step is to conduct a thorough review of the documentary evidence.
This includes reviewing contemporaneous documentation from the time of the lending in question (such as lending applications and sanctioning decisions); as well as documents and correspondence generated since that time showing the lifecycle of the loan – including any steps taken to sell the security and recover outstanding sums due from the borrower.
As part of this review, we also assess whether there are any pressing time limits which require urgent action to be taken – for example, whether the potential claim is approaching the expiry of the applicable limitation period (i.e. the deadline by which a claim has to be brought at court).
In claims against valuers, this initial investigatory stage usually then leads to instructing an expert to advise on whether the original valuation was negligent. It is a question of asking the expert to metaphorically transport him or herself back in time to the date of the valuation to put themselves in the shoes of the original valuer to determine whether that original valuation was negligent.
It is worth bearing in mind that whilst an expert may consider that the original valuer had overvalued a particular property or site, this does not automatically mean that the original valuation was negligent.
To amount to negligence, the valuation has to fall outside the permissible margin of error, usually somewhere between 5% and 15% depending on the particular property in question. Subject to the nature of the claim against a solicitor, expert evidence may be required at the investigation stage to determine the strength of the case in these types of claim as well.
The next stage (assuming there are no pressing limitation issues) is to comply with the Pre-Action Protocol for Professional Negligence under the Civil Procedure Rules.
This involves putting the professional on notice of a claim (if this hasn’t already been done) and then setting out the lender’s claim in detail in a Letter of Claim, including the financial loss the lender has suffered.
The professional has 21 days to acknowledge the Letter of Claim and then up to three months from the date of that acknowledgment to investigate the matter and provide a Letter of Response or Letter of Settlement (or both).
In the majority of cases, following the Letter of Response, the parties will enter further negotiations and correspondence in order to try to resolve matters, which often involves discussions and (if agreed) arrangements about mediation.
The key battlegrounds with the defendant professional (and its insurers) tend to be on liability, causation and contributory negligence.
As a general rule, it is usually accepted that the professional owed a duty of care towards the lender and therefore defendants tend to focus on attacking the other pillars needed to build a successful professional negligence claim.
Overcoming the liability hurdle is achieved by obtaining good quality, independent expert evidence.
Cases stand and fall on the quality of the expert evidence a party is relying on and failure to establish that there has been a breach of duty on the part of the professional means that the claim will fail.
Disputes around causation in these types of claims – that is to say did the negligence by the relevant professional cause the lender’s loss – tend to involve allegations that the lender has not truly relied on the professional’s advice when making its lending decision.
Clear documentary and witness evidence of reliance by the lender is therefore helpful in defeating such arguments.
As for contributory negligence, lenders have been operating tighter lending controls given the lessons learned from the financial crisis a decade ago.
The consequence of this is that it is likely to prove more difficult for defendants to professional negligence claims brought by lenders to seek to reduce their liability by alleging that the lender has caused or contributed to its own loss by making poor lending decisions.
However, lenders would be well advised to ensure that lending proposals are carefully analysed, and sufficient checks made on affordability and repayment in particular, with supporting documentary evidence retained, in case that decision is later subject to scrutiny.
Finally, allegations that the lender has failed to adequately mitigate its loss are also often made by defendant professionals. This is usually an allegation that the security should have been sold for more than it was sold for, or that the lender has failed to take sufficient steps to pursue its borrower for repayment.
These are things which the lender should be mindful of when conducting its recoveries process.