CONTENTS
| |
|
PARA |
| A |
INTRODUCTION |
1 |
| B |
WITNESSES |
6 |
| C |
BACKGROUND
(a) The Tiuta Companies
(b) The Fund
(c) The Contractual Documentation
(d) The typical transaction involving an advance by the Fund to TIL to enable it to grant a bridging loan to its customer
(e) The basis upon which the solicitor was instructed
(f) The nature of the relationship between the Fund and TIL
(g) The duty of the solicitor to the Fund |
15
21
30
39
48
51
60 |
| D |
THE PRESENT TRANSACTION
(a) The history of the Property
(b) The background to the transaction from the Tiuta Group's perspective
(c) Hewletts' involvement and the history of the lending transaction between the Fund and TIL
(d) The COT |
78
93
107
119 |
| E |
THE FUND'S ALLEGATIONS OF BREACH OF DUTY AND NEGLIGENCE AGAINST HEWETTS
(a) Introduction
(b) Undervalue
(c) Prior sale of the Property for £2,500,000
(d) Planning permission and the 35,000 "commuted sum"
(e) Restrictive covenant with regard to height
(f) Restrictions in the underlease
(g) Presence of asbestos
(h) Good leasehold title
(i) Lack of title to 6th floor
(j) Onerous draft 6th floor underlease
(k) Overall conclusion in respect of alleged breaches |
120
122
132
139
156
163
171
187
196
204
212 |
| F |
RELIANCE AND CAUSATION
(a) Introduction
(b) The law
(c) The facts
(i) Reliance
(ii) Causation |
213
214
231
234 |
| G |
RECOVERABLE LOSS AND DAMAGE
(a) Introduction
(b) SAAMCO Cap
(i) Legal principles
(ii) SAAMCO applied to the facts
(c) Interest
(d) Contributory Negligence |
264
267
275
280
282 |
| H |
OVERALL CONCLUSION |
285 |
MARK CAWSON QC:
A. INTRODUCTION
- In the present proceedings, the Claimant, The Connaught Income Fund, Series 1 ("the Fund"), seeks damages for professional negligence against the Defendant, Hewetts Solicitors ("Hewetts"). The Fund claims to have relied upon a certificate of title dated 12 September 2008 ("the COT") produced by Hewetts in authorising a drawdown of funds under a loan facility by Tiuta International Limited ("TIL"), which was, in turn, advancing monies to Mansfield Road Freehold Limited ("the Borrower") to fund the purchase by the Borrower of a long leasehold interest in premises at 11-17 Parker Street, Liverpool L1 1DJ ("the Property"). The Fund claims to have suffered a loss of approximately £800,000 as a result of making the advance to TIL, after having enforced its security.
- The Fund was represented by Ms Joanna Smith QC, and Hewetts was represented by Mr Jamie Smith QC. I am grateful to them both for their helpful written and oral submissions.
- The potential issues that arise for consideration, dependent upon my findings in relation to earlier issues, are the following:
3.1. The scope and extent of Hewetts' duty of care towards the Fund in completing the COT, which was addressed to both TIL and the Fund. It is common ground that Hewetts was not formally retained by the Fund, and that the duty of care that arose was a tortious common law duty. Hewetts maintains that the duty was qualified by the fact its instructions came from TIL, that TIL acted as "Specialist Advisor", a form of agent, for the Fund, and that Hewetts was not asked to, nor given any means to, communicate with the Fund directly. Hewetts thus maintains that the duty was not a duty to speak, but, rather, that it was limited to a duty to exercise due skill and care when speaking (in the form of the COT). The Fund maintains that Hewetts was subject to a wider duty along the lines of that held to exist in Mortgage Express Ltd v Bowerman Partners Ltd [1996] 2 All ER 836 at 842D to F, such that Hewetts was, in completing the COT, obliged to report to the Fund any facts that: … "a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender's security or some other ingredient of the lending decision…"
3.2. Whether Hewetts did breach its duty to the Fund by failing to qualify the COT to reflect:
3.2.1. That the Property was sold at an undervalue?
3.2.2. That the sale price of the Property in May 2006 was £2,500,000?
3.2.3. That the Property was sold with the benefit of planning consents granted by the local authority and was subject to a s 106 agreement that provided for the payment of a £35,000 commuted sum that had not been paid?
3.2.4. The existence of a restrictive covenant in respect of the Property and the possible breach of that covenant?
3.2.5. Restrictions in the Underlease (as defined below) relating to change of use of the Property?
3.2.6. The possible presence of asbestos in the Property?
3.2.7. The fact that the registered title to the Property was good leasehold title and not title absolute?
3.2.8. The fact that the lending was, so the Fund contends, unviable in that (i) no charge could be granted over the sixth floor; (ii) development over floors 2-5 alone was not possible because of the terms of the planning permission.
3.2.9. The restrictions in paragraphs 3.3 and 15 of Schedule 2 to the draft Agreement for Underlease (as defined below) in respect of the sixth floor.
3.3. If Hewetts did act in breach of duty, did the Fund rely on the COT such that the breach of duty on the part of Hewetts caused the Fund loss?
3.4. If so, what if any loss did the breach cause, and ought that loss to be capped by application of the principle described in Banque Bruxelles Lambert SA v Eagle Star Insurance Co. Ltd [1997] AC 191?
3.5. Was the Fund guilty of contributory negligence in:
3.5.1. Failing to enquire into the ability of the Borrower to develop the Property and thereby repay the loan made to it?
3.5.2. Failing to undertake proper investigations as to the cost of development of the Property and how the Borrower proposed to fund that cost?
3.5.3. Failing to requisition a full building survey of the Property?
3.5.4. Advancing the loan in breach of its own lending criteria?
3.5.5. Advancing the loan despite TIL's conflict of interest?
3.5.6. Failing to give proper scrutiny to the CJ Valuation (as defined below)?
3.5.7. Failing to reject the relevant loan application?
3.6. Whether interest is recoverable against Hewetts as set out in paragraph 5.7 of the Re-Re-Amended Particulars of Claim?
- I include in this judgment an adapted version of the parties' agreed Dramatis Personae:
| Person/Entity |
Role |
The Connaught Income Fund, Series 1 ("the Fund") |
Formerly, and as at September 2008, known as: "The Guaranteed Low Risk Income Fund, Series 1". A limited partnership and collective investment
scheme within the meaning of s 235 of the Financial Services and Markets Act 2000 ("FSMA 2000") |
Connaught Administration Services ("CAS") |
The general partner of the Fund. |
Connaught Asset Management ("CAM") |
Founder partner of the Fund. Appointed asset manager of Fund in 2008. |
Capita Financial Managers Limited ("Capita") |
A limited company. Appointed operator of the Fund in 2008 and an entity regulated by the Financial Services Authority. |
Hewetts Solicitors ("Hewetts") |
The Defendant. A former firm of solicitors (now incorporated as Hewetts Law Limited). |
Mr Timothy Butcher ("Mr Butcher") |
A partner of Hewetts. Responsible for preparing the COT in respect of the Property in 2008. Witness for Hewetts. |
Tiuta Plc ("TPlc") |
A specialist short-term bridging lender. Parent of the Tiuta group of companies. Guarantor of the obligations of TIL to the Fund. |
Tiuta International Limited ("TIL") |
A short-term bridging lender. Wholly-owned subsidiary of TPlc. The party to which the Fund lent and the 'Specialist Advisor' within the meaning of the Services Agreement (as defined below). |
Tiuta Loans Limited ("TLL") |
A short-term bridging lender. Wholly-owned subsidiary of TPlc. Mortgagee-in-possession of the
Property in 2008, in which capacity it sold to the Borrower. |
| Mr Gary Booth ("Mr Booth") |
A director of TPlc, TIL and TLL. |
City Retail Investments Limited ("CRIL") |
A property development company. Defaulted on a loan from TLL secured on the Property, leaving TLL as mortgagee-in-possession in 2008. |
Ms Ravinder Kalyan ("Ms Kalyan") |
The in-house solicitor for the Tiuta group of companies. |
Mansfield Road Freehold Limited ("the Borrower") |
A company owned and controlled by Mr Wall. The Borrower in respect of the Loan from TIL. |
Mr Alan Wall ("Mr Wall") |
Director and owner of the Borrower. |
Copping Joyce Chartered Surveyors ("Copping Joyce") |
A firm of chartered surveyors. Valued the Property, producing a valuation report dated 20 August 2008. |
GroundSure Screening |
A consultancy firm. Produced an environmental report in respect of the Property dated 3 September 2008. |
Mr Michael Davies ("Mr Davies") |
Vice-Chairman and then Chairman of CAM. Chairman of CAM's Asset Allocation Committee. Witness for the Fund. |
Mr Matthew Bedding ("Mr Bedding") |
Employee of Capita and CAS. Member of CAM's Asset Allocation Committee subsequent to the time of the Loan. Witness for the Fund. |
Duff & Phelps Ltd ("D&P") |
Firm of insolvency practitioners, representatives of whom were appointed as the Fund's joint liquidators on 20 December 2012. |
Mr Gary Hargreaves ("Mr Hargreaves") |
Employee of D&P. Responsible for selling the Property at auction in 2013. Witness for the Fund. |
Colliers International Limited |
Real estate services consultant. Instructed as fixed charge receivers in respect of the Property by D&P in 2012. |
Lambert Smith Hampton |
A real estate agent. Instructed by D&P in respect of the sale of the Property in 2013. |
Global Environmental Consultancy Limited |
Environmental consultant. Instructed to produce a report about asbestos at the Property in 2013. |
Mr Michael King FRICS ("Mr King") |
Valuation expert jointly instructed by the Fund and Hewetts. |
Mr Robin Bryant ("Mr Bryant") |
Lending expert instructed by Hewetts. |
Mr Adrian F Bloomfield ("Mr Bloomfield") |
Lending expert instructed by the Fund. |
- Before considering the allegations against Hewetts and resolving the issues identified in paragraph 3 above that require to be resolved, I must first review the witness evidence adduced during the course of the trial, and also deal in some detail with the circumstances in which Hewetts came to be instructed, and how the Fund came to suffer the loss that it seeks to recover from Hewetts. For these latter purposes, it is necessary to consider in some detail the circumstances behind:
5.1. The Tiuta companies;
5.2. The way in which the Fund was set up and organised to carry on business;
5.3. The transactions involving the purchase by the Borrower of the Property, the advance by TIL to the Borrower of £1,300,000, and the advance by the Fund to TIL of £1,093,200;
5.4. How and in what circumstances Hewetts came to be instructed, and, in consequence, came to provide the COT to the Fund; and
5.5. The provision of the COT, and the drawdown of funds, including what Hewetts actually did, and how Hewetts carried out its instructions, including the provision of the COT.
B. WITNESSES
- I heard from three witnesses of fact during the course of the trial, namely Mr Davies and Mr Bedding on behalf of the Fund, and Mr Butcher on behalf of Hewetts. I should say at once that I found all three of these witnesses to be frank and honest witnesses doing their best to assist the Court. Having said that, I did get the impression during parts of the evidence of each of Mr Davies and Mr Butcher that their evidence, and what they had to say in respect of certain matters, was based not on an actual recollection of events but on an ex post facto reconstruction of events in their own minds assisted, with varying degrees of accuracy and reliability, by a reading of the contemporaneous documentation some years after the event.
- As to Mr Davies, he gave evidence by video link from near his home in Bath in view of the state of his health. Medical evidence confirms that he has been suffering from depression and anxiety, and I gained the clear impression that he has been affected by events surrounding the liquidation of the Fund in 2012, and the subsequent bringing of proceedings against him under the Company Directors' Disqualification Act 1986. At various stages of his evidence, I gained the impression that he was (subconsciously) reconstructing events in his own mind so as to justify his position in a way that was not always supported by the facts. Further, he did have a tendency to be categorical about events in circumstances when, if probed under cross-examination, it became clear that he was unable to be so categorical. In this respect, I would refer, for example, to his evidence in respect of the Connaught Revolving Credit Facility Letter dated 17 September 2008. In chief, and initially under cross-examination, he was adamant that such a letter would only be provided where Connaught was advancing to TIL a lesser sum than TIL was, in turn, lending on to the ultimate borrower. However, he subsequently conceded that such Connaught Revolving Credit Facility Letters would have been produced by TIL in every case. He was similarly unequivocal with regard to whether Capita, in fact, carried out a separate review (including of the COT) akin to that carried out by the Fund in respect of loan transactions, only to equivocate on the point when pressed. In these circumstances, I consider that I must treat aspects of his evidence with some care.
- In closing submissions, Ms Smith submitted that there were a number of occasions during the course of his cross-examination when Mr Davies became obviously tired, and when tired, conceded matters that he would not otherwise have conceded. I have to say that I did not get that impression. In the light of medical evidence before the Court, Mr Davies gave evidence for no longer than 30 minutes in any one stretch, with a break of at least 15 minutes after each such stretch. Although, overall, Mr Davies gave evidence for longer than had been suggested as ideal by the medical evidence, I carefully checked on a number of occasions whether Mr Davies was happy to proceed. On each occasion, Mr Davies indicated that he desired to continue and get his evidence over with, without giving any impression of being over-fatigued.
- The Fund also relies upon two witness statements of Mr Hargreaves, dealing respectively with the subsequent sale of the Property and the cost of funding. These witness statements were not challenged, and Mr Hargreaves was therefore not cross-examined.
- In his witness statement, Mr Butcher sought, in respect of the various allegations of negligence alleged, to explain why he had acted in the way that he had. Ms Smith relied upon the fact that, on a number of occasions, Mr Butcher was forced to accept that the reason that he had put forward in his witness statement could not, in fact, have been an explanation for the way in which he acted at the time. Further, she criticised him for coming up with alternative no more persuasive explanations in the witness box. Ms Smith argued that the way in which Mr Butcher had dealt with matters in his witnesses statement reflected a carelessness of approach in the preparation of his witness statement that was generally symptomatic of the carelessness that he adopted in performing his instructions. It is certainly right that a number of explanations put forward by Mr Butcher in his witness statement and in giving evidence to explain his actions did not stand up to scrutiny. However, I consider that it would be reading too much into the answers given to say that the way that the explanations were put forward is itself probative of carelessness on the part of Mr Butcher at the time. Consistent with what I have said above, I believe that Mr Butcher was making an honest attempt to recall, many years after the event, why he had acted as he did at the time. Further, I consider it necessary to consider carefully each of the allegations in turn, as I seek to do below, in order to assess whether Mr Butcher did act negligently as alleged, and that the issue in each case is not necessarily determined by the fact that Mr Butcher might have put forward some unsatisfactory explanations at trial.
- Likewise, the mere fact that Mr Butcher might, under the pressure of cross-examination, have made certain concessions as to his culpability and therefore that of Hewetts is not, in my judgment, necessarily determinative of the issue. This is because the issue of whether Mr Butcher fell below the requisite standard is an essentially objective question, and not one dependent upon Mr Butcher's subjective view expressed in the premise of particular questions posed under cross-examination. Again a careful consideration of the evidence in respect of each allegation of breach is required.
- At the start of his cross-examination, Mr Butcher was taken to his firm's current website where he is referred to as … " our Director in charge of the Private Client Department dealing with Wills and Probate, Legal Care of the Elderly (including looking after people's affairs under both Enduring and Lasting Powers of Attorney), Court of Protection work, legal and mental capacity issues, as well as advising on Asset Protection and Inheritance Tax planning and on matters such as Long Term Care funding issues." No mention is made there of the conveyancing expertise referred to in his witness statement. However, I accept Mr Butcher's explanation that his role has changed somewhat since 2008, and that having qualified as a Legal Executive in 1993, and then as a Solicitor in 2002, he had considerable conveyancing experience by the time of the relevant events in 2008.
- As to expert evidence, both parties rely upon a joint valuation report of Mr King. This values the relevant leasehold interest in the Property in September 2008 upon a number of hypotheses potentially relevant to damages.
- In addition, both parties rely upon expert evidence in respect of lending practice, namely the evidence of Mr Bloomfield on behalf of the Fund, and the evidence of Mr Bryant on behalf of Hewetts. The evidence as to lending practice that they gave is primarily relevant to the allegation of contributory negligence on the part of the Fund, should it arise, although their evidence has helped me on other issues as referred to below. Mr Bloomfield and Mr Bryant respectively come from very different backgrounds, and that was reflected in their evidence. Mr Bloomfield demonstrated an intimate knowledge of the short-term bridging loan market, the loan, certainly from TIL to the Borrower, purported to be such a loan. Mr Bryant comes from a merchant banking background and looked at lending from a more general perspective.
C. BACKGROUND
(a) The Tiuta Companies
- TPlc was, in 2008, the parent company of a group of companies ("the Tiuta Group") that had, from 2004, specialised in the provision of short term (bridging) loans, primarily to property developers and investment companies, utilising subordinated debt provided under facilities granted by a variety of banks to fund its loan book.
- TPlc's consolidated profit and loss account for the year ended 31 March 2008 showed a profit of £1,597,910 on a turnover of £12,180,559. TPlc's balance sheets as at that date showed shareholder funds of £2,429,737, and cash at bank of £6,501,690. As against debtors of £67,595,315, it had creditors (mainly bank loans) of £51,933,166 due within 12 months, and creditors of £22,662,610 due after more than one year, thus making it comparatively highly geared. However, of the amounts due after more than one year, only £9,024,607 was represented by bank loans and the balance by loans from the directors and "The Savva Family".
- The Tiuta Group lent through subsidiary companies incorporated for the purpose. TIL, which had been incorporated on 23 May 2006, was, from about April 2008, used as the vehicle for making bridging loans using the Fund as the funding line. All the loans made by the Fund were made to TIL, TIL using the monies advanced to make bridging loans to its customers.
- A number of points should be noted about the Tiuta Group:
18.1. The various companies within the Tiuta Group, including TIL and TLL, were all wholly owned subsidiaries of TPlc;
18.2. The directors of TPlc, Gary Booth, Steven Nicholas (himself a Solicitor), and Charles Baba, were also directors of each of the relevant subsidiary companies, the evidence suggesting that the Group was effectively run as one common entity;
18.3. Within the Information Memorandum referred to in paragraph 24 et seq below, TPlc and TIL were referred to fairly interchangeably as the "Specialist Partner";
18.4. When it came to giving instructions to Solicitors to act for TIL on loan transactions using funds advanced by the Fund, the instructions were given by Ms Kalyan in her capacity as the in-house solicitor for the Tiuta Group, with the instructions being sent out with TPlc referred to in the email signature;
18.5. Although the loan in the present case was technically made to TIL, the funds were actually remitted to TPlc, and, as we shall see, TPlc provided a guarantee to the Fund.
- TLL had granted a loan to CRIL secured upon the Property that was, in 2008, in default. TLL had taken possession as mortgagee with a view to selling the Property but had been unsuccessful in finding a buyer until Mr Wall, utilising the Borrower as the purchase vehicle, had expressed an interest in buying the Property. In the circumstances referred to below, in September 2008, TIL funded the purchase of the Property by the Borrower from TLL, with the benefit (substantially) of funds advanced to TIL by the Fund. This is the transaction the subject matter of the present claim.
- TPlc, TLL and TIL (and other companies in the Tiuta Group) entered into administration in 2012, and subsequently entered into insolvent liquidation.
(b) The Fund
- The Fund is, as described above, an unregulated collective investment scheme ("UCIS") within the meaning of s 235 of the FSMA 2000. It was registered as a limited partnership on 10 April 2008, and was subject to the terms of an agreement ("the Limited Partnership Agreement") dated 10 July 2008. The general partner of the Fund was, at all relevant Titles, CAS, and the founder partner of the Fund was CAM.
- On 10 July 2008 Capita was appointed as the operator. In this capacity, Capita carried out operational matters on behalf of the Fund, such as receiving and distributing funds, that required to be carried out by a regulated entity.
- On 10 July 2008 CAM was appointed as the Fund's asset manager by Capita. As such, CAM was responsible for how investment monies were used, and it reported to investors on a quarterly and annual basis.
- On 1 April 2008, Capita, as operator of the UCIS, issued an information memorandum for investors ("the IM").
- The Executive Summary to the IM referred to the growth in demand for bridging finance and that the Fund had been … "developed to offer potential investors the opportunity to invest money directly into the bridging loan market with a guaranteed annualised income paid quarterly in arrears from 8.15% to 8.5% depending on investment levels, with any monies lent being insured (sic) on a first charge on the property made in favour of the Limited Partnership".
- The original name of the Fund suggests that it was set up as a low risk fund. However, it should be noted that an "Important Notice" at the beginning of the IM stated that: "Throughout this document, reference is made to "very low risk" "low risk" and "medium risk". Such terms are used with the specific meanings as set out on page 11 of this document and should not, therefore, be considered, or relied upon, as having a generic meaning." Page 12 (not page 11) of the IM referred to TPlc's "classification of loan to value in terms of risk" which was expressed to be: "very low risk" being a loan to value ("LTV") of less than 70%; "low risk" being a LTV of between 70% and 75%; and "medium risk" being a LTV up to 85% (but such that above 80% there was required to be a "guaranteed exit route"). There is then reference to the fact that the targeted risk profile of the Fund was … "for up to 90% of the available monies to be held in very low or low risk loans and up to 10% in medium risk loans."
- The categorisation of "low risk" also has to be viewed against the fact that the interest rate payable to investors, at between 8.15% and 8.5% per annum, was a comparatively high rate of interest reflecting the corresponding risk taken by investors. Further, when pressed, the Fund's own expert, Mr Bloomfield, was not prepared to describe the loans made by the Fund as "prudent", preferring to view the Fund's own lending in terms of being an "acceptable risk" having regard to the intended return for investors of approximately 8%.
- The IM, in its description of "Key Parties" referred to TPlc as "Specialist Partner", although in the "Definitions and Terms" at the end of the IM, TIL is described as the "Specialist Partner". The IM set out the roles of the "Main Parties", namely Capita as the "Operator", CAM as the "Asset Manager", and TPlc as the "Specialist Partner". The IM does therefore provide assistance as to the true nature of the relationship between the Fund on the one part, and TPlc/TIL on the other part.
- The following parts of the IM are of particular relevance for present purposes:
29.1. On page 6 of the IM:
29.1.1. Reference was made to the fact that the Asset Manager would be using the "professional services" of TPlc as "the Specialist Partner";
29.1.2. The "key roles" of the Asset Manager were expressed as including approving "all proposed bridging loan applications recommended from the Specialist Partner", reviewing "the independent valuations on any properties before reviewing applications", and ensuring "that the first charge is registered to the Limited Partnership";
29.1.3. The "key roles" of the Specialist Partner were described as being to:
"
• provide the Asset Allocation Committee all documentation regarding a proposed loan
• ensure a thorough credit vetting process has been undertaken
• provide an independent valuation on each property
• ensure the first charge is subordinated to the Limited Partnership
• provide a monthly progress and activity report on all loans relating to the monies raised by the Fund"
29.2. TPlc's lending record was described on page 7. Reference was made to the fact that the value of loans provided had risen from just over £1 million in 2004 to £117 million in 2007, the number of loans made annually in the same period rising from 6 to 374. Further, reference is made to the "default rate" remaining at less than 1%.
29.3. On page 8, it was stated that bridging finance is: "a very low risk lending business because it never allows the lending to be more than 80% of the independently assessed value of a property (a higher percentage lending is only allowed when the borrower has a guaranteed exit route), interest and fees deducted upfront normally reduce the net amount lent to nearer 75%".
29.4. On page 12, reference was made to the "Investment Objective", referring to the fact that the Fund would: "seek to exploit the current market conditions and the general market requirement for short-term (bridging) finance. Investors will receive a fixed annualised interest rate, paid quarterly in arrears, of between 8.15% and 8.5%". Then, under the heading "The Lending Strategy" and "Breakdown of Loan book" it was stated that: "The Fund will lend to a range of customers who are looking to utilise short-term Funding… The majority of loans will be to fund a property purchase with a short completion deadline, to fund a short-term renovation or project or to refinance or to raise capital. All loans will be secured with a first charge over one or more properties but will be registered to the Limited Partnership for the duration of the loan." This, and other passages within the IM, were suggestive of an intention that the Fund would lend directly to the ultimate borrower requiring the bridging loan. However, Mr Davies was clear in his evidence that this was never the intention, however the IM might have been expressed. A subsequent IM produced after Capita had been replaced as Operator used different language making it clear that the Fund was to lend to TPlc/TIL, and that the latter was then to lend on to its customer.
29.5. On page 14, under the heading "Guaranteed Income Returns", it was stated that: "The interest received by Investors is legally guaranteed by the Specialist Advisor and is underwritten by the Parent Company Tiuta Plc as Guarantor. The Specialist Advisor guarantees the payment or discharge to the Limited Partnership and undertakes that the Guarantor will on demand in writing made on the Guarantor pay or discharge to the Limited Partnership all monies and liability which shall be duly owing or incurred by the Specialist Advisor to the Limited Partnership."
29.6. The "Sales and Underwriting Process" was described on page 16. The description began by stating that: "The Specialist Partner, through existing client contacts and its broker network will attract borrowers and manage the underwriting, legal work and administration relating to each loan." I would highlight here the reference to the Specialist Partner managing the legal work. The description subsequently included the following wording:
"If the borrower and security meet the preliminary requirements then the loan is fully underwritten using the criteria as agreed in the most recent lending and credit committee (sic).
A template request form is then submitted to the Asset Manager for approval outlining the details of the case and attaching a copy of the independent valuers report and a certificate signed by a solicitor confirming the title is acceptable as security; if the requirements prescribed by the Fund are met the Asset Management Committee will approve the release of the Funds which are provided to the client to use. The first legal charge is then subordinated in the name of the Limited Partnership.
Once the monies are lent, the Specialist Partner will manage the day-to-day administration of loan…
The loans that will be completed by the Fund will have been assessed as having a very high chance of redeeming both capital and interest and fees. The timeframe for redemption of each loan cannot be guaranteed to be within the contractual term of the loan, but the risk-profiling of each loan based on the extensive experience of the legal, survey and financial specialists and the resultant underwriting criteria are designed to be conservative. The Asset Manager will not consider any properties that exceed the investment criteria."
29.7. Page 17 et seq refers to "Key Personnel". Not only were Mr Davies and the other directors of the Fund/CAM referred to, but so also were Gary Booth, Steven Nicholas, and Charles Baba of TPlc.
(c) The Contractual Documentation
- Against the background of the IM, the following contractual documentation was entered into between the key participants.
- A Limited Partnership Agreement dated 10 July 2008 between CAS(1) and CAM(2) ("the LP Agreement") which regulated the Fund's constitution. The following provisions of this agreement are relevant for present purposes:
31.1. Recital B and clauses 1.1 (definition of "Operator") and 5.1 related to the appointment of Capita as the Operator.
31.2. Clauses 1.1 (definition of "Asset Manager") and 5.2 governed CAM's appointment as Asset Manager.
31.3. Clauses 1.1 (definition of "Specialist Partner") and 5.5 gave general authority to Capita and to any party appointed by Capita on the Fund's behalf (amongst other things) "to evaluate all short term loan applications against the criteria set out in the current [IM] and: confirm that the Partnership has a first charge over the security; approve those applications; and, authorise the release to the Specialist Partner of funds held by the Partnership". It should be noted that by clause 1.1, "Specialist Partner" was defined as: "Tiuta Plc or such other third-party who may be appointed to assist in the management of [the Fund's] assets".
- An Operator's Agreement between the Fund (1), CAS (2) and Capita (3) ("the Operator's Agreement") provided for the appointment of Capita as Operator. Clause 2.2 thereof is of particular relevance in that, pursuant thereto, Capita was given "primary responsibility for managing the investments". However, clause 2.2 then went on, in sub- clauses 2.2.1 to 2.2.4 thereof, expressly to state that Capita did not hold itself out as having competence to undertake that role, and thus that Capita … "may and will delegate to [CAM] the managing of such investments". In this way, Capita was able to, and did authorise CAM to be the Fund's investment agent, i.e., to carry out the role described in clause 5.5 of the LP Agreement.
- An Asset Management Agreement between Capita (1) and CAM (2) ("the AM Agreement") under which Capita appointed CAM as asset manager, and pursuant to which CAM's duties as asset manager were prescribed. The latter duties were set out in clause 3 thereof, which provided, so far as is relevant, as follows:
3.1 "3 Asset Manager's Duties The Asset Manager shall be responsible for:
(i) sourcing, identifying, negotiating and arranging suitable Loans;
(ii) managing and monitoring Loans;
(iii) arranging and negotiating the repayment or disposal of Loans;
in each case in accordance with the Investment Policy. The Asset Manager, in performance of its duties hereunder, will use all reasonable endeavours to:
3.1.2 give [the Fund] the benefit of its best judgment in relation to Loans in the light of the Investment Policy;
3.1.3 perform the obligations set out in this Agreement and procure that any Delegate performs its obligations, in a good and efficient, proper and professional manner with the degree of skill and judgment expected of an experienced professional in the field of bridging finance;
…
3.2 the Asset Manager may appoint third parties (each a "Delegate") to provide services to [the Fund]; "
- It is important to note that CAM's power to delegate in clause 3, by sub-clause 3.1.3, expressly envisaged delegation to an "experienced professional in the field of bridging finance", i.e., in the present instance, to TPlc/TIL as "Specialist Partner" or "Specialist Advisor", a significant point being that CAM had no expertise itself in relation to "the field of bridging finance". Whilst this delegation was envisaged, and was required given the lack of expertise on the part of CAM, there is no dedicated written contract dealing therewith.
- There is what is described as a Services Agreement dated 15 April 2008 between the Fund (1), TIL (defined as "Specialist Advisor") (2) and TPlc (defined as "Guarantor") (3) ("the Services Agreement"), but this is more concerned with regulating the terms on which TIL would be entitled to draw down funds from the Fund than regulating services to be provided by TIL/TPlc. It provides for what is akin to a revolving facility, by which TIL (or TPlc, in the event) could obtain and on-lend money provided by the Fund. Thus clause 3 thereof expressly refers to "a Revolving Credit Facility". The following terms of the Services Agreement are of relevance for present purposes:
35.1. Clause 4 provides that the "facilities will only become available once [the Fund] has received and is satisfied as to the form and content of the following items… ". Sub- clauses 4.1 to 4.8 then list a number of requirements including:
"4.1 A debenture in the form of a fixed and floating charge over the assets of [TIL] granted in favour of [the Fund]
4.2 A Corporate Guarantee by [TPlc] for all obligations of [TIL] to [the Fund ] as Principal
4.3 A sub Mortgage over all legal charges granted by [TIL] in favour of [the Fund] …..
4.5 Each drawdown is not to exceed 80% loan to value
4.6 That each drawdown request will be accompanied by a solicitors certificate of title in relation to each property to be financed by [TIL] in the prescribed form and un-amended without the consent of LP, in favour of the Specialist Advisor and [the Fund ]
4.7 a valuation on the property to be financed by the Specialist Advisor from a panel approved by [the Fund]…"
35.2. Somewhat inconsistently with the other terms of the Services Agreement, but in my judgment reflecting the fact that it was envisaged that TIL would be providing services to the Fund as envisaged by other documentation including the IM, clause 9 of the Services Agreement, headed "Liability" provided as follows:
"The Specialist Advisor will act in good faith and with due diligence in the performance of its duties under this Agreement. Neither the Specialist Advisor, nor any agent employed by the Specialist Advisor, will be liable for any loss to [the Fund] howsoever arising except to the extent that such loss is due to the gross negligence, wilful default or fraud of the Specialist Advisor or its members, officers, employees or agents".
- The formal documentation also included CAM's "Investment Policy and Procedure Manual" dated April 2008. Mr Davies accepted that he would have drafted this, albeit utilising an earlier draft prepared by a predecessor. This document included a section headed "Fund Rationale", and a section headed "Outline procedure":
36.1. The relevant part of the section headed "Fund Rationale" provided as follows:
"The funds will invest (sic) in short-term, typically between three months and 12 months repayment period, bridging loans secured on UK real property sourced by [TPlc] in return for an annualised interest payment of between 8.15% and 8.5% depending on the size of the initial investment and paid quarterly in arrears.
The sourcing of secured bridging loans which meet the credit criteria approved by [CAM] will be the responsibility of the Principal Partner [TPlc]. Tiuta will also underwrite loans, including obtaining independent valuations of each property offered as security and will 'price' the loans to provide sufficient margin to meet the interest guarantee to the investors in the fund.
Tiuta, having packaged the loan applications, including providing an independent valuation report on the security, a report on title produced by a solicitor acting for the lender and confirmation from a mandated Titua underwriter that the loan applied for is within Tiuta credit policy, will forward the packaged loan to [CAM] by any appropriate and secure means.
One or more members of the Asset Allocation Committee will review the loan package and if, approved, will instruct the operator and Manager to release the funds."
36.2. The relevant part of the section headed "Outline procedure" provided as follows:
"A rigorous process for assessing the creditworthiness of an applicant for a loan and the suitability of the property offered as security for the loan has been put in place.
1. Connaught Asset Management Investment Committee (CAMIC) approves the lending criteria with the Specialist Partner in respect of loans that will be acceptable as an investment for this fund.
2. [TIL] will source loan applications that fit the funds lending criteria and will carry out a full credit assessment, including carrying out credit searches, obtaining an independent valuation of the property offered as security and arranging for a solicitor to carry out all necessary searches and to assess the borrowers title to the property.
3. Tiuta will formally present a packaged loan application to CAMIC, together with a request for a drawdown of the funds required to complete the loan as set out in appendix (i).
4. If the request is approved by at least one mandated member of CAMIC, the Fund will be authorised to release the monies requested to Tiuta."
36.3. I would note that whilst under the "Fund Rationale" heading referred to in sub- paragraph 36.1 above, the Investment Policy and Procedure Manual referred to an "Asset Allocation Committee", as did the IM, this committee was described in the section of the Investment Policy and Procedure Manual referred to in sub- paragraph 36.2 above as "Connaught Asset Management Investment Committee (CAMIC)". I will refer to the relevant committee as the Asset Allocation Committee as this appears to have been the more widely used expression.
36.4. Appendix (i) referred to in the "Outline procedure" consisted of a "Tiuta Plc - Revolving Credit Facility Utilisation Pack Front Sheet" ("the Utilisation Pack Front Sheet"), comprising a form to be filled in by TIL in presenting the packaged loan application to CAM's Asset Allocation Committee. Appendix (i) also included a standard form "Release Approval Form" ("the Release Approval Form") to be completed by CAM's Asset Allocation Committee, or the relevant member thereof, in approving a particular drawdown. This was in the form of a check list posing a number of questions, which admitted only of a yes or no answer. There are sections relating to the relevant loan application form, the valuer's report, the offer of advance, and, most importantly for present purposes, the solicitor's report on title. The questions posed in respect of the solicitor's report on title were as follows:
"5.1 Is the property address confirmed as the security in the Report on Title that confirmed in the application form and Offer of Advance?
5.2 Does the solicitor confirm a good freehold or leasehold title?
5.3 Does the solicitor confirm that the lender will have a first charge over the security?"
If the answer to any of these questions was no, then the instruction on the Release Approval Form was: "decline and return to Tiuta".
- By a Guarantee dated 15 April 2008, TPlc guaranteed the liabilities of TLL to the Fund.
- Further, TIL granted a Debenture dated 16 April 2008 to the Fund.
(d) The typical transaction involving an advance by the Fund to TIL to enable it to grant a bridging loan to its customer
- The essence of the typical transaction involving the Fund and TIL, as foreshadowed by the above documentation, involved the following.
- The borrower applied to TIL using a standard form loan application form.
- TIL would carry out its own due diligence/underwriting in relation to the borrower and the purpose for the loan, and would instruct the valuer to provide a valuation report, and the solicitor to complete the COT. I shall return shortly to consider the basis upon which the solicitor was instructed.
- Subject to its own diligence/underwriting, the receipt of a satisfactory valuation report, and the solicitor returning the COT duly signed, TIL would then complete the Utilisation Pack Front Sheet, and forward the packaged loan application to the Fund, accompanied by the documents referred to in the Utilisation Pack Front Sheet. I notice that there are some differences between the documents specified in the form included within Appendix (i) to the Investment Policy and Procedure Manual, and the form used in the present case. However, the common documents referred to include TIL's offer of advance, the valuation report, the COT, and a "Completed Revolving Credit Facility Letter".
- As to the "Completed Revolving Credit Facility Letter", there was, as referred to in paragraph 7 above, an issue as to whether the latter were provided in every case. However, Mr Davies ultimately confirmed that (as suggested by the Utilisation Pack Front Sheet) they were provided in every case.
- On receipt of the Utilisation Pack Front Sheet, CAM's Asset Allocation Committee, or a representative thereof, would consider the same, and complete the Release Approval Form. It was put to Mr Davies that this was, essentially, a rubber stamping, or tick box exercise involving little or no independent consideration. Mr Davies denied that this was the case. I accept that it would be wrong to describe the process as being simply a rubber stamping exercise. However, the process was, plainly, designed to be a simple one under which loans to TIL would generally if not invariably be approved if the paperwork was in order, and the various questions posed on the Release Approval Form could be answered with a "yes".
- It was Mr Davies' evidence that any qualification to a COT, or any amendment thereof would have resulted in the Fund rejecting the relevant loan application, quite simply because the system was not designed to deal with anything apart from unqualified documentation, and the Fund did not have the expertise or resources to deal with any such departures from the norm. Mr Smith, on behalf of Hewetts, put to Mr Davies clause 4.6 of the Services Agreement and suggested that this admitted of an amended COT with "the consent" of the Fund. However, it was Mr Davies' evidence that whatever clause 4.6 of the Services Agreement might have said, an amended COT would never have been accepted for the above reasons. I accept Mr Davies' evidence as to this.
- A further issue arose as to Optima's involvement in this process. Mr Davies did suggest in his evidence that the decision of the Asset Allocation Committee was subject to an independent consideration of the application by Optima who he described as a "second pair of eyes". However, having been shown the exchange of email correspondence relating to the transaction the subject matter of this action, Mr Davies accepted that it would appear therefrom that Capita's involvement in this case had been a mere formality, and that Capita had not given any independent consideration to the transaction, but he was adamant that this was not the process that he could recall having been provided for. However, it will be recalled that the "Fund Rationale" within the Investment Policy and Procedure Manual did refer to the fact that "the members of the Asset Allocation Committee will review the loan package and if, approved, will instruct the Operator and Manager to release the funds" (my emphasis). This would suggest that Capita was not intended to have the role suggested by Mr Davies, but ultimately I do not consider that anything turns on this point.
- Mr Davies was asked under cross-examination about what consideration he or the Fund gave, in respect of the particular transaction the subject matter of this action, to the fact that the loan-on from TIL to the Borrower was significantly larger in amount than the loan from the Fund to TIL, and indeed larger to such an extent that, so far as the loan to the Borrower was concerned, it amounted to in excess of 95% LTV, and also to the fact that there was no obvious exit route from the supposed bridging loan. The gist of Mr Davies' response was to the effect that the Fund did not in any case think about or give any real consideration to the position of the borrower, and that so far as the Fund was concerned, the key consideration was the Fund's security for its loan to TIL, and therefore the LTV in relation to that, and the guarantee provided by TPlc. In his expert evidence on behalf of the Fund, Mr Bloomfield, endorsed this as a proper approach to the type of borrowing that the Fund was making. On this basis, the financial position of TPlc was of greater importance and significance to the Fund than the circumstances of the borrower.
(e) The basis upon which the solicitor was instructed
- As I have mentioned, the instructions to the solicitor, in each case, emanated from TPlc's Legal Department, in the present case, the process being initiated by an email dated 13 August 2008 from Ms Kalyan. The formal instructions were in the form of a letter of instruction. In the present case, the letter of instruction was dated 13 August 2008. The latter, which followed a standard form, included the following wording:
48.1. The letter began by stating that: "We understand that you act for the above named client in respect of the above named property. We confirm that we have agreed to provide your client with finance facilities, to be secured in accordance with the letter of instruction, the terms of the Guidance Notes and Instructions to Solicitors and the Facility Letter which accompanies the Certificate and Undertaking as limited by Paragraph 3 Rule 6 Solicitor's Practice Rules 1990".
48.2. Apart from the documents referred to in sub-paragraphs 48.4 and 48.5 below, the letter enclosed various documents including a copy of the Facility Letter, the Valuation (in the present case to follow), Legal Mortgage to be executed by the Borrower, and the COT with the instruction "Please return this duly signed once you are in a position to do so".
48.3. On the second page thereof, the letter of instruction included the following:
"We should be pleased if you would also attend to the security perfection formalities on our behalf and act for us to ensure that we obtain first legal charges and register the same at HM Land Registry. Please proceed in accordance with the CML Handbook. Should you feel that at any stage there is a conflict of interest, you should inform us immediately and cease to act on our behalf."
48.4. The letter of instruction was also accompanied by a "Note to solicitor" which began by stating: "For the sake of expediency we have agreed that you can act for us as well as your client in the perfection of our security. These notes are intended to assist you with the completion of our documentation." The note then went on to include the following:
"2. You will also need to register the Sub-Charge given to [the Fund] by [TIL] at Companies House and HM Land Registry. For this purpose we enclose Form 395. You will see the sum referred to in this form is less than the total advance made to your client. We will arrange for [the Fund] to send you a duly signed Sub-Charge shortly following completion and please ensure that this is registered at Companies House within the prescribed time and thereafter registered at HM Land Registry.
3. We will endeavour to send you the survey report as soon as possible. Please draw our attention to any inconsistencies as soon as possible so as to enable you to complete The Guaranteed Low Risk Income Fund, Series 1 Certificate of Title with regard to the section relating to the inspection of the survey.
4. Please ensure that the insurance schedule notes the interests of [TIL] and [the Fund] and is for the minimum sum as recommended in the survey."
48.5. The letter of instruction was also accompanied by a document headed: "General Instructions". This began, in paragraph 1 thereof, by stating that: "The accompanying letter of instruction explains the basis upon which you are asked to act for the Bank. These Guidance Notes are intended to assist you in the discharge of the instructions and to detail the Bank's requirements. They do not in any way limit or reduce your duties either to the Bank or the Guarantor/Mortgagor." At paragraph 9 thereof, this document, under the heading "Title" stated follows:
"You are not instructed, unless separate instructions to provide a report on title are enclosed, to advise the Bank as to the validity, marketability or saleability of the title to any real property ("the Property") to be secured. Where however you are aware of any specific defect, dispute or matters relating to the Property which might affect the acceptability of the Property as security for the Bank facilities, then you should advise us accordingly."
- That TPlc/TIL should have instructed the solicitor to act, including completing the COT is, of course, entirely consistent with the IM, the LP Agreement, the Operator's Agreement, the AM Agreement, the Services Agreement, and the Investment Policy and Procedure Manual, being one of the services to be provided by TPlc/TIL referred to therein.
- Mr Davies was asked under cross-examination about the role of the solicitor in the transaction, and the interrelationship between the solicitor, the Fund and TIL. The following answers that he gave are of particular importance in understanding the nature of the relationship between the Fund, TIL, and the solicitor acting in respect of transactions such as the present:
50.1. Mr Davies said that he, therefore the Fund, was unaware as to the basis upon which TIL was asking the solicitor to give advice, on the basis that this was something that the Fund left to TIL to attend to.
50.2. Mr Davies accepted that if the solicitor had points to raise during the course of his or her work, then his anticipation was that they would be raised with TIL alone.
50.3. Mr Smith put to Mr Davies the following proposition: "And in September 2008, you would agree with me … that TIL had full discretion to resolve issues raised by solicitors as it saw fit". In response to this, Mr Davies replied: "Yes, with the proviso that that would be done prior to them ever submitting the case to [the Fund], so those issues would be resolved before we saw the pack, yes."
50.4. Following on from this, Mr Smith put a further proposition to Mr Davies, namely: "So if the position was that a solicitor such as the Defendant had raised a spectrum of issues about the title to the property, and TIL had responded to say that, we are aware of those, we are satisfied about the position and you can give a clean Certificate of Title, you would consider that to be an entirely appropriate thing to have happened, wouldn't you?"
Mr Davies responded to this as follows: "I have to give the answer carefully here because all we would expect to see is a Certificate of Title that met". Mr Smith then interjected: "And in every other respect, you left it to their professional services to decide what was the appropriate course?", to which Mr Davies replied: "Yes".
50.5. It is clear from the above that, so far as the Fund was concerned, TIL had a discretion to resolve issues with the solicitor, subject to the proviso that that was done prior to submitting the relevant pack to the Fund, and that if matters could be dealt with satisfactorily between TIL and the solicitor such that the solicitor was properly able to submit an unqualified COT, then the Fund would expect the matter to be dealt with between them.
50.6. Later in his evidence, Mr Davies confirmed that if a COT had been qualified in any way, for example if accompanied by a narrative letter pointing matters out, then that would have led to a rejection of the application. However, whilst amounting to an unqualified rejection of the application, it would, in practice, be referred back to TIL, and if the matter were subsequently resolved as between the solicitor and TIL such that the solicitor was properly able to provide an unqualified COT, then it would have been open to TIL to resubmit the application with a new drawdown pack, and there is no reason why the application would not then otherwise have been accepted. I refer in this respect to the important exchange during the course of Mr Davies' cross-examination recorded in the transcript at Day 2, pages 49-50.
(f) The Nature of the relationship between the Fund and TIL
- It is the Fund's case that the relationship between it and TIL was simply that of creditor and debtor, and that there is simply no scope for the existence of an agency relationship between them. Hewetts, on the other hand, argue that TIL did act as agent of the Fund, with the consequence, amongst other things, that the knowledge of the Fund is to be equated to that of TIL. The crux of Hewetts' case on this point is pleaded in paragraph 1 of its Particulars of Agency where it is contended that:
"… TIL was the [Fund's] introducing agent for the purposes of the [Fund's] assessment of whether loans were to be made by it under the scheme. That is to say, TIL had authority to receive information on the [Fund's] behalf about the ultimate borrower's loan application (i.e., in this case, in respect of the Loan). This is the nature of the agency that [Hewetts] intends to refer to in paragraph 57(i) of the Amended Defence".
- Ms Smith, on behalf of the Fund, argues that the necessary ingredients for agency are missing in the present case. She referred me to Bowstead on Agency, 20th edn, at paragraph 1-001 where it is said that:
"Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifests his assent that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifests assent so to act or so acts pursuant to the manifestation… ".
- Ms Smith referred me to a number of other authorities on the nature of agency including, most importantly, the speech of Lord Pearson in Garnac Grain Inc v HMF Faure & Fairclough Ltd [1968] AC 1130, where, at page 1137, Lord Pearson had referred to an earlier edition of Bowstead and to other textbooks, and stressed that the relationship of principal and agent can only be established by the consent of the principal and the agent, and that they will be held to have consented if they have agreed what amounts in law to such a relationship.
- Ms Smith also took me to the decision of the Court of Appeal in Atlas Maritime Co SA v Avalon Maritime Limited ("the Coral Rose") [1991] 1 Lloyd's Rep 563 where the court at first instance had decided that there was an agency agreement, but the Court of Appeal held that it had been wrong to do so on the basis that the true nature of the relationship was that of debtor and creditor. Ms Smith referred to a passage in the judgment of Neill LJ at page 567, where he had said that: "It is true that the evidence of the existence of the loan is scanty and is not supported by any contemporaneous documents but it seems to me that the relationship of debtor and creditor can be more readily inferred on these facts than a relationship of agent and principal." Ms Smith pointed out that Neill LJ referred to, and had in mind what Lord Pearson had said in Garnac with regard to the fundamental principle that the relationship of principal and debtor can only be established by the consent of principal and agent, and relied upon Atlas Maritime as helping to demonstrate that one was essentially concerned with a binary question as to whether the relevant relationship was a commercial relationship of debtor/creditor, or, alternatively, a relationship of agent/principal, it being suggested that Neill LJ did not appear to think that "those two things could run along together".
- Mr Smith, on the other hand, referred me to two different passages in Bowstead, namely:
55.1. Paragraph 1-019 concerning the "canvassing" or "introducing" agent, and making the point that such agents often have authority to receive and communicate information on their principals' behalf, and in so doing have the capacity to alter their principals' legal position; and
55.2. Paragraph 6-037, which suggests that the existence of a fiduciary relationship may not be an absolute requirement for the existence of an agency relationship - "Rather than talk of a "non-fiduciary agent" it seems better to say that where an agent does not act in a fiduciary capacity (e.g. because he simply carries out specific instructions), this is a reflection of the scope of his duties and the boundaries of the equitable rules".
- I do not agree with Ms Smith's submission that I am essentially faced with a binary decision between whether the relationship was that of creditor/debtor, or that of principal/agent. I do not read Atlas Maritime as being authority for any such opposition, but merely as showing that, on the facts of that particular case, a relationship of creditor/debtor could not coexist with that of principal/agent. However, on appropriate facts, and in particular where one is involved with a tripartite arrangement, or some other arrangement that involves another party or parties, I see no reason, in principle, why a relationship of creditor/debtor could not coexist alongside a relationship of principal/agent.
- The following matters contained within the documentation referred to above do, in my judgment, point to the relationship between the Fund and TIL being more than that simply of creditor/debtor and point to that relationship involving a form of agency:
57.1. The reference on page 6 of the IM to using the "professional services" of TPlc as "Specialist Partner". Although the reference there is to TPlc, as I have said, there is a degree of interchangeability between TIL and TPlc, and as the arrangements worked out it was TIL that did, in fact, provide the services in question.
57.2. The reference on page 16 of the IM to the Specialist Partner managing various aspects of the transaction, including the "legal work".
57.3. The fact that clause 2.2 of the Operator's Agreement provided for Capita, as Operator, to delegate the management function to CAM, and the fact that the AM Agreement then, by clause 3.2, provided that CAM might delegate to third parties services to be provided to the Fund, with there being a specific obligation on CAM's part to ensure that any "Delegate" performed its obligations, in a good and efficient, proper and professional manner with the degree of skill and judgment expected of an experienced professional in the field of bridging finance, an area in which only TPlc/TIL professed expertise.
57.4. Although in the context of the Services Agreement, which did not, oddly, specifically deal with the provision of services, it is, as I have already indicated, not without significance that reference was made in clause 9 thereof to the Specialist Adviser being required to act: "… in good faith and with due diligence in the performance of its duties under this Agreement".
- Further, the role that Mr Davies, in giving evidence, anticipated that TIL would play in resolving matters raised by the solicitor acting in a particular transaction does, as I see it, further support the contention that this was not a simple creditor/debtor relationship as contended by the Fund, and that a form of agency was involved.
- However, the mere fact that a form of agency might have been involved does not, in my judgment, necessarily lead to the conclusion that the Fund is to be treated as attributed with the knowledge of TIL. That must, as I see it, be dependent upon the particular context in which the knowledge is said to be relevant. However, I do consider that the existence of a form of agency relationship as between the Fund and TIL might well have an impact on the scope of the duty owed by the solicitor to the Fund and TIL respectively, and might help inform whether a particular course of conduct might have amounted to a breach of duty or negligence, and/or had causative effect.
(g) The duty of the solicitor to the Fund
- I first consider the generic position where the solicitor instructed by the borrower is involved in acting in a transaction such as the present, with the actual instructions coming from TIL. I then consider whether the relevant duty, and the scope thereof, might be qualified to any material extent in the present case bearing in mind that another company in the Tiuta Group (TLL), rather than an independent third party, was the seller in respect of the present transaction.
- As to the generic position, there is a fundamental difference of approach between the Fund on the one part, and Hewetts on the other part.
- It is common ground between the parties that although TIL formally retained and instructed Hewetts, the Fund did not do so, and so there was no contractual duty between the Fund and Hewetts. The issue between the parties is therefore as to the scope of the duty of care at common law owed by Hewetts to the Fund.
- It is the Fund's case that Hewetts owed the fund a duty of the kind found to exist in Mortgage Express v Bowerman [1996] 2 All ER 836 at 842D, per Sir Thomas Bingham MR, as recently affirmed in Goldsmith Williams v E.Surv Ltd [2016] PNLR 11 at [38] to [39], and [59], per Sir Stanley Burnton and Patten LJ. As Sir Thomas Bingham MR put it:
"[I]f in the course of doing the work he is instructed to do the solicitor comes into possession of information which is not confidential and which is clearly of potential significance to the client, I think that the client would reasonably expect the solicitor to pass it on and feel understandably aggrieved if he did not. I would accordingly reject the submission originally made on behalf of the solicitors as to the narrow ambit of the duty, as the judge did, and accept, as I understand her to have done, the submission of Mortgage Express. This was that if, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuat ion of the lender's securit y or some other in gredient of the lending decision, then it is his duty to point this out." (Emphasis added by Ms Smith).
- Although Ms Smith acknowledges that the above passage refers to "the client", the Fund argues that it applies equally to the situation in which a solicitor knows that he is undertaking a duty to another party (in the sense that he knows, as here, that the third party will rely on the product of his work) and where information comes to his attention which he knows or ought to know would have a material bearing on that party's decision to lend.
- Ms Smith relies upon the fact that the role of the Fund in the relevant transaction is made clear in the letter of instruction to the solicitor, and the accompanying documentation, and relies upon the fact that the letter of instruction to the solicitor makes express reference to proceeding in accordance with the CML Handbook. She also placed particular reliance on paragraph 9 of the "General Instructions" accompanying the letter of instruction.
- Ms Smith also relied upon the fact that Mr Butcher, whilst he accepted that he had, at the time, focussed upon the position of TIL, under cross-examination, appeared to recognise in the face of questions put to him by Ms Smith that:
66.1. Had he thought about it at the time, he would have known and appreciated that the Fund would be lending and wanted a COT from him on which it was going to rely in deciding whether to lend.
66.2. He believed his obligations to TIL and to the Fund to be the same such that as with TIL he was assuming responsibility to the Fund both in respect of the completion of the COT (in the sense of the accuracy of the information set out in it) and the investigations and work done in order to give those undertakings.
66.3. He understood that he had an obligation to raise any issue which affected the accuracy of his representations/warranties with the Fund, e.g., in response to questions in respect of sale at an undervalue he appeared to accept that this was a matter that he should have brought directly to the Fund's attention.
- Thus it was the Fund's case that Hewetts assumed the following duties of care:
67.1. To carry out a reasonably careful investigation of title and other matters, such as restrictions on the title of the Property and/or restrictions in the lease, which would or might impact on the adequacy of security being made available to the Fund in respect of the Fund's intended transaction with TIL;
67.2. To carry out reasonable, necessary and appropriate searches to ensure that the purpose of the transaction for the Fund, namely the secured lending to TIL, was not likely to be frustrated, and further to pursue further enquiries or give clear advice to the Fund as to the risks of failing to undertake further enquiries;
67.3. To inform the Fund of information within (or which ought to have been within) Hewetts' knowledge which could cause doubt as to the accuracy of the valuation of the Property or its adequacy as security for the lending to TIL;
67.4. To inform the Fund in writing if there were matters preventing Hewetts from providing an unqualified COT and a duty to set out and explain the qualifications, required in light of the circumstances.
- Mr Smith, on behalf of Hewetts, argues that the duty was very much more limited in scope and extent. Whilst Hewetts admits and accepts that it owed a duty of care to the Fund, it is Hewetts' case that the duty was not a duty to speak, but rather was limited to a duty to exercise due skill and care when speaking (in the form of the COT). Thus, so it is argued, Hewetts did not owe a duty to give the Fund advice. It merely had to exercise the degree of care and skill to be expected of a reasonably competent conveyancer in 2008, when making the statements of fact and setting out the opinions in the COT, when those statements of fact and those opinions are fairly read with any other communications to or from TIL.
- Entirely consistent with the arrangements between the Fund and TIL under which TIL was effectively engaged to provide services that included managing the legal work involved, Mr Smith on behalf of Hewetts argues that it was TIL alone that engaged the solicitor, and on a proper reading of the letter of instruction, TIL alone that requested Hewitts to "proceed in accordance with the CML Handbook". On this basis, so it is argued, Hewetts was not asked to, nor given any means to, communicate with the Fund directly, the only interface being with TIL.
- Mr Smith relies on the decision of the Court of Appeal in Hunt v. Optima (Cambridge) Ltd [2014] EWCA Civ 714, [2015] 1 WLR 1346. This case involved a different situation, and concerned the provision to purchasers of properties within blocks of flats of architect's certificates produced by an architect engaged by the builder of the blocks of flats to carry out inspections. Whilst it was accepted that a wider contractual and tortious duty was owed to the builder, the issue was whether the duty owed by the architect to the purchasers resulting from the provision of the certificates was simply limited to a duty to take care in making the statements contained in the certificate, i.e., whether the architect assumed a responsibility, when speaking, to speak carefully, or whether the architect had assumed a responsibility to speak such that he must therefore be taken to have assumed an independent duty to carry out the work of inspection competently.
- The Court of Appeal held that the architect's duty was limited to one to speak carefully. In reversing the decision of the Court below, the Court of Appeal reminded itself that the genesis of any liability in respect of inspection to purchasers would be the certificate, which contained a series of statements and, therefore, absent a contractual relationship, the basis of liability, and the true cause of action, was for negligent misrepresentation or misstatement applying the well-known principles established by Hedley Byne & Co. Ltd v Heller & Partners Ltd [1964] AC 465.
- As Tomlinson LJ put it in Hunt v Optima at [114] and [115]:
"[114] … Looked at in the light of the formulations in the Hedley Byrne case itself, I do not think that there is any warrant for imposing, or ordinarily any necessity to impose, on a representor a freestanding independent duty of care owed at a stage before he has made a representation. It is the circumstances in which the representation is made or enshrined in a form which can be communicated to a third party which generates the duty, or as I prefer, gives rise to the assumption of responsibility. As pointed out by Lord Devlin in the Hedley Byrne case [1964] AC 465, 529, "responsibility can attach only to the single act, that is, the giving of the reference, and only if the doing of that act implied a voluntary undertaking to assume responsibility"…
… assumption of responsibility for the statement is the touchstone of liability.
115 Naturally I accept that [the architect] owed a contractual duty to carry out the work of inspection competently. I cannot however accept that it is appropriate to regard [the architect] as at that stage assuming a like responsibility to those to whom certificates might one day be issued."
- Thus the present issue is, as I have said, whether Hewetts was subject to a wider "Bowerman" duty, akin to that owed to TIL which had formally retained Hewetts, which might have involved an obligation to speak, or whether the duty was a more limited one, namely to exercise reasonable skill and care when speaking in the form of the COT.
- What I gain from Hunt v Optima is that what is key to the resolution of this issue is the answer to the question as to what Hewetts can properly be said to have assumed responsibility for, namely whether it was simply the making of a series of statements in the form of the COT, in which case assumption of responsibility for those statements would be the touchstone of liability, or whether Hewetts assumed responsibility for something more? Thus it is necessary in my view to consider what Hewetts can properly be said to have assumed responsibility for.
- I am not greatly assisted by what Mr Butcher, himself, had to say under cross- examination, and in an attempt to reconstruct what he might have thought at the time, as to what he had assumed responsibility for. I heard no evidence from other solicitors involved in these sorts of transactions, who may well have expressed a different subjective view. To the contrary, in a limited sense, the fact that Mr Butcher's own focus, at the time, plainly was upon TIL is informative because it provides an indication as to how he read his instructions at the time.
- In my judgment, absent special circumstances, solicitors such as Hewetts, acting in circumstances such as the present, did not owe to the Fund the wider "Bowerman" duty contended for by the Fund, but rather owed a duty limited to exercising due skill and care when speaking in the form of the COT. The following considerations lead me to this conclusion:
76.1. The transaction as between TIL and the ultimate borrower on the one hand, and the transaction as between the Fund and TIL on the other hand, were each different transactions involving different lending considerations and decisions. This was recognised by Mr Davies in his highlighting of the fact that the Fund's concerns were its security over the property and the guarantee provided by TPlc. Thus the Fund was not concerned with the personal attributes of the borrower, and in the instant case with the fact that TIL was lending to the Borrower an amount in excess of 95% LTV. Further, apart from the fact that the solicitor would be aware that the Fund was taking security over the relevant property, the solicitor was not privy to the basis upon which the Fund was taking and making its lending decision.
76.2. Under the way the relevant arrangements were documented and structured, it was TIL that was responsible for instructing and dealing with the solicitor, and not the Fund, and as Mr Davies frankly admitted, the Fund was unaware as to the basis on which the solicitor was being instructed. Further, the language of the instructions given by TIL to the solicitor was such as to emphasise that the instructions were being given by TIL, albeit that those instructions included certain requirements, such as the completion of the COT and various security documents, for the benefit of the Fund. Thus, for example:
76.2.1. The letter of instruction, and certainly that dated 13 August 2008 used in the present case, in the first paragraph thereof, uses the word "we" in a context that can only refer to TIL because it refers to the "we" as having agreed to provide the solicitor's client with finance facilities. It then talks in terms of acting for "us".
76.2.2. In the same letter, the reference to proceeding in accordance with the CML Handbook is in the context of a paragraph asking the solicitor to "also attend to the security perfection formalities on our behalf and act for us to ensure that we obtain first legal charges…"
76.2.3. Whilst the same letter does refer to including a sub-charge in favour of the Fund and form 395 duly completed, and asks that these be registered at Companies House and H M Land Registry, the reference to the report on title is not specifically linked to the Fund, and the solicitor is simply asked to "return this duly signed once you are in a position to do so".
76.2.4. Again, the accompanying "Note to solicitor" refers to acting for "us as well as your client in the perfection of our security", and although referring to the need to register the sub-charge etc., refers to drawing "our" attention to any inconsistencies as soon as possible so as to enable the solicitor to complete the COT. This is, to my mind, expressly inviting the solicitor to raise matters with TIL and not the Fund.
76.2.5. Further, paragraph 9 of the "General Instructions" accompanying the letter of instruction refers to advising "the Bank" which, in the context of this documentation as a whole, seems to be a reference to TIL, and not the Fund.
76.3. As Mr Davies' evidence as to actual practice demonstrated, given the way that the Fund operated, the only role for the solicitor vis-à-vis the Fund, apart from attending to certain formalities concerning the securities taken by the Fund, was to provide a competently completed unqualified COT if able to do so. The Fund had no mechanism or ability to deal with particular issues raised by the solicitor arising from the COT, the obvious expectation, it seems to me, being that these were matters to be dealt with by TIL in managing the legal work. That being the case, it seems to me that a solicitor involved in a transaction such as the present has done no more than assume a responsibility to do competently that which was expected of him or her by the Fund, namely to act competently in completing the COT, i.e. to act competently in speaking to the Fund through the COT, but being under no obligation to speak beyond that.
76.4. It would always have been open to the Fund to have expressly required more of the solicitors involved in the process, and to have designed documentation that made it clear that they were assuming a greater responsibility than I have found that they did assume.
- I have considered whether some more onerous duty was imposed on Hewetts in the circumstances of the present case given that TIL was funding the purchase by the Borrower of a property being sold by TLL, another subsidiary of TPlc, giving rise to a potential conflict of interest between TIL and the Fund that would not have existed in other transactions. I note that in his evidence, Mr Bloomfield stressed the particular commercial considerations behind TIL funding this particular transaction that might have explained it departing from its usual lending criteria, e.g. as to the LTV at which it was prepared to lend. However, bearing in mind the Fund's own lending criteria as explained by Mr Davies, and the emphasis on the security over the property and the LTV at which the Fund was lending to TIL, and the guarantee provided by TPlc, I am not persuaded that this imposed any additional obligation on Hewetts particularly given that the COT itself identified that the Borrower was "Buying from Tiuta as mortgagee in possession" in answer to a question designed to identify a conflict such as this and expose a transaction that was not at arm's length.
D. THE PRESENT TRANSACTION
(a) The history of the Property
- The building on Parker Street, Liverpool ("the Building") of which the Property forms part has something of a complex history.
- The Building. The Building comprises a basement, ground and 5 upper floors, with a roof/roof space on top. The freeholder is (or was at any rate at all material times) the Liverpool City Council ("LCC").
- In their valuation report dated 20 August 2008 produced for the purposes of the transaction the subject matter of this action ("the CJ Valuation"), Copping Joyce stated that the Building had been built at the turn of the 20th century, although the title documents suggest it may have been in the 1920's. The basement, ground and first floor had enjoyed profitable retail use (Superdrug was a tenant), but the upper floors had been vacant since the 1970s.
- The Superior Lease. Pursuant to a lease dated 29 January 1925 ("the Superior Lease") the whole of the Building was demised by the LCC to S Reece and Sons Limited for a term of 999 years. This long leasehold title was registered at HM Land Registry (title no: MS80313), and the relevant Office Copy Entries ("OCE") were obtained by Mr Butcher in September 2008 and were before the Court. This long leasehold title was registered as 'Good Leasehold' rather than 'Title Absolute'.
- The Superior Lease contained a restrictive covenant in favour of adjoining buildings prohibiting the erection of any building on the land shaded yellow on the plan annexed to the Superior Lease where its height was greater than buildings standing on that part of the plan marked green and grey. The Superior Lease also required that consent to structural alterations to the Building be obtained from the Superior Landlord.
- City Retail Investments Limited (CRIL). By no later than July 2003 CRIL, a development company, had become the Superior Tenant and had appointed Mishcon de Reya to act for it on property matters. Through the services of Mishcon de Reya, CRIL obtained defective title insurance in respect of the Good Leasehold quality of the leasehold title.
- C R IL's plans for the Bui ldi ng. As at late 2004 CRIL's plans for the Building comprised the following steps:
84.1. It wished to sell the Superior Lease to Legal & General Assurance Society Limited ("L&G"), which was interested in the rental income from Superdrug's occupation of the basement, ground and first floors of the Building.
84.2. It wished to take a long lease of the 2nd to 5th floors of the Building and it wished to undertake (or at least have the entitlement to undertake) a residential development scheme involving the 2nd to 5th floors and a new 6th floor to be constructed in the roof space of the Building.
84.3. As such, CRIL wished to be entitled to a separate long lease of the 6th floor, once constructed.
- CRIL's plans were reflected in the following documents:
85.1. Sale agreement between CRIL and L&G – On 23 December 2004, CRIL and L&G entered into the agreement, whereunder:
85.1.1. L&G agreed to acquire CRIL's interest in the Superior Lease for £11.8m (subject to adjustment);
85.1.2. CRIL agreed to carry out "Separation Works", namely building works to separate the Superdrug parts of the Building (basement to 1st floors) from the 2nd to 5th floors;
85.1.3. Upon conclusion of those building works, Superdrug would be granted a new underlease of the separated lower floors, and CRIL would be granted a new underlease of the 2nd to 5th floors.
85.2. The Option Agreement – On 20 January 2005, L&G and CRIL entered into an Option Agreement the essence of which was as follows: The Option had a 10-year duration, ran with CRIL's underleasehold interest in the 2nd to 5th floors and was for the benefit of CRIL's successors in title (clause 4.1), and was to be and was the subject of a Unilateral Notice registered at HM Land Registry and as shown on the OCE.
85.2.1. If the Option were exercised, then the relevant parties were bound to enter into the Agreement for Underlease which provided, in outline, that:
85.2.2.1. CRIL (or its successor) would carry out development works including the construction of a new 6th floor; all in accordance with plans that would require prior approval by L&G before submission to the planning authority (paragraph 3 of Schedule 2).
85.2.2.2. (Amongst other terms to protect L&G's interest in the Building) CRIL (or its successor) was not entitled to commence the works without providing "such security for performance of its obligations under this agreement as is acceptable to [L&G] acting reasonably" (paragraph 15 of Schedule 2).
85.2.2.3. Upon practical completion of the works, L&G (or its successor) was obliged to grant to CRIL (or its successor) an underlease in the newly constructed 6th floor, that lease being essentially in the terms contained in the draft attached (clauses 4 and 5), the underlease of the sixth floor being in materially identical terms as CRIL's underlease of the 2nd to 5th floors (referred to in paragraph 87 below).
- Various events then took place in the summer of 2006 relating to CRIL's prospective development works.
- The Underlease of the 2nd to 5th floors. By an Underlease dated 5 May 2006, L&G sub- demised the Property (i.e. the 2nd to 5th floors of the Building ) to CRIL for a term of 910 years. Title to this underleasehold term was registered at H M Land Registry (title number MS521526). Again, when instructed in 2008, Mr Butcher obtained the OCE relating thereto. It is relevant that:
87.1. As with the Superior Lease, the underleasehold title was registered as 'Good Leasehold' rather than 'Title Absolute'.
87.2. The OCE recorded that: "The value stated as at 5 May 2006 was £2,500,000". In fact, CRIL had not paid anything to L&G for the Underlease (rather, as I have said, L&G, as above, had paid £11.8m for the Superior Lease). The lending file of the Tiuta Group shows that Edward Symmons, the well-known valuation firm, had valued CRIL's interest in the Property at c £2.4 million or thereabouts in mid- 2006.
87.3. Clause 3.10.1 of the Underlease provided that CRIL "shall not make any structural alterations or additions" to the Property "without the consent of the Landlord (which consent is not to be unreasonably withheld or delayed)".
87.4. Clause 3.10.2 of the Underlease prohibited tenant's exterior alterations to a particular part of the Property shown hatch hatched green on the plan attached. In the event, CRIL's residential development scheme (as referred to in the CJ Valuation) did not involve any alterations to this part.
87.5. Clause 3.11 of the Underlease contained "Restrictions on user" but permitted (amongst other use classes) use as "residential apartments".
87.6. Clause 3.22 of the Underlease made clear that CRIL needed to obtain any relevant consents from the Superior Landlord as required under the Superior Lease.
- C R IL's pl anning permis sion for r esidenti al dev elopm ent . Having sold the superior leasehold title to L&G in 2004, CRIL took steps to obtain planning permission for conversion of the 2nd to 5th floors and erection of a 6th floor, all to form 35 residential apartments. LCC, in its capacity as the Superior Landlord, consented to the development scheme. There is no evidence that L&G, as the new mesne landlord, also consented, but it would be very surprising if this consent had not also been obtained.
- The Council, in its capacity as planning authority, granted planning permission for the relevant scheme on 24 May 2006. Conditions were attached to the permission which Copping Joyce (in the second paragraph of the CJ Valuation, which was seen by TIL/TPlc and by Mr Davies/CAM) described as "generally of a standard nature for the type of development proposed with nothing of an unusual or onerous nature adversely affecting value". Pursuant to these conditions, development was required to be commenced by 24th of May 2009, or the consent would lapse.
- Further, LCC required CRIL to enter into a s106 Agreement ("the s 106 Agreement") as a condition of grant of planning permission. As to the terms of the s 106 Agreement, so far as is relevant for present purposes:
90.1. By clause 2 and the Fourth Schedule thereof, CRIL covenanted to pay a "Commuted Sum". By clause 1 and the Third Schedule, development could not commence until the sum were paid.
90.2. By clause 4.4 thereof, any obligation to pay the Commuted Sum would lapse if development were not commenced by 24 May 2009.
90.3. By the Fourth Schedule, if the Commuted Sum were paid within 1 year of the s106 Agreement, it was fixed at £35,000. Otherwise the amount was index linked.
90.4. It follows that the only relevant binding obligation on CRIL's part was that if the planning permission were not to lapse, then it had to commence development no later than 24 May 2009, and, it was required to pay the Commuted Sum immediately prior to that commencement. As Mr Smith on behalf of Hewetts points out, non-payment was not per se a breach at all and did not invalidate the planning permission.
- Further steps relating to title indemnity insurance. CRIL obtained an amendment, recorded by way of an endorsement dated 21 July 2006, to its title insurance policy as to the quality of the leasehold title (see paragraph 83 above); so that the policy explicitly covered CRIL's interest in the Underlease over the 2nd to 5th floors.
- On 11 August 2006, title indemnity insurance was also obtained in respect of the restrictive covenant in the Superior Lease referred to in paragraph 82 above relating to the height of the Building. As Copping Joyce were later to observe in the CJ Valuation, there was reason to believe that the Building might have been built in breach of the covenant. The cover obtained was designed to cover the risks arising from a breach of this covenant in the context of the proposed development. The relevant policy schedule contained an express warranty in respect of the development works in the following terms: "It is hereby warranted that the property shall be developed to incorporate an additional floor to be built within the existing roof area of the building at the Property".
(b) The background to the tran saction f ro m th e T iu ta Grou p 's persp e ctive
- In or around August 2006, and at about the same time as the granting of the Underlease, Tiuta Funding Limited lent CRIL £800,000. Mr Cook, of Hobson & Arditti, acted as Tiuta Funding Limited's solicitor at this time.
- By January 2008 this bridging finance had been taken over by TLL, whose exposure was £963,950 or thereabouts. By July 2008 TLL's exposure had risen to £1,106,000 odd as revealed by an email dated 28 July 2008 from Tim Nichols of the Tiuta Group to Steven Nicholas, Gary Booth and Charles Baba. At the time that TLL took over this loan, Copping Joyce had prepared a valuation report valuing CRIL's leasehold interest in the Property (2nd to 5th floors) and the residential development opportunity comprising the construction of an additional 6th floor at £1,525,000.
- In April 2008, at a time of increasing difficulty in the property market, CRIL became insolvent before having either commenced the residential scheme or having sold on the opportunity (together with the benefit of the Option Agreement). This left TLL with the Property on its hands as mortgagee in possession.
- It is, in my judgment, reasonable to assume that the key individuals in the Tiuta Group, including those referred to in paragraph 94 above, would have become aware that the Property had been valued by Edward Symmons in 2006 at £2.4m or thereabouts.
- The Property and the development opportunity, in TLL's hands as mortagee-in- possession, had a difficult marketing history. As at July 2008 an offer to TLL of £725,000 had been made "based on residential usage", but the bidder withdrew after further due diligence "because market dropped since May and they had underestimated costs" – see the email dated 28 July 2008 referred to in paragraph 94 above.
- Further, it had come to light that there was evidence of asbestos at the Property as appears from an email dated 16 September 2008 from Robert Diggle of Edward Symmons to Steven Nicholas wherein reference is made to an asbestos report that had been obtained that Robert Diggle was intending to send to Steven Nicholas. Further, there is evidence in the form of an email dated 11 August 2008 that the relevant representatives of the Tiuta Group had in mind that there was an obligation to pay the Commuted Sum under the s106 Agreement and that it was not yet known whether it had been paid. In addition, there is evidence in the form of an email dated 18 April 2008 that the relevant representatives of the Tiuta Group were aware that L&G had policed the user clause in the Underlease (clause 3.11) so that, for example, it had demanded a premium for a suggested change to hotel use.
- However, fortuitously, on or about 11 August 2008 TLL (and the Tiuta Group) was able to agree terms for a sale of the underleasehold interest in the Property with Alan Wall, a developer with whom the Tiuta Group had extensive experience, and who the Tiuta Group regarded as a successful developer. Gary Booth managed, on behalf of TIL and TLL, to reach a form of joint venture agreement with Mr Wall under which, in essence:
99.1. TIL would lend £1.3m to the Borrower, an asset-less shelf company acquired by Mr Wall;
99.2. The relevant loan would be on a 12-month bridging basis (but extendable) with a commensurately high rate of interest;
99.3. The Borrower would pay TLL £1.14m to acquire the Underlease title to the Property. This was calculated as a 25% discount to Copping Joyce's 2008 valuation of £1,525,000 on the basis of a "quick sale".
- This arrangement would enable TLL to pay off its subordinated lender, Clydesdale Bank Plc, with TIL's replacement money used to make the advance to the Borrower being borrowed from the Fund (which had started to lend to TIL in June of 2008). Mr Wall would then "go and work my magic" (see the email from Mr Wall to Gary Booth dated 29 August 2008 (13:02pm)) in order to enhance or augment the value of the development opportunity, it being agreed between TIL and Mr Wall/the Borrower that the profit, after all expenses, would be shared equally with TIL on a 50/50 basis.
- Mr Wall explained the arrangement as follows in an email to Mr Butcher dated 14 August 2008:
"The bank has given me an excellent opportunity to work with them as a consultant to their property requirements and I take this as a big compliment. Its almost like a trouble shooting role, where I look after their difficulty [sic] assets and work out a plan of attack for them, ultimately to remove any problems and make the projects work. This will be via an independent Ltd company that acquires the sites and then I am charged with turning them around and securing an uplift I valuation [sic] and then disposing of the property".
- The terms agreed were recorded in an annotated email dated 11 August 2008. In the event, as set out in the relevant signed Facility Letter, all interest was rolled up such that it was payable at the end of the loan.
- Mr Wall submitted an application form dated 12 August 2008 to TIL/TPlc. This was in somewhat sketchy terms.
- The proposed loan to the Borrower was outside TIL's/TPlc's usual lending criteria in a number of respects:
104.1. The agreement concluded between Gary Booth and Mr Wall, and the 25% discount agreed, was initially predicated on the basis of a valuation of the Property at £1,525,000. However, when the CJ Valuation subsequently valued the underleasehold interest in the Property at £1,366,500, this meant that TIL was proposing to lend at 95% LTV, i.e., significantly above its own internal maximum of 60% LTV for commercial bridging loans that did not amount to "closed bridges". Further, the rolled-up interest should have been deducted from the loan advance if (as was the case) MRFL could not meet 'Affordability' criteria. With the interest added (5 instalments of £21,450), the loan exceeded 100% LTV;
104.2. Mr Wall had an outstanding county court judgment, and MRFL had a £0 credit rating, but Tiuta Group's written underwriting procedures required "clean credit only – no CCJ's defaults [sic]";
104.3. There was significantly less than 12 months left to run on the residential planning permission. The Tiuta Group's policy was not to lend in these circumstances, and also where, as here, lending was to be secured against a steel framed property and the existing lender was another bridging loan provider.
- There was one particular not insignificant respect in which the loan was within the Tiuta Goup's lending criteria. The discount on the purchase price to the anticipated value (of 25%) was within underwriting criteria as regards transactions at an undervalue. In the event, the discount was much less, namely 16.5%. The drop in % arose from Copping Joyce's lower valuation of £1,366,500 in the CJ Valuation – a drop of £158,500 (10%) in 7 months, most likely indicative of the state of the property market in the second half of 2008.
- TIL/TPlc recognised that the loan was outside its own criteria as evidenced by its "Initial Proposal Assessment" dated 12 August 2008. In the box marked, "Outside Criteria? Why? Agreed with who and when?", the underwriter has written "Agreed by Gary Booth". However, for the commercial reasons explained by Mr Bloomfield in his evidence on behalf of the Fund, there were good commercial reasons for TIL to proceed notwithstanding. The motivation is revealed by what Gary Booth said in an email dated 27 August 2008 to Ms Kalyan, the in-house lawyer at the Tiuta Group:
"Due to the profit sharing nature of the deal please try to accommodate Alan as much as possible in terms of the contract and structure."
(c) Hewetts' involvement and the history of the lending transaction between the Fund and TIL
- Mr Butcher of Hewetts was named as the Borrower's solicitor in the application for a loan submitted by Mr Ward/the Borrower to TIL/TPlc on 12 August 2008.
- On 13 August 2008, TIL formally offered the Borrower a facility of £1,300,000 to be secured on the Property ("the Loan"). The terms were set out in a facility letter of that date.
- On the same day, Ms Kalyan having made initial contact with Hewetts by email, TIL sent to Hewetts the letter of instruction dated 13 August 2008, referred to in paragraph 48 above. This was accompanied by the documents referred to in paragraph 48 above, the facility letter therein referred to being the offer of advance made by TIL to the Borrower, and the report on title being a draft bespoke COT which named TIL and the Fund as recipients.
- On 20 August 2008, TIL obtained the CJ Report from Copping Joyce ascribing a market value of £1,366,500 to the Property.
- On 3 September 2008, Hewetts obtained from GroundSure Environmental an environmental report in respect of the Property ("the GroundSure Report").
- On 12 September 2008, Mr Butcher completed and signed the COT in respect of the Property and forwarded it to TIL. The COT was un-amended and unqualified. I set out in paragraph 119 below the relevant terms of the COT as completed by Mr Butcher.
- On 16 September 2008, the Borrower accepted the terms of the Loan.
- On 16 September 2008, TIL applied to the Fund for a drawdown to enable it to make the Loan to the Borrower, doing so by submitting to the Fund a pack ("the Drawdown Pack") comprising a Utilisation Pack Front Sheet similar to that referred to in sub- paragraph 36.3 above, and the required accompanying documentation which included the completed COT and a Revolving Credit Facility Letter addressed to CAM that identified the loan applied for in the sum of £1,093,200, namely 80% of the market value of £1,366,500, and requested the release of the sum of £1,093,200 by payment into a bank account in TPlc's name. It should be noted that the facility letter dated 13 August 2008 was subsequently amended after a copy thereof had been sent to Hewetts with the letter of instruction dated 13 August 2008. A copy of this amended facility letter (still dated 13 August 2008) was included in the Drawdown Pack.
- On 17 September 2008 Mr Davies considered the Drawdown Pack. He completed the Release Approval Form (of the kind referred to in sub-paragraph 36.3 above) circling 'yes' in response to question 5.2: "Does the Solicitor confirm a good freehold or leasehold title?", and he approved the request for the drawdown. The Fund thus permitted a drawdown on the Facility of £1,093,200 to TIL ("the Drawdown").
- It should be emphasised that:
116.1. The Drawdown was £1,093,200 and this was a drawdown on the facility between the Fund and TIL. The only parties to this transaction were the Fund and TIL. It is in respect of this transaction that the Fund claims that it has suffered a loss for which Hewetts is liable.
116.2. TIL used this funding towards funding its own advance of £1,300,000 to the Borrower. The only parties to this transaction were TIL and the Borrower.
- On 18 September 2008 the Loan was secured by a legal charge from the Borrower in TIL's favour and the Drawdown was secured by a sub-charge from TIL in the Fund's favour. Both charges were registered with the Land Registry on 14 October 2008. In addition the Fund had the benefit of the debenture that had been granted by TIL on 16 April 2008, and duly registered. In addition, of course, the Fund had the benefit of the guarantee provided by TPlc.
- Subsequently:
118.1. On 1 February 2012, the Borrower requested an extension of the Loan.
118.2. On 5 July 2012, TIL entered into Administration.
118.3. On 14 December 2012, D&P, acting as Administrators of TIL, made a formal demand for the repayment of the Loan from the Borrower.
118.4. On or around 20 December 2012, D&P appointed fixed charge receivers over the Property.
118.5. On 14 October 2013 the Property was sold at auction for £484,000, and on 7 November 2013 the sale of the Property was concluded.
(d) The COT
- It is necessary to set out the terms of the COT as completed by Mr Butcher in some detail:
119.1. The COT is expressed to be addressed … "To: Tiuta International Limited and the Guaranteed Low Risk Income Fund Series 1".
119.2. There are then two columns, the column first is headed - "This column confirms instructions and questions for the Borrowers"; the second column is headed - "This column is for the Borrower's solicitor to insert responses to the instructions and questions".
119.3. The relevant parts of the COT were then completed as follows:
1.1 "The Borrower benefiting from the Facilities intended to be provided by the Bank is" – to which Mr Butcher responded "Mansfield Road Freehold Limited". Underneath this part of the form appears the following wording "In this Report liabilities shall mean all sums due and to become due by the Borrower to the Bank"
1.3 "If the sale of the Property to the Borrower is not at arm's length provide details" – to which Mr Butcher responded "Buying from Tiuta as mortgagee in possession"
1.4 "Where it is shown on the title register, or apparent from the deeds, provide the date and consideration of the last sale of the Property" – which Mr Butcher left blank
2.3 "You have reviewed the valuation report obtained by the Bank. You are asked only to consider the description of the Property within the valuation report. Detail any obvious inconsistency between this description and the title to the Property" – to which Mr Butcher replied "Address is correct"
2.5 Please state the current use of the Property as told to you by the Borrower" – to which Mr Butcher responded "Planning for 35 units"
2.6 "Please state the Borrower's intended use of the Property if different from the current use" – which Mr Butcher left blank
119.4. Part 3 of the COT contained a number of undertakings ("the Undertakings") that were to be given by signing the COT, the most relevant of which for present purposes are the following:
"1. In completing and executing this Certificate we acknowledge that the Bank is relying upon the terms of this Certificate in providing the Facilities to the Borrower. We acknowledge a duty of care to the Bank, and confirm we have carried out priority searches in the Bank's name, wherever appropriate. In the case of a purchase, we are not acting on behalf of the seller.
…
3. On the basis that we have investigated the title of the Property in the manner which current good conveyancing practice dictates that a competent solicitor would regard as necessary to enable him/her to give this Certificate, we confirm that:
3.1 the Borrower will at Completion:
3.1.1 have a good and marketable title to the Property free of any charge ranking prior to the Bank's and of any overriding interests, restrictive covenants or other incumbrances which could have a reasonably foreseeable and materially adverse effect on such title;
3.1.2 be entitled to use the Property for its current and intended use as told to us by the Borrower free of restriction; and
3.1.3 be solely entitled to the Property;
…
3.4 there are no unduly onerous burdens or conditions in the titles or otherwise which affect the current or intended use as told to us by the Borrower of the Property;
3.5 the Borrower has not told us of any circumstances suggesting that the Property is or has been sold at undervalue or which may be likely to have any transaction relating to the Property set aside;
…
4. In this clause, the following definitions apply:
"Environmental Matters" means the treatment, removal or other operation whatsoever relating to the environment, toxic substances, controlled waste or generally any matter affected by any law or statute which relates to the protection of the environment and for the health and safety of any human and other living organism.
"Ancillary Matters" means building consents, planning consents, regulatory consents or other documentation relating to matters which pertain to the marketability of a property but not intrinsic to the title of that property.
4.1 From all reasonable enquiry, no order, formal notice or letter, or informal notice or letter has been issued in respect of the Property relative to Environmental Matters.
4.2 From enquiries of the seller and the Borrower, there are no uses to which the Property has been put, or affected by, that are reasonably likely to induce attention from regulatory or other authorities in respect of the Environmental Matters.
4.3 We have investigated all Ancillary Matters that good practice would reasonably dictate as necessary for the Property and there are no results from such investigations that are likely to adversely affect the ability of the Bank to obtain the best price reasonably obtainable for the Property if it exercises the power of sale contained in its legal mortgage.
…
11. We shall advise the Bank in writing before the Facilities are utilised or Completion effected if any of our answers to Parts 1 and 2 of this Certificate would be different. We shall not utilise or draw upon any of the Facilities until the Bank shall have approved in writing such different answers".
E. THE FUND'S ALLEGATIONS OF BREACH OF DUTY AND NEGLIGENCE AGAINST HEWETTS
(a) Introduction
- The Fund's allegations of breach of duty of care or negligence are set out in subparagraph 4.2 of the Re-Re-Amended Particulars of Claim. They are then expanded upon as set out in the Fund's Re-Amended Reply to the Defendant's Part 18 Request ("the Part 18 Reply"). There are, in essence, 9 distinct allegations of breach of duty or negligence that I deal with in turn.
- The Fund alleges that the various breaches of duty involved breaches of the CML Handbook and the Solicitors' Practice Rules. Paragraph 10.1 of the CML Handbook is relied upon by the Fund as having overarching application. This provides that: "You should not submit your certificate of title unless it is unqualified or we have authorised you in writing to proceed notwithstanding any issues you have raised with us."
(b) Undervalue
- The allegation is that the Property was sold by TLL to the Borrower at an undervalue, and that the COT should have been qualified to reflect that there had been a sale at an undervalue so that the Fund was informed of this position. It is alleged that paragraph 3.5 of the Undertakings should have been qualified to say that there were circumstances suggesting a sale at an undervalue of £226,500, and that had such qualification been made, then the Fund would not have made any loan to TIL. Reliance is also placed upon paragraph 5.1.2 of the CML Handbook.
- In paragraph 26 of his witness statement, Mr Butcher sought to justify his approach at the time by reference to the fact that the Borrower "was providing additional consideration in the form of a share of future profits on development". However, in the course of cross-examination, he rather distanced himself from this as an explanation, and accepted that if he had thought that there was additional consideration for the purchase, any such additional consideration would have had to have been disclosed on the COT. I consider this to be one of those instances where Mr Butcher has honestly sought to recall why he acted as he did, but that he has reconstructed an explanation which, ultimately, did not stand up to scrutiny.
- In a similar way, Mr Butcher distanced himself from the explanation given in paragraph 27 of his witness statement by reference to the Law Society's Conveyancing Handbook A/4/128. Mr Butcher did, however, come up with another explanation in the course of cross-examination that had not been mentioned in his witness statement, namely that he had relied upon what had been said in the CJ Valuation with regard to market conditions. Although Ms Smith suggests that Mr Butcher was unable to point to any passage in the CJ Valuation which assists him on this point, and that I should reject this explanation because it had not been referred to in Mr Butcher's witness statement, it is an explanation that did, in my judgment, make more sense than Ms Smith gave credit for. On page 12 of the CJ Valuation, it is said that: "Locally the Liverpool market has conformed with wider trends with the weaker market conditions in 2008 affected by a lag of over pricing and the effects of the credit crunch and general slowing down of the economy, which has led to extended marketing periods. Local agents report a slowing market due to an over supply of flats within the Liverpool city centre which is reflected in extended marketing periods and falls in prices …" I am inclined to accept what Mr Butcher had to say in this respect, notwithstanding that it was not referred to in his witness statement, in that I can see that Mr Butcher might well have concluded that, against the background of the market conditions so described, a purchase price might well have been negotiated that was below the valuation contained in the CJ Valuation that Copping Joyce subsequently provided.
- It is fair to say that, in the course of giving evidence, Mr Butcher accepted that his obligations in completing the COT required him to report on the potential of a sale at an undervalue whether or not there was a danger of a clawback, and he did appear to accept that he was not in a position to form a view as to whether there was a risk of clawback because he had not sought the relevant information. Ms Smith relies upon what she says is an important concession in relation to the Fund, namely his answer "yes" to the following question put to him by Ms Smith: "… As a competent solicitor, you would have needed to make sure that if there was a potential of a sale at an undervalue, you drew it to the Fund's attention; you didn't leave it to them to divine it from the documents that you sent to them. That's what you needed to do, wasn't it?"
- So far as Mr Davies was concerned, the facts said to demonstrate a sale at an undervalue were put to him, and the essence of his response was to the effect that this is not something, in itself, that would have troubled the Fund. However, what he did say is that if Mr Butcher had raised the issue by way of qualification of the COT then, given the way that the process operated as I have already described, he would have been bound to reject TIL's application for the advance ultimately made to it.
- The essence of the defence to this allegation is that the starting point is the precise wording of the Undertaking at paragraph 3.5 of the COT, which raises a specific issue in relation to undervalue, or the risk of the transaction being set aside as an undervalue, namely whether the Borrower (as its client) had informed Hewetts "of any circumstances suggesting" the latter. It is said that, in those circumstances, and particularly having regard to the true extent of the duty that Hewetts was subject to vis- à-vis the Fund, namely a duty to exercise due skill and care in speaking, but not to speak, there was no obligation on Hewetts to inform the Fund that which it already knew, namely that the Property had been valued at £1,366,500 (the Fund had a copy of the CJ Valuation), and that the price being paid by the Borrower was £1,140,000 (because the COT so stated).
- I accept Hewetts' submissions on this point, and, in the circumstances, would have been inclined to do so even had I reached a different view, in the Fund's favour, in respect of the scope of the duty of care and agency issues. For whatever reason, paragraph 3.5 of the Undertakings in the COT was worded in the way that it was. That Undertaking, itself, was truthfully given, and did not require any qualification. There is nothing to suggest that the Borrower had informed Hewetts of any circumstances suggesting an undervalue, or that the relevant transaction was open to challenge. There was nothing that Mr Butcher knew that the Fund (or TIL) did not know. Further, in these circumstances, there cannot, as I see it, be any question of paragraph 5.1.2 of the CML Handbook being engaged to require Mr Butcher to draw anything in respect of a potential undervalue to the specific attention of the Fund.
- In these circumstances, and in this respect, I consider that the COT was completed with due skill and care, and the skill and care to be expected of a reasonably competent solicitor, and that there was no additional duty to speak to the Fund in respect of the issue of undervalue.
- I have, of course, taken into account the concessions made by Mr Butcher in the course of his cross-examination. However, for the reasons that I have already given, I do not consider any concessions that he might have made in the witness box to be binding upon me in the sense of leading me to a different conclusion than as set out above. Having considered all the evidence in respect of the allegation, I am not persuaded that a breach of duty/negligence is established by the evidence.
- Consequently, in short, I find that the Fund has failed to establish this first alleged breach of duty in respect of a sale at an undervalue.
(c) Prior sale of the Property for £2,500,000
- The allegation is that there had been a prior sale of the Property on 16 May 2006 for £2,500,000, and that the prior sale history should have been reported to the Fund so that the information could be referred to an independent valuer if the Fund wished. It is alleged that the relevant section of the COT, paragraph 1.4, should have been completed so as to particularise this information, rather than being left blank. Reliance is again placed on paragraph 5.1.2 of the CML Handbook.
- In fact, there was no sale of the Property for £2,500,000 on 16 May 2006 as such, as CRIL disposed of the superior leasehold title to L&G for £11,800,000, and, on 5 May 2006, had been granted an Underlease of the Property without the payment of any premium. However, at about that time, the underleasehold interest had been valued by Edward Symmons, and this is understood to have led to it being recorded on the registered title, and therefore referred to in the OCE, that: "The value stated as at 5 May 2006 was £2,500,000".
- Given that there had been no sale of the Property as such, it may not, strictly, have been inaccurate to leave paragraph 1.4 of the COT blank. However, Mr Smith, on behalf of Hewetts realistically recognised that but for the agency point, it would amount to a breach of the duty of care owed to the Fund not to have completed paragraph 1.4 so as to have referred to the value as at May 2006 as is recorded in the OCE, which Mr Butcher had a copy of.
- This thus begs the question as to whether the agency relationship between the Fund and TIL that I have found to exist was such that Hewetts was absolved from any liability for not fully completing the COT if the matter in question related to information that was already known to TIL.
- As to whether the relevant information was already known to TIL, Ms Smith challenges this on the basis that although another company or other companies within the Tiuta Group might have known about what was revealed by the OCE, there was no actual evidence that TIL did so. As to this, I have to say that, given my findings in respect of the set up of the Tiuta Group as referred to in paragraph 15 et seq above, I have had very little difficulty in concluding that if one company within the Tiuta Group was aware thereof, then TIL must be taken to have been aware thereof as well.
- However, I am not satisfied that the nature of the agency relationship in question was such as to absolve Hewetts. The COT was designed to convey at least a certain level of information to the Fund in order to enable it to reach its lending decision. It does seem to me therefore that it was at least incumbent upon Hewetts to complete the COT by answering each of the questions posed. Given the concession that paragraph 1.4 did admit of an answer by reference to the figure of £2,500,000 referred to in the OCE, I consider that it was incumbent on Hewetts to answer that question by reference thereto, not least because it did potentially indicate a transaction at an undervalue.
- Consequently, I find the breach in respect of this second head is established irrespective of whether or not TIL was the Fund's agent.
(d) Planning permission and the £35,000 "comm u ted sum "
- The allegation is that the Property was sold with the benefit of planning permission for the development of 35 residential units, and was subject to the s 106 Agreement, and that Hewetts ought to have qualified the COT to reflect this, and investigated whether or not the "commuted sum" (which was to be paid pursuant to the s 106 Agreement), had been paid. As pleaded (see paragraph 16 of the Part 18 Reply), it is alleged by the Fund that a reasonably competent solicitor would have:
139.1. Informed the Fund in writing that there was a concern that the commuted sum had not been paid, and that there was in consequence a breach of the s 106 Agreement, and that this might affect the marketability of the Property and impact upon the warranty that there was a "good and marketable title"; and
139.2. In the light thereof, qualified paragraphs 3.1.1, 3.1.2 and 3.4 of the Undertakings.
- It is the Fund's case that paragraphs 4.1.3, 5.3.1, 5.3.2, 5.3.3, 5.3.4, and 5.4.1 of the CML Handbook, and paragraphs 29(i) and (ii) of the Solicitors' Practice Rules are engaged.
- It is fair to say during the course of the trial, and in a particular in closing submissions, the focus was very much on the £35,000 commuted sum, and the wider allegation concerning an alleged failure to qualify the COT to refer to the planning consent was not actively pursued.
- Mr Butcher did not know if the commuted sum had been paid, and accepted that if the sum was not paid, then the Borrower could not start the development. However, his general approach was that there was nothing unusual or onerous about an obligation to pay a commuted sum of this kind, and that it would be a fairly trifling expense to be incurred as part of the significant development costs that would require to be incurred in order to develop the Property in accordance with the extant planning consent. In this respect, the CJ Valuation identified a gross development value of £4,560,000, and a development cost of £2,200,000, of which £35,000 would represent about 1.5%.
- Ms Smith took issue with Mr Butcher in the course of his cross-examination as to his suggestion that something else that he took into account in forming the view that he did not need to draw attention to the possible non-payment of the commuted sum, was that he did not know for sure that the intended use was planning for 35 residential units, another possibility being the development of a hotel at the Property. In this respect, it will be recalled that in paragraph 2.5 of the COT Mr Butcher had confirmed the "… current use of the Property as told to you by the Borrower" as being "Planning for 35 units". Mr Butcher's suggestion that some other user might have been intended had formed the basis of an unsuccessful application to amend the Particulars of Claim to introduce a further allegation of breach based thereupon. However, the point that Ms Smith did take was that once TIL and the Fund had been told in unequivocal terms that the intended use was "Planning for 35 units", the question of payment of the commuted sum was relevant to the ability of the Borrower to carry out that development, and Mr Butcher was criticised by Ms Smith for failing to investigate whether the Borrower could pay the money. It was therefore argued that in circumstances where Mr Butcher had told the Fund that the intended use was planning for 35 residential units, he could not properly dismiss the issue of the commuted sum by reference to an entirely different (and undisclosed) understanding of the facts, this being inconsistent with the actions of a reasonably competent solicitor.
- It was argued that the sum of £35,000 remaining outstanding was a burden that was capable of affecting the development of the Property and, in the circumstances and absent further investigations by Mr Butcher into the assumption made in the CJ Valuation that the money had been paid, Mr Butcher could not properly sign off on paragraph 3.4 of the Undertakings, and the potential existence of such a burden meant that he could also not sign off in respect of there being a good and marketable title. Further, so it was argued, the commuted sum was a planning matter that should have been investigated as falling within "Ancillary Matters" on the COT and absent such investigation, Mr Butcher could not properly sign off on paragraph 4.3 of the Undertakings.
- In response, Mr Smith on behalf of Hewetts, argued that the answers given by Mr Butcher to paragraphs 2.5 and 2.6 of the COT were perfectly accurate. The current use was as per the existing planning consent, that representing the most immediate intention so far as development was concerned. This is, to my mind, quite right although ultimately it seems to me that it does not have any direct bearing upon this particular allegation as now formulated.
- Mr Smith points out that the non-payment of the £35,000 would not, as suggested by the Fund's pleaded case, indicate any existing breach of the s 106 Agreement, but would merely be an obligation to fulfil before development could commence.
- Mr Smith argued that this particular allegation turns upon paragraph 3.4 of the Undertakings, Mr Smith taking the point that the only obligation under paragraph 3.4 of the COT was to identify "unduly onerous burdens". If the obligation to pay £35,000 prior to commencement of development was not to be categorised as an "unduly onerous burden", then there can have been no breach of paragraph 3.4. Further, if there was no breach of paragraph 3.4, then it could not realistically be suggested that there was breach of the Undertaking relating to good and marketable title, or, the Undertaking at paragraph 4 in respect of Ancillary Matters.
- Mr Smith argued that paragraph 3.4 of the Undertakings conferred on Mr Butcher an element of discretion as to what he considered to be an "unduly onerous burden" and that Mr Butcher was entitled to conclude that the obligation to pay the commuted sum was not such a burden bearing in mind the considerations that I have identified in paragraph 142 above. This approach was exemplified by the following passage from Mr Butcher's cross-examination:
"Q. This was a burden that was capable of affecting the development, wasn't it, because the money had to be paid before the development could take place?
A. But bearing in mind the investment that would have to be put into development, it wasn't an unduly onerous burden.
Q. But that wasn't a decision that you as a solicitor could take, was it? That was a decision for the lender to decide.
A. Well, bearing in mind I knew the amount was being paid and the overall development then yes, I believe I could."
- Although not strictly relevant to the way that the Fund's case was ultimately put, Mr Smith reminded me that the CJ Valuation had referred to the obligation to pay the commuted sum, identified that Copping Joyce had not been informed if the payment had been made, and stated that for the purposes of the valuation they had assumed that it had been paid. Mr Smith submitted that, in the light of this, Mr Butcher could justifiably conclude that both the Fund and TIL were aware that no confirmation had been given that the commuted sum had been paid.
- Further, in this context, Mr Smith referred to an email exchange between Ms Kalyan and Mr Butcher on 16 September 2008 in which Ms Kalyan had sought Mr Butcher's confirmation that the valuation: "is satisfactory and contains no onerous matters that may affect our security", to which Mr Butcher had responded: "…the legal assumptions made by the valuer regarding the lease terms are correct. We can make no other covenant than that".
- There was a somewhat revealing exchange in respect of the £35,000 during the cross- examination of Mr Bloomfield that I regard of some relevance albeit that Mr Smith was exploring another issue, namely whether the Fund might have been guilty of contributory negligence:
"Q. There was a phrase within the valuation report, and I can show you if we need to, but it made reference to a commuted sum of £35,000. And the valuer proceeded on the assumption that that had been paid. But it was clear that it was an assumption. And what I suggest to you is that a prudent fund would have chased up that enquiry to ascertain the position. What do you say about that?
A. I don't think the fund ever set itself out to make those detailed underwriting and details point enquiries. I mean, they expected the partner they tied up with, Tiuta, to make all those things. I am aware of the dispute or issue of this pounds 36,000 (sic), but I mean, in the overall context of this whole matter which involves millions of pounds, it seems to me 36,000 isn't an awfully important amount of money to change anything for anybody."
- Irrespective of any questions of agency, I consider that this particular allegation of breach does, for the reasons advanced by Mr Smith, essentially turn upon paragraph 3.4 of the COT and the undertaking thereat. It is, in my judgment, implicit therefrom that Mr Butcher can only have been under an obligation to qualify that undertaking, if he ought to have concluded that the obligation to pay the £35,000 commuted sum was an "unduly onerous burden". I find that Mr Butcher did, and was entitled to conclude that the obligation in question was not such a burden bearing in mind the factors identified above, in particular that the liability to pay the £35,000 arose on the commencement of development, in which event it would have formed a fairly insignificant part of the overall development costs. It seems to me that Mr Bloomfield really hit the nail on the head in suggesting that this was all rather insignificant.
- In the circumstances, I do not consider that there can have been any breach of the undertaking at paragraph 3.4 of the COT. If there was no breach of this undertaking, I find it difficult to see that there was any breach of any of the other Undertakings. Consequently, I do not consider that it has been established that Mr Butcher failed to exercise due skill and care in speaking through the COT in this respect.
- Even if, contrary to my finding as to the scope of the duty above, Mr Butcher was, in appropriate circumstances, under a duty to speak, I find it difficult to see that he was, in the present context, under any duty to speak or raise the question of the commuted sum, and the obligation to pay the £35,000. I note that Ms Smith identified as one of the reasons why this obligation ought to have been raised that it was relevant to the ability of the Borrower to carry out development. However, as Mr Davies conceded, and as Mr Bloomfield explained, that was not a matter which the Fund had any interest in getting into. In the circumstances, it is difficult to see why Mr Butcher can be criticised for not raising the matter with the Fund if it would have had no interest, at least in this respect, in the information received. Consequently, I consider it difficult to see that any of the provisions of the CML Handbook relied upon provide any assistance to the Fund in the particular circumstances of the present case.
- I therefore find that this third allegation of breach is not made out.
(e) Restrictive covenant with regards to height
- The Fund's case is that:
156.1. The CJ Valuation identified that there had been a breach of the restrictive covenant in the Superior Lease in favour of the adjoining property preventing the Building, and hence the Property, from being built higher than a neighbouring property;
156.2. Hewetts ought to have advised by means of amendment and/or qualification to the COT that (a) there was a breach of the restrictive covenant, and that the policy of indemnity insurance referred to in paragraph 92 above ("the Restrictive Covenant Policy") concerned that defect in title, and (b) the scope of such policy was unclear as to whether it encompassed the existing breach and/or the breach arising on developing a 6th floor to the Property;
156.3. If Hewetts had amended and/or qualified the undertaking at paragraph 3.1.1 of the COT appropriately, then the Fund would not have proceeded to advance the funds required for the Loan;
156.4. Reference is made to the undertakings at paragraphs 3.1.1, 3.1.2, 3.4, and 4.3 of the COT, and reliance placed upon paragraphs 4.1.3, 5.4.1, 5.1.2, 5.7.1 and 5.10.9 of the CML Handbook, and paragraphs 2 (i) and (ii) of the Solicitors' Practice Rules.
- Ms Smith, in the course of her submissions, emphasised a number of particular points, namely:
157.1. Mr Butcher was aware that the Restrictive Covenant Policy was in existence, but did not check it prior to completing the COT, taking the view that such a policy was not necessary given that the breach had taken place a long time ago, an approach not taken by Mr Cook of Hobson & Arditti who had previously acted for Tiuta Funding Limited.
157.2. Given that the CJ Valuation made reference to a new development, that it was not clear from the documentation that he had what, exactly, this development would entail, in particular whether it would involve a further breach of covenant, Mr Butcher should not have signed off on the COT without having checked the scope of the Restrictive Covenant Policy which, if he had done, would have led Mr Butcher to realise and appreciate that it was "ambiguous" (Mr Butcher having accepted in evidence that the Restrictive Covenant Policy was accurately so described).
157.3. Mr Butcher accepted, so suggested Ms Smith, that he could not have had any certainty that the 6th floor extension was not going to involve new development outside any existing roof structure, and so the new development was obviously capable therefore of amounting to a fresh breach.
- As to this allegation, it is submitted on behalf of Hewetts that Mr Butcher acted with due skill and care in giving the undertaking at paragraph 3.1.1 of the COT as to the absence of restrictive covenants which could have "a reasonably foreseeable and materially adverse affect on such title", in that:
158.1. As Mr Butcher explained to the Court, in the circumstances as he knew them to be, the adjoining owners had not sought to enforce the restrictive covenant since at least when the Superior Lease had been granted in 1924;
158.2. The effect of paragraph 5.7 of the CML Handbook is that even a solicitor bound to comply with the terms of the CML Handbook is not bound to qualify the COT as to the risk of enforceability, or to obtain indemnity insurance if satisfied that there is "no risk" to the security, the breach has continued for more than 20 years, and there is nothing to suggest that any action is being taken or is threatened in respect of the breach;
158.3. Mr Butcher could reasonably consider that, although the proposed residential development involved adding a 6th floor to the Building, the extension was, as explained in the CJ Valuation, to be built "within the height of the existing roof top structure", it being a further consideration that Schedule 1 to the draft agreement for Underlease in respect of the 6th floor prescribed that the mesne landlord's approval to the erection of the additional floor would not be unreasonably withheld or delayed provided that "… the height of the new roof of the Premises shall be of a height no greater than the top of the highest point of the existing roof of the Building". It was pointed out by Mr Smith that whilst Mr Butcher accepted that the CJ Valuation did not specify whether there was a "full roof covering the entirety of the building or partial roof", he was of the firm view that the key point was that the extension would go no higher than the existing structure. As to this, whilst not specifically referred to by Mr Butcher in explaining his thinking, it is relevant that the CJ Valuation stated that: "the[6th floor] extension is to be set back from the main parapet in order to maintain the building appearance…".
158.4. Mr Smith submitted that, although it was put to Mr Butcher in cross-examination that he "had no certainty … that the sixth floor wasn't going to involve new development outside any existing roof structure", this was an unrealistic approach given that there was no reason why the "working drawings" would have extended or expanded the overall development plans for which planning permission had been obtained, and it was those plans that Copping Joyce had considered and described.
158.5. Further, Mr Smith submitted that if agency applied in the way that he conntended, then TIL certainly knew about the relevant issues as Mr Cook of Hobson & Arditti had obtained the Restrictive Covenant Policy.
- In my judgment, again irrespective of the agency point, this point turns on what was required of Mr Butcher in providing the undertaking that he did by paragraph 3.1.1 of the COT, and whether he was properly, without any negligence on his part, entitled to conclude that title to the Property was free of any restrictive covenant which "could have a reasonably foreseeable and materially adverse effect on such title". It does seem to me that, in circumstances such as the present, where the Building had been in situ at the same height for at least 80 years, and the information in respect of the planning permission for new development was firmly to the effect that the Building, even as developed, would be of no greater height, and that, as Copping Joyce put it, the extension will be built "within the height of the existing roof top structure", Mr Butcher was entitled to take the view that the relevant restrictive covenant was not one that was liable to have a reasonably foreseeable and materially adverse effect on the title.
- The completion of the COT did, as I see it in respect of paragraph 3.1.1, require the exercise of a degree of judgment on the part of Mr Butcher, and I do not consider that the judgment that he did exercise is one that can properly be said to have been negligently exercised such that he is properly to be regarded as having acted without due skill and care.
- Further, even if, contrary to my finding above, the duty on the part of Hewetts went beyond a duty of skill and care in speaking, and extended to a duty to speak, I find it difficult to see that there was, in the present circumstances, a duty to speak in respect of something that did not require a qualification of paragraph 3.1.1 of the COT. That being the case, I find it difficult to see that the various provisions of the CML Handbook relied upon by the Fund assist its case.
- Consequently, I find this fourth alleged breach has not been established.
(f) Restrictions in Underlease
- The allegation is that there were restrictions in the Underlease relating to change of use and alterations to the Property, and that the nature of these restrictions and their potential impact on the value of the security should have been reported to the Fund, especially in light of the fact that the Borrower was to redevelop the Property. It is alleged that Hewetts should have advised the Claimant of appropriate steps to be taken to mitigate these risks prior to completion, or they should have qualified the COT, and that if Hewetts had advised correctly or qualified the COT correctly then the Fund would not have proceeded to advance the funds required for the Loan.
- Reference is made by the Fund to the Undertakings at paragraphs 3.1.1, 3.1.2, 3.4 and 4.3 of the COT, and reliance is placed on paragraphs 4.1.3, 5.4.1, 5.1.2 and 5.10.9 of the CML Handbook and paragraphs 2 (i) and (ii) of the Solicitors' Practice Rules. The essential allegation is that Mr Butcher could not properly sign off on the Undertakings at paragraphs 3.1.2 and 3.4 without qualification, and acted negligently in doing so.
- The particular provisions of the Underlease in question were clauses 3.10 and 3.11 relating to change of use and alterations to the Property. In closing submissions, it was submitted on behalf of the Fund that the provisions in respect of change of use were of particular significance if, as Mr Butcher had accepted, there was the possibility of an alternative use to the development into 35 residential units, in which case, certainly, the restrictions would have had a material effect on value.
- In response to this allegation, Mr Smith submitted that so far as clause 3.10.2 was concerned, imposing a prohibition on making exterior alterations to a small area on the ground floor of the Building, Mr Butcher had considered and "chased down" this point, and that there was no way that this could be considered to be an "unduly onerous burden" within the meaning of the Undertaking at paragraph 3.4 of the COT or otherwise require qualification of the Undertakings at paragraph 3.1 of the COT. This, to my mind, must be correct.
- As to clauses 3.10.1 and 3.11.1, it is submitted that these were perfectly ordinary types of provision that one might find in an underlease of this kind, and could in no sense properly be considered to give rise to an "unduly onerous burden" in the context of the intended user referred to in paragraphs 2.5 and 2.6 of the COT, and any proposal to develop the Property into 35 residential units in the way anticipated by the existing planning permission. As to this, Mr Smith pointed to the fact that the CJ Valuation made clear that Copping Joyce had been provided with a copy of the Underlease, and the CJ Valuation set out the substance of clauses 3.10 and 3.11 thus showing that Copping Joyce must necessarily have taken the relevant restrictions into account in valuing the Property. Mr Smith complained that the fact that the Fund's focus had moved to the potential difficulties of clauses 3.10 and 3.11 in respect of some alternative use, represented a further attempt to resurrect arguments behind the failed attempt to seek to amend the Particulars of Claim in respect of the answers given at paragraphs 2.5 and 2.6 of the COT.
- In my judgment Mr Butcher was entitled to focus on the intended user as reflected by the existing planning permission, and the potential impact of the relevant provisions in the Undertaking thereupon, and to conclude that, in that context, these provisions did not impose an "unduly onerous burden", and therefore did not require to be drawn to the attention of TIL or the Fund. On this basis, there was, as I see it, no reason to believe that these provisions would have any material impact on the value of the security, particularly bearing in mind the footing on which the security had been valued by Copping Joyce in the CJ Valuation as referred to in paragraph 167 above. That being the case, I do not consider that the provisions of the CML Handbook relied upon by the Fund provide any additional assistance to it.
- Mr Smith made a further point that is not without significance, when he referred me to a passage from Mr Bloomfield's cross-examination in which he had said: "There was no one - in the correspondence that I have seen, none of the parties expected the property to be developed out, and there was no money for it to be developed out, and no process for it to be developed out." If, which would appear to be the case, that is right, then I agree with Mr Smith that it would not be for the reasonably competent conveyancer to speculate in respect of the various uses to which the relevant property might be put, and/or the effect thereof on value, particularly where there was an established planning permission, by reference to which the security had been valued.
- Consequently, I find that this fifth alleged breach has not been established.
(g) Presence of asbestos
- In paragraph 4.2(vi) of the Particulars of Claim (as amended), it is alleged that the GroundSure Report stated that a site inspection and the issue of asbestos were matters outside the scope of that report, and that Hewetts should therefore have qualified the COT and recommended that a report be obtained to confirm whether asbestos was present in the Property prior to completion of the Loan. It is said that given the age of the Property and the Borrower's intention to develop it, this would have been something a reasonable conveyancer would have recommended. If a report had been obtained, the existence of a substantial amount of asbestos at the Property would have been discovered, and the Fund would not have proceeded to advance the funds required for the Loan.
- However, the case as put at trial focussed more on an allegation that the Undertakings at paragraphs 3.1.1, 3.1.2, 3.4, 4.1 and 4.3 of the COT should have been struck through or otherwise qualified, and that the failure to do so amounted to a breach of Hewetts' duty of care and skill, and a breach of paragraphs 5.1.2 and 5.2.2 of the CML Handbook.
- So far as the GroundSure Report is concerned, this did, in its "Executive Summary" state that the Property was an "Acceptable Environmental Risk", and as to "Recommendations", stated "None Required". However, under the heading "Additional Matters", the GroundSure Report set out that: "The following additional risk issues are outside the scope of the opinion provided by this report. However, further consideration of these may be appropriate for the subject property". Further:
173.1. In the box marked, "Site specific features", the point was made that there had been no "site inspection"; and
173.2. Against the box marked, "Asbestos", the report set out that: "The Control of Asbestos Regulations 2006 require an Asbestos Management Plan to be maintained for all commercial property constructed prior to 2000 i.e. whether asbestos may be contained within the building fabric. Refurbishment or demolition of site structures may require further Type 3 Asbestos Surveys".
- Reliance is placed by the Fund upon paragraph K1.74 of the Law Society's Conveyancing Handbook (15th edition), which is within the section of the latter dealing with acting on the grant of a lease. Mr Butcher accepted that he was aware of paragraph K1.74, which states as follows:
"Control of Asbestos Regulations 2006, reg. 4 contains a duty relating to the management of asbestos in non-domestic premises. Broadly the duty is imposed on duty holders (as defined), e.g. those responsible for the maintenance of the premises. The duties basically require an assessment as to whether there is asbestos in the premises, a decision as to whether it should be removed or properly maintained, and monitoring. Information has to be provided to those likely to come into contact with asbestos, for example, contractors and the emergency services."
- In her closing submissions, Ms Smith relied upon a number of admissions made by Mr Butcher in the course of cross-examination as follows:
175.1. Mr Butcher was questioned on comments in his witness statement that he had relied upon the assurances in the Executive Summary to the GroundSure Report to the effect that there was an acceptable environmental risk. Having been taken to the matters referred to under the heading "Additional Matters", Mr Butcher accepted that his reliance upon the GroundSure Report was, as he put it, "not wise".
175.2. As to the CJ Valuation, Mr Butcher accepted that he had no basis to conclude therefrom that there was no risk of asbestos being present at the Property. Having been taken to the section of the CJ Valuation that made it clear that the property had not been investigated for the purposes of identifying asbestos, and therefore that the valuation was on the basis that none was present, Mr Butcher responded as follows to the following questions:
"Q: … it must follow that you therefore have no basis on which to conclude that this property represented acceptable security from the point of view of the potential for asbestos being present was there?
A: Correct
Q: … are you now able to agree with me that had you carried out the analysis that we have now done, that you wouldn't have been in a position to sign off on the certificate in the way the you did?
A: … Yes, on this point."
175.3. Mr Butcher accepted that he took no steps to make enquiries about asbestos, and that in order to have acted properly, he would either have needed to make those enquiries, or to have alerted the lender to the fact that he could not be sure about the presence of asbestos and that if the lender had concerns, advise it that it should obtain a survey specifically in respect thereof.
175.4. Further, Mr Butcher accepted that that the asbestos would have fallen within the definitions of both "Environmental Matters" and "Ancillary Matters" in paragraphs 4.1 and 4.3 of the COT and that, therefore, he was in no position to give the Undertakings relating to at least the latter, and also the Undertaking at paragraph 3.1.1 on the basis that marketability was in issue. As Mr Butcher put it:
"A: … I wrongly certified it based on these issues, yes…
Q: … The question of marketability was an issue, wasn't it?
A: …yes it was. They would have had to have had a survey and checked for asbestos in the way".
- In response to the case as so put, the essence of Hewetts' case is the necessity to focus on the Undertakings given, and whether Mr Butcher had failed to exercise due skill and care in completing the COT without further enquiry, and without qualifying the Undertakings given. As to paragraph 4.1 of the COT, Mr Smith argued that what is required is "all reasonable enquiry", observing that there is no expert evidence to the effect that the only competent thing to have done was to explore with the seller whether an assessment had been carried out pursuant to Reg 4(3) of the 2006 Regulations, there being no suggestion in the Law Society's Conveyancing Handbook that this was a burden that necessarily fell upon solicitors. Mr Smith made a similar submission in relation to paragraph 4.3 of the COT, arguing that this raises the question as to whether "good practice would reasonably dictate as necessary" that the relevant steps that it is alleged ought to have been taken were taken.
- Mr Smith urged caution in accepting the Fund's case on the basis that it sought, in effect, to place the burden on the conveyancer to detect asbestos when, by definition, it is either visible therefore detectable by the valuer undertaking an ordinary survey, or not visible, and therefore only detectable as a result of destructive testing.
- Further, Mr Smith submitted that paragraphs 5.2.1 and 5.2.2 of the CML Handbook do not take the Fund's case any further, even if Hewetts was subject thereto, in that these paragraphs are concerned with searches and enquiries, and there is no search that can be carried out to detect asbestos.
- Further, Mr Smith submitted that there was no basis for concluding that Mr Butcher was obliged to advise that a Type 3 Asbestos Survey be carried out.
- I am not persuaded that any of the Undertakings are engaged save possibly those in paragraphs 4.1 and 4.3 of the COT. Paragraphs 3.1.1, 3.1.2, and 3.4 are, as I see it, essentially concerned with questions of title, and encumbrances burdens etc., relating thereto. I do not regard a solicitor signing off on these undertakings as having been negligent for not having had in mind the possibility of the existence of asbestos at the Property. Further, I agree with Mr Smith that, even if applicable, paragraphs 5.2.1 and 5.2.2 of the CML Handbook do not take the Fund's case any further on the basis that there is no obvious search that can be carried out in respect of asbestos, save possibly as to whether certain exemptions exist in respect of the relevant property which does not seem to me to take the matter any further. Insofar as paragraph 5.2.1 refers to "enquiries", the obligation is to ensure that all "usual and necessary" enquiries carried out. This does not, to my mind, in the present context, add anything to the enquiries that might be required to be carried out before certifying in accordance with paragraphs 4.1 and 4.3 of the COT.
- As to what ought to have been done in respect of paragraphs 4.1 and 4.3 of the COT, this does, as I see it, boil down to whether, given Mr Butcher's knowledge that this was an old building, given that Mr Butcher accepted that he was aware of least of the gist of the contents paragraph K1.7.4 of the Law Society's Conveyancing Handbook (which he probably ought to have been aware of in any event), and given what was said under the heading of "Additional Matters" in the GroundSure Report, he ought, at the very least, to have made enquiries of the sellers, or the liquidators of CRIL, as to whether there was any assessment under Reg. 4(3) of the 2006 Regulations.
- I can see that a very cogent case can be made out that he ought to have done so before signing off on paragraphs 4.1 and 4.3 of the COT. Mr Butcher's own responses under cross-examination do provide persuasive support for the Fund's case on this although, I do have to treat Mr Butcher's answers with some caution given the premise behind a number of them. However, on balance, I am persuaded by Mr Smith that there was no error or breach of duty on Mr Butcher's behalf in certifying as he did by signing off on paragraphs 4.1 and 4.3 of the COT bearing in mind that he was certifying that he had made "all reasonable" enquiry for the purposes of paragraph 4.1, and that he had for the purposes of paragraph 4.3 investigated all Ancillary Matters that "good practice would reasonably dictate as necessary" (my emphasis).
- I have not been referred to any guidance within the Law Society's Conveyancing Handbook or elsewhere that advises any rouTitle enquiry on the part of a solicitor as to the existence of asbestos, even in older buildings. In the circumstances of the present case, whilst best practice might have suggested that the relevant enquiries be carried out, and I am simply not satisfied that Mr Butcher fell below the requisite standard, and failed to exercise due skill and care by proceeding in the way that he did.
- I should add that even apart from my finding that Hewetts were under no duty to speak, even if Hewetts had been subject to such a duty, I would not have found that they were obliged to advise that a Type 3 Asbestos Survey be carried out. All that the GroundSure Report says is that the refurbishment or demolition of site structures "may require further Type 3 Asbestos Surveys".
- I should further add that I do not consider that Hewetts' case as to agency adds anything to this point in that, as I say, the issue for present purposes is not whether TIL's knowledge is to be imputed to the Fund, but whether Mr Butcher was entitled to sign off on the Undertakings without further enquiry.
- Consequently, on balance, I find that this sixth alleged breach has not been established.
(h) Good Leasehold Title
- The allegation, in paragraph 4.2 (vii) of the Particulars of Claim (as amended) is that the Property is a good leasehold title, and did not have title absolute, and that the indemnity policy dated 10 July 2003 referred to in paragraph 83 above, as endorsed on 21 July 2006 as referred to in paragraph 91 above, concerned that "defect in title". It is alleged that a reasonably competent solicitor would have advised the Fund in writing of these facts, and thus that the Undertaking in paragraph 3.1.1 of the COT required to be amended and/or qualified, such that the COT could not be provided in an unamended form to the Fund. It is alleged that if the COT had been amended or qualified in this respect, then the Fund would not have proceeded to advance the funds required for the Loan.
- It is said on behalf of the Fund the whilst paragraph 5.4.2 of the CML Handbook sets out certain circumstances in which good leasehold title will be acceptable, it is not open to Hewetts to the rely upon this because, when he signed off the COT, Mr Butcher did not know, and had not made the necessary enquiries to satisfy himself, that the factors set out therein were present.
- A further point is taken on behalf of the Fund, namely that the facility letter to the Borrower included within the documents forwarded to Hewetts on 13 August 2008 made specific reference to security being taken over the Property which was described as having title absolute. It is said that this discrepancy should have been drawn to the Fund's attention.
- Hewetts does indeed rely on paragraph 5.4.2 of the CML Handbook, which provides as follows:
"5.4.2 Good leasehold title will be acceptable if:
- 4.2.1 a marked abstract of the freehold and any intermediate leasehold title for the statutory period of 15 years before the grant of the lease is provided; or
- 4.2.2 you are prepared to certify that the title is good and marketable when sending your certificate of title (because, for example, the landlord's title is generally accepted in the district where the property is situated); or
- 4.2.3 you arrange indemnity insurance. Our requirements in respect of indemnity insurance are set out in section 9."
- Although Mr Butcher may not have had this immediately in mind, reliance is placed upon the fact that Mr Butcher did have in mind, as referred to in paragraph 47 of his witness statement, that L&G, the immediate landlord, had demised the Property by way of the Underlease with full title guarantee, and that the freeholder, LCC, apart from having had title for very many years, had a title that would have been generally accepted in the district, namely Liverpool.
- In these circumstances, it is submitted on behalf of Hewetts that the fact that the title was good leasehold, and not absolute title, was not something that required any form of qualification in the COT, and that Mr Butcher had reached a non-negligent judgment in respect of this matter in accordance with paragraph 5.4.2 of the CML Handbook. Further, bearing in mind that, in respect of this Property, there was no material distinction between a good leasehold, and an absolute title, the Fund could have no cause for complaint that the error of description in the facility letter to the Borrower was not corrected.
- It is, to my mind, important to understand the significance of a title being a good leasehold title, rather than a title absolute. The point is that registration, in the case of a good leasehold title, provides no guarantee in itself as to the status of the superior title. However, of course, that does not mean that the superior title cannot be guaranteed, or at least sufficiently guaranteed in other ways as reflected in paragraph 5.4.2 of the CML Handbook.
- The potential problem here was that the freeholder, LCC, did not have good title, or rather did not have good title when the Superior Lease was granted. However, having regard to the nature of the freehold owner, a long and well established local authority, and that the freehold owner had, for many years after the Superior Lease, continued to own the Building, even though there might not have been any specific evidence before the Court that it was still the freeholder, demonstrates to my mind that there was no material risk of there being any defect in LCC's freehold title. In those circumstances, I consider that Mr Butcher was, for the reasons that he has given, entitled to proceed without qualifying the COT in the way that it is alleged that he should have done, and without specifically identifying the discrepancy in the facility letter to the Borrower.
- Consequently, I find that this seventh alleged breach has not been established.
(i) Lack of title to the 6th floor
- This allegation is set out in some detail in paragraph 4.2(vii) of the Particulars of Claim (as amended), as follows:
"Secured lending against the Property was unviable because:
a. the Borrower did not have title to the sixth floor of the Property. It was clear from the Option Agreement and clause 4.1 of the Draft Sixth Floor Agreement for Underlease that the Borrower could not obtain title to the sixth floor until practical completion of the building works. Therefore the Defendant ought to have realised that the Report was based on an incorrect assumption that the Property included the sixth floor and the development of 7 flats on that floor.
i. A reasonably competent solicitor would have (i) not provided the Certificate of Title because no first charge could be granted over the sixth floor and undertaking 3.7 was false, and (ii) further or alternatively advised by qualification/amendment to the Certificate of Title) that the Borrower's development of the Property was not viable for the secured lending because of (i).
b. even supposing that the Borrower would have sought to proceed with the transaction on the basis of developing only those parts of the Property to which it would acquire title (i.e. floors 2, 3, 4, and 5), the relevant planning permission contained a condition such that construction of all 35 flats had to be completed before any of them could be occupied. Accordingly the Defendant should have advised the Claimant by means of amendment and/or qualification to undertaking 3.9 and 3.4 of the Certificate of Title that the development all of the Property was enviable and/or secured lending against the Property was unviable. If the Defendant had advised the Claimant correctly or qualified the Certificate of Title appropriately, the Claimant wo not yet all could not have proceeded to advance the funds required for the Loan."
- The gist of the Fund's case is therefore that the lending to TIL was not viable because (i) no charge could be granted over the 6th floor; and (ii) development over the 2nd to 5th floors alone was not possible because of the terms of the planning permission. It was suggested that this would have meant that if the Fund had sought to take possession when the development of the Property was half completed, whilst it could have taken possession of the 2nd to 5th floors, it could not have taken possession of the 6th floor because the security that it held did not extend to the 6th floor.
- It is alleged that these matters should have led to the Undertaking in paragraphs 3.1.1, 3.1.2, 3.1.3 and 3.4 of the COT being struck through or otherwise qualified, and it is alleged that failure to do so was in breach of Hewetts' duty of skill and care, and in breach of paragraphs 4.1.3, 5.1.2 and 5.4.1 of the CML Handbook.
- Ms Smith placed reliance on the fact that Mr Butcher accepted that the title to the 6th floor was a complicated issue, and that there was nothing in the CJ Valuation that would have alerted the Fund to the issues around title. Ms Smith relied, in particular, upon Mr Butcher accepting during the course of his cross-examination that the implication from the Undertaking at paragraph 3.1.2 of the COT was that the Borrower would have title to all seven of the flats on the 6th floor owing to the fact that the COT was addressing the current and intended use of the Property as "planning with 35 units", and that Mr Butcher went on to accept that the fact that the Borrower was not going to get title to the 6th floor until after practical completion was something that he needed to have drawn to the Fund's attention.
- The gist of the defence advanced by Hewetts to this allegation is that the Fund's case misses the point that:
200.1. The effect of the series of documents entered into between CRIL and L&G referred to in paragraph 85 above was designed to, and in fact did confer on CRIL the ability to develop the Property, and in the process thereof to acquire the 6th floor as part of the development through the exercise of the option provided for by the Option Agreement dated 20 January 2005. The 6th floor was, in reality, of little importance or relevance save as part of the proposed development permitted by the planning permission. What was important was that CRIL had the ability, as seen from a legal perspective, to carry out the development and, in the process thereof, to acquire an underleasehold title to the 6th floor. The basis of the Borrower's purchase of the Property was to put the Borrower in the same position as CRIL, and there was nothing to suggest that that would not be the practical effect of the Borrower's purchase.
200.2. The Borrower was also to grant a charge over the Property to TIL, and the Borrower was also grant a debenture to TIL. TIL was to grant to the Fund a sub- charge, and the Fund already had the benefit of a debenture granted by TIL as referred to above.
200.3. Consequently, if the worst came to the worst, and it was necessary to enforce security, the Property could be sold on with exactly the same rights as the Borrower was acquiring, which included the right to develop out and acquire the 6th floor, and the position would be no different if it was necessary to enforce security whilst the works were in progress.
- I am persuaded that Hewetts' analysis as to this is correct. It seems to me that the important consideration is that the Fund and TIL, through their own security, had security over the right to develop the 6th floor and, once the development was complete, the right to acquire it. As the Property had been valued on the basis of the existing planning permission, and the legal ability to carry out development, I cannot see any difficulty with Mr Butcher having signed off the COT in the terms that he did. Further, I do not consider that paragraphs 4.1.3, 5.1.2 or 5.4.1 of the CML Handbook add to the Fund's case.
- Had Mr Butcher had in mind the above considerations when he gave evidence under cross-examination, then I do not believe that he would have accepted that not getting an immediate charge over the 6th floor was something that he needed to draw to the Fund's attention in completing the COT.
- Consequently, I find that this eighth alleged breach has not been established.
(j) Onerous draft 6th floor Underlease
- The Fund's case is that it was negligent for Mr Butcher to have provided an unqualified COT given two paragraphs of Schedule 2 to the draft Agreement for Underlease in respect of the 6th floor, namely:
204.1. Paragraph 3.3: "The Tenant will submit the Plans [namely for the development works] to the Landlord for approval (such approval not to be unreasonably withheld or delayed)"; and
204.2. Paragraph 15: "The Tenant may not commence the Building Works including any works affecting the Tenant's Property without providing such security for performance of its obligations under this agreement as is acceptable to the Landlord acting reasonably".
- It is alleged that the existence of these provisions should have led to the Undertakings in paragraphs 3.1.1, 3.1.2, 3.4 and 4.3 of the COT being struck through or otherwise qualified, and that the failure to do so was in breach of Hewetts' duty of skill and care and further in breach of rules 5.1.2 and 5.4.1 of the CML Handbook.
- The Fund relied upon the fact that Mr Butcher accepted that a lender who is obtaining a charge would want to know that that charge was unfettered and unburdened, that he could not know what the provision of security for performance might involve in terms of money but that it was likely to involve the provision of a bond and that such a bond might require security amounting to a very substantial part of the build cost. This would mean that if the development were to be built, the Borrower would have to find not only the cost of that development, but also the cost of the performance bond on top. On this basis, Mr Butcher was prepared to accept that, in the circumstances, paragraph 15 of Schedule 2 could be onerous.
- On the other hand, on behalf of Hewetts, it is submitted that Mr Butcher's evidence is that his view at the time was that he did not consider either paragraph to be unduly onerous, and that this was a judgment that Mr Butcher was entitled to form.
- It is then said that;
208.1. As to paragraph 3.3 of Schedule 2 - There was nothing at all onerous about L&G (or its successor) needing to approve the plans for the building works; and consent had almost certainly already been given; and
208.2. As to paragraph 15 of Schedule 2 – It was not onerous for the Borrower or other developer to have to provide security. If building works were to take place the latter would need development finance and, to that extent, it would be able to provide, say, a performance bond, as part of the development cost.
- As I see it, the key to this is the undertaking at paragraph 3.4 of the COT, and whether the existence of either of these two provisions truly were not just burdens, but "unduly onerous" burdens that ought to have been specifically identified. If not, then it seems to me that it would be difficult properly to suggest that any of the other Undertakings ought to have been qualified or struck through, or that there had been a breach of paragraphs 5.1.2 or 5.4.1 of the CML Handbook.
- Whilst a provision such as paragraphs 3.3 and 15 of Schedule 2 might in certain circumstances be regarded as onerous, I find it difficult to see that these provisions can properly be described as "unduly onerous" in the context of what was envisaged concerning the 6th floor. The requirement to submit plans for approval in paragraph 3.3 was subject to the proviso that approval should not be unreasonably withheld or delayed. This ought not to have provided any real difficulty in respect of any reasonable development. So far as paragraph 15 is concerned, there is an obligation on the part of the Landlord to act reasonably so far as the terms of the security to be provided are concerned. As referred to above, it is clear from the CJ Valuation that the costs of the development works would be significant, and in the context thereof I do not consider that a requirement that reasonable security be provided to the Landlord could, on any sensible view, be regarded as "unduly onerous".
- In the circumstances, I do not find the ninth of the allegations to have been established.
(k) Overall conclusion in relation to alleged breaches
- My overall conclusion in relation to the alleged breaches is therefore that only the second allegation, relating to the failure to complete paragraph 1.4 of the COT in respect of the £2,500,000 valuation shown on the OCE is made out.
F. RELIANCE AND CAUSATION
(a) Introduction
- In my judgment discrete issues arise in respect of reliance and causation in respect of the one head of negligence that I found established. However, in case I should be wrong in relation to any of my findings of alleged negligence and breach of duty, I do deal with the case as to reliance and causation in relation to each of the various heads thereof. I first deal with the legal principles to be applied, and then consider the factual issues that arise concerning reliance and causation.
(b) The Law
- It is necessary to consider reliance and causation together in the light of the Fund's contention that in a certificate of title case such as the present, the causation enquiry stops at the reliance stage if the Fund can show that it would not have acted as it did if the COT had been as the Fund says that it ought to have been, namely completed, amended, or qualified as alleged.
- As to reliance, the following propositions are not, as I understand it, disputed:
215.1. In order to found a claim for damages, a claimant must establish that he relied on the solicitor's information or advice such that if he had been correctly informed or advised, he would have acted differently: Sykes v Midland Bank Ltd [1971] 1 QB 113, per Harman LJ at 124F;
215.2. The incorrect advice or information need not be the sole motivating factor for the lender to enter into the transaction, but must play a "real and substantial part" in inducing participation: JEB Fasteners Ltd v Marks Bloom & Co (a firm) [1983] 1 All ER 583, per Stephenson LJ at 589a;
215.3. The claimant must show that he relied on the information or advice and believed it to be correct: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769, per Phillips J at 796c;
215.4. The standard processes of the lender may serve as evidence of reliance: Cavendish Funding Ltd v Henry Spencer [1998] PNLR 122, at 127A to B per Aldous LJ.
- However, the Fund relies upon what was said by Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1 at 11D to E (in purporting to follow what Hobhouse LJ had said in Downs v Chappell [1997] 1 WLR 426), as authority for the proposition that in cases where the solicitor has negligently given incorrect advice or information, the claimant need only show that he would not have acted as he did if he had not been given the relevant advice or information, and, importantly, that he need not show that he would not have acted as he did if he was given correct advice or information. This is in contrast to the case where the solicitor fails to give proper advice where he does need to show that he would not have acted as he did had proper advice been given.
- Mr Smith, in response, draws my attention to the recent case of Thomas v Allbutt [2015] PNLR where Morgan J, at [430]-[435] considered the correctness of what Millett LJ had said in Mothew at 11 D-E, and rejected the submission in the claim before him, involving alleged barrister's negligence, that all that was needed was reliance, and that causation did not require to be examined. Morgan J declined to apply what Millett LJ has said in Mothew on the basis that Millett LJ was the only judge in Mothew who had supported this proposition, and that what Millett LJ had said had to be read in the light of the fact that in the subsequent case of Swindle v Harrison [1997] 4 All ER 705, Hobhouse LJ had suggested that Millett LJ in Mothew had misunderstood the judgments in Downs v Chappell. Further, Morgan J placed reliance upon what had been said by the Court of Appeal in Levicom International Holdings v Linklaters [2010] PNLR 29 at [254] per Stanley Burton LJ, and also at [284] per Jacob LJ, where Jacob LJ had said:
"When a solicitor gives advice that his client has a strong case to start litigation rather than settle and the client then does just that, the normal inference is that the advice is causative. Of course the inference is rebuttable—it may be possible to show that the client would have gone ahead willy-nilly. But that was certainly not shown on the evidence here. The judge should have approached the case on the basis that the evidential burden had shifted to Linklaters to prove that its advice was not causative. Such an approach would surely have led him to a different result."
- Whilst Ms Smith reserves the position of the Fund should the matter go further, I consider that, as a matter of judicial comity, I should follow Morgan J, and find that causation should not necessarily stop at the reliance stage. Thus the Court is, in my judgment, bound to consider whether, even if Mr Butcher had acted as it is alleged that he ought to have acted but failed to act, the transaction would have gone ahead in any event. I am bound to say that, on the facts of the present case, an unjust outcome would be capable of resulting if this were not the correct approach to take.
- A further legal issue arose at trial as to the burden of proof in respect of causation. Ms Smith, for this purpose, relies on the passage cited from the judgment of Jacob LJ in Levicom referred to in paragraph 217 above. She argues that this shows that the burden of proof is on Hewetts to prove that the Fund would have gone ahead in any event, and not on the Fund to show that it would not, given the reference in this passage to what Linklaters was required to prove. This particular passage led Morgan J to say in Thomas v Albutt at [436]:
"I will proceed on the basis that the burden of proof is on Mr Albutt [the defendant barrister] to show that any negligent advice did not make any difference to the position of Mr and Mrs Thomas".
- Mr Smith, in response, submitted that in Levicom and Albutt one was concerned with the discrete principle established in Mount v Barker Austin [1998] PNLR 493 to the effect that although the burden of proof remains on a claimant to prove that in losing the opportunity to pursue a claim, he had a real and substantial rather than merely a negligible prospect of success, where the legal adviser defendant has advised positively as to the merits of the litigation, there is a heavy evidential burden on the defendant to show to the contrary. Mr Smith submitted that this is the evidential burden that Jacob LJ was referring to in Levicom, and that this was the burden that Morgan J was referring to in Albutt, albeit referring to it as the burden of "proof". Mr Smith therefore submitted that, as the present claim does not involve the conduct of litigation, this is not a proper case to apply the Mount v Baker Austin principle, and so the evidential burden remains on the Fund.
- Following the conclusion of the trial, Ms Smith provided further written submissions to which Mr Smith has since responded. Ms Smith submits that in the event that I decide to follow Morgan J in Thomas v Albutt, and therefore do not apply the approach of Millett LJ in Mothew as to causation, then if I accept, on the balance of probabilities, that the COT would have been sent back to TIL if Mr Butcher had done that which the Fund contends that he should have done, then what would then have taken place was outside the control of the Fund, and in the hands of Hewetts and TIL. She submitted that when the actions of a third party are involved in this way, then the Court must determine whether there is a substantial chance that (by reason of that third party's actions) the Fund would not have drawn down the Loan, and that if there is such a substantial chance, then the evaluation of that substantial chance is a matter for the quantification of damages. Ms Smith relies upon Allied Maples Group Ltd v Simmonds & Simmonds [1995] 1 WLR 1602, per Stuart Smith LJ at 1611:
"In many cases the plaintiff's loss depends on the hypothetical action of a third party, either in addition to action by the plaintiff, as in this case, or independently of it. In such a case, does the plaintiff have to prove on balance of probability, as Mr. Jackson submits, that the third party would have acted so as to confer the benefit or avoid the risk to the plaintiff, or can the plaintiff succeed provided he shows that he had a substantial chance rather than a speculative one, the evaluation of the substantial chance being a question of quantification of damages?
Although there is not a great deal of authority, and none in the Court of Appeal, relating to solicitors failing to give advice which is directly in point, I have no doubt that Mr. Jackson's submission is wrong and the second alternative is correct."
- Ms Smith then submitted that:
222.1. As to the actions of Hewetts, its evidence was that it would not complete a false certificate. Consequently, if any of the breaches were incapable of remedy such that an un-amended or unqualified COT could not properly be sent to the Fund, then the transaction would not have proceeded because any amended or qualified COT would have been rejected by CAM/the Fund.
222.2. So far as the actions of TIL/TPlc are concerned, as to Hewetts' case that TIL would have resolved the issues regarding the COT so as to enable it to resubmit an unamended and unqualified COT, it was Ms Smith's submission that there was no evidence to inform the Court one way or the other as to what steps TIL/TPlc would have taken, and that it was for Hewetts to call evidence to establish the relevant facts, whether on the authority of Mount v Barker Austin or, as she put it, "on the basis of fundamental principles as to the evidential burden of proving a positive case." She pointed out that there was no witness evidence from TIL/TPlc.
222.3. Ms Smith then submits that in the absence of that evidence, Hewetts cannot get over the fact that there was plainly a substantial chance that TIL/TPlc would not resolve the issue regarding the COT such that the drawdown would never have happened.
- As to the status of Mount v Barker Austin, Ms Smith relied upon the recent case of Harding Homes (East Street) Ltd v Bircham Dyson Bell [2015] EWHC 3329, in which Proudman J at [34]-[38] held that the Mount v Baker Austin principle was capable of broader application, Proudman J seemingly being prepared to apply it to a case involving loss of chance in a commercial negotiation.
- As to Harding Homes, I consider that the relevant passages in the judgment of Proudman J therein are no more than a recognition that, as appears from Simon Brown LJ's formulation of the principle in Mount v Barker Austin summarised by Proudman J at [34], where the "loss of chance" jurisdiction does apply, then:
224.1. whilst the claimant bears the legal burden of proving that in losing his opportunity, he lost something of value (i.e., something having a real and substantial prospect of success);
224.2. the evidential burden lies on the defendant to show that the opportunity was of no value.
- Consequently, I consider it necessary to consider whether the loss of chance jurisdiction does apply in the circumstances of the present case and, if it does apply, what the significance thereof is.
- It is, to my mind, important to bear in mind why loss of chance principles are applied when they are to resolve loss and damage issues, namely to deal with the forensic difficulty of dealing with the hypothetical actions of third parties when the issue is whether that third party, who generally had no interest or involvement in the relevant litigation, would have conferred a benefit on the claimant, or acted so as to avoid loss to the claimant, in the relevant circumstances. Thus, as the case of Veitch v Avery [2008] PNLR 7 cited by Mr Smith demonstrates, if the third party's actions can be closely associated with those of the claimant (in that case it was the relationship of father and son), then the Court may be more able to deal with the particular evidence said to have causative effect on the basis of the balance of probability. In that case, the issue was whether the claimant's father would have advanced funds that would have saved what was otherwise a doomed business in a case where it was necessary for the claimant to show that the business was not doomed.
- Hewetts maintain that this is not a loss of chance case. Mr Smith submits that whether or not the Court finds that TIL was the Fund's agent (but a fortiori if it does), then there was plainly a very close association between those two parties for the purposes of the scheme promoted by the IM such that, as with the relationship between father and son in Veitch v Avery, this closeness of association justifies TIL's hypothetical conduct being judged on the balance of probabilities.
- I agree with Mr Smith that even in the absence of positive evidence from TIL/TPlc, and irrespective of the fact that TIL was, at one stage, co-claimant with the Fund to the present action, the closeness of the relationship between TIL/TPlc and the Fund was such that it is appropriate to consider what TIL would have done on the basis of what, on the balance of probabilities, TIL would have done had Hewetts, in respect of each of the alleged breaches of duty, done what the Fund maintains it should have done. I reach this view in the light of my finding above as to the nature of the relationship between the Fund and TIL, it being of importance and significance, in my judgment, that the Fund had, through CAM, delegated to TIL the specific function of dealing with the legal work necessary in relation to the relevant transaction, and that TIL was acting as agent of the Fund to that extent at least.
- I further agree with Mr Smith that the Mount v Baker Austin principle is only of application in a loss of chance case where the court first requires the claimant to bear the legal burden of proving that in losing his opportunity, he has lost something of value, in which event the evidential burden lies on the defendant to show that the opportunity was of no value. On this basis, I see no reason to depart from the general rule that it is incumbent on the Fund, as claimant, to prove causative effect – see Boateng v Hughmans [2002] PNLR 40 at [30] per Sir Christopher Slade.
- Thus, on the basis of my finding that I ought to follow the approach of Morgan J in Thomas v Albutt with regard to Millett LJ's approach in Mothew, I consider that the onus is on the Fund, having established that Hewetts acted in breach of duty in any of the ways alleged, to then demonstrate, in respect of each breach of duty, why and in what way different advice would have led the Fund to decline to advance the Loan. I therefore proceed on that basis.
(c) The Facts
(i) Reliance
- I am satisfied that the Fund relied upon the COT in deciding to advance funds to TIL. It is right that Mr Davies was not necessarily troubled per se by a number of the matters that it is alleged should have been drawn to the Fund's attention by the COT or by an accompanying explanatory letter, and that the Fund had no real concern about the status of the Borrower, e.g. so far as its exit route was concerned, or the fact that it was borrowing from TIL in excess of 95% LTV.
- However, I accept that although the process was essentially a tick box exercise, the Fund, or rather CAM's Asset Allocation Committee, did consider and go through the documentation provided under the cover of the Utilisation Pack Front Sheet, including the COT, with a view to ensuring that all was in order, and to enable the Release Approval Form referred to in sub-paragraph 36.3 above to be duly completed and signed off. Thus I accept that Mr Davies did properly consider the COT and having done so, and seen that it had been completed without amendment or qualification, did circle the relevant "yes" options on the Release Approval Form, and that had the COT not been so provided, then the Release Approval Form would not have been completed in the way that it was, and the advance to TIL would not have proceeded, at least without the COT being re-submitted by TIL in an unamended and unqualified form as part of a fresh Drawdown Pack. Further, I accept Mr Davies' evidence when he said that, in contrast to any consideration of the status of the Borrower, "the main consideration was always the security in the property. In other words is our loan to value at a sufficient level to allow for any eventuality ?". Further, of course, Mr Davies gave evidence as to the additional significance attached to the guarantee provided by TPlc.
- It is suggested by Hewetts that rather than Mr Davies having read and genuinely relied upon the COT when approving the advance to TIL, the more probable explanation was that Mr Davies was, in reality, relying on the fact that TIL (as part of the Tiuta Group) had provided a Drawdown Pack and had thereby signified its own approval of the Loan. However, I am satisfied that Mr Davies did, in fact, rely, amongst other things, upon the fact that Mr Butcher had duly signed off on the COT in the terms that the COT had been signed off, and without amending or qualifying the same, or raising any issues with the Fund.
(ii) Causation
- On the basis of the analysis of the relevant legal principles considered in paragraphs 214 to 230 above, it is necessary to ask what would have happened if Mr Butcher had done that which it is alleged that he ought to have done, but failed to do, in completing the COT for transmission to the Fund, and in particular whether, as Hewetts maintains, even if Mr Butcher did act in breach of duty of care and negligently, the Fund would have gone ahead with the transaction in any event. This is, necessarily, a multi-layered enquiry, not least because the answer is liable to be affected, although not necessarily determinatively, by whether TIL was acting as agent for the Fund, and, more importantly, the true scope of the duty of care owed by Hewetts to the Fund.
- It is Hewetts' case, in short, that if Mr Butcher had, as it is alleged that he ought to have done, completed or qualified the COT to draw the Fund's attention to the matters that it is alleged ought to have been drawn to the Fund's attention, then whilst that particular application for the approval of the relevant advance would have been rejected, this would simply have led to Mr Butcher taking up the relevant issues with TIL, and those matters being resolved as between Mr Butcher and TIL, thus enabling an unamended and unqualified COT then to be resubmitted to the Fund, together with a fresh Drawdown Pack, in which event the advance would have been approved. Thus, in short, even if the relevant breaches had been established, they would have caused no loss or damage.
- I will deal with this line of argument below. However, a discrete causation point arises in respect of the head of breach that I have found has been established, namely that in respect of the failure to complete paragraph 1.4 of the COT to refer to the valuation of £2,500,000 referred to in the OCE. As to this, it is necessary to ask what would have happened had Mr Butcher completed the COT in the correct way so as to refer to this valuation. As to this, Mr Davies' evidence was very clear that it would not have caused him any concern, and would not have caused him to reject the application. I refer to the following exchange during the course of Mr Davies' cross-examination:
"Q. Then box 1.4 – read 1.4 carefully, Mr Davies. It says: "Where it is shown on the title register or apparent from the deeds, provide the date and consideration of the last sale of the property."
A. Right.
Q. So what I'm saying is I need to explore with you your response if what had been filled in there was the value stated as at 5 May 2006, which was £2.5 million. You understand what I mean by that?
A. I do, yes.
Q. My question to is that that would not have caused you any concern or caused due to reject the loan, would it.
A. It wouldn't."
- On this basis, without any need to consider the wider argument referred to in paragraph 235 above, I am satisfied that the breach of duty in question caused no loss or damage because even if Mr Butcher had done that which he ought to have done, and completed paragraph 1.4 of the COT properly, the transaction would have proceeded in any event because it would not have caused the application to be rejected.
- So far as the wider argument is concerned, I am satisfied, on the basis of the evidence as a whole, including the evidence of Mr Davies referred to in paragraph 236 above, that if Mr Butcher had done that which it is alleged that he should have done, but failed to do in respect of the other alleged breaches, then the application would have been rejected, but if a new application supported by a new Drawdown Pack had been submitted to the Fund, together with a fully completed, unamended and unqualified COT, then the advance by the Fund to TIL would have gone ahead in any event.
- However, this then raises further questions as to whether, if an application to the Fund had been rejected in circumstances such as these, matters could and would properly have been resolved as between Hewetts/Mr Butcher and TIL such that Mr Butcher could and would have properly signed off on a fully completed, unamended and unqualified COT.
- Before turning to consider the individual alleged breaches, assuming, contrary to my findings above, that the breaches had been established, I consider that it is necessary to bear in mind the following more general considerations:
240.1. As I have already commented in sub-paragraph 76.3 above, as Mr Davies' evidence demonstrates, the Fund had no mechanism or ability to deal with particular issues raised by solicitors arising from COTs such as the present, the obvious inference being that the matters would therefore have to be dealt with as between the solicitor and TIL. That is why, as I see it, Mr Davies accepted under cross-examination that, as referred to in sub-paragraph 50.2 above, if the solicitor had points to raise during the course of his or her work, then Mr Davies' anticipation would be that the points would be raised with TIL alone.
240.2. I consider the factors referred to in paragraph 99 above, as further touched on in paragraphs 104 and 106 above, concerning TIL's own keenness to enter into the Loan with the Borrower for the commercial reasons therein referred to, to be of particular significance. The proposed transaction with the Borrower was one that TIL was very keen to enter into given the difficulties that TLL had found itself in, and had had in finding a buyer. It was for these commercial reasons that TIL was, as Mr Bloomfield so colourfully put it, prepared to "sacrifice" its lending criteria. Thus TIL would, in my judgment, for the same reasons, have been anxious to try and resolve any issues that Mr Butcher raised so as not to prejudice what it saw as a good deal.
240.3. The Tiuta Group was well familiar with the history and circumstances of the Property. Whilst the three relevant companies in the Tiuta Group were separate entities with separate legal personalities, as I have already found, they operated together, and I consider it artificial to regard the knowledge of one as not being the knowledge of another of them in the circumstances in which they shared common directors in the way that they did.
240.4. As to the knowledge of the Tiuta Group:
240.4.1. TLL was well aware of the circumstances behind Edward Symmons' valuation of the £2.5 million in 2006 and the market conditions that had led to TLL struggling to find an offer that matched that of the Borrower;
240.4.2. As referred to in paragraph 98 above, TLL/TIL was well aware of the presence of asbestos at the Property. The email dated 16 September 2008 from Jonathan Williams of Gardner Theobald LLP to Robert Diggle of Edward Symmons therein referred to engineers who had recently attended at the Property having confirmed that … "asbestos warning stickers are adhered to the [lift] shaft". This email was forwarded to Steven Nicholas of TIL/TLL the same day by Robert Diggle who referred to having an "asbestos report" that he would send on. However, it seems clear that Steven Nicholas was not sufficiently concerned to take this up with Mr Butcher because Mr Butcher was not told about this exchange of emails.
- Turning then to the specific alleged breaches, assuming that they had been made out.
- Undervalue - It is difficult to believe that this would ever have been an issue that prevented the transaction from going ahead. For what it is worth, Mr Davies was not concerned with it as an issue as such. Whilst, if raised by way of an amendment of or qualification to the COT this might well have led to a rejection by Mr Davies or CAM's Asset Allocation Committee, that was, from the Fund's perspective, a matter of procedure rather than substantive concern in the light of what Mr Davies had to say about the point.
- There would, as I see it, have been no difficulty if the factors pointing to a potential undervalue had been raised in dialogue between Hewetts and TIL. Irrespective of any eagerness on the part of TIL to lend to the Borrower so that TLL could effect a sale to the latter, TIL was well aware of the difference between the purchase price and the CJ Valuation and, in any event, the difference in question fell within its own lending policy. TIL would not in my judgment have seen it as an issue at all.
- As I have already found, even Mr Davies recognised that the appropriate channel of communication for resolving any difficulties was as between Hewetts and TIL. If, as I consider to be the better view, TIL was acting as agent of the Fund, then that would be the end of the matter. Mr Butcher could have raised the matter with TIL, and if he had, and this had been the only outstanding issue, then there would have been no difficulty in resubmitting the COT.
- However, even apart from agency, I consider that Mr Butcher must have had a degree of discretion in completing the COT. Having raised the matter with TIL, if he had done that, then given the wording of the Undertaking at paragraph 3.5 of the COT referred to in paragraph 127 above, in the absence of an established line of communication between Hewetts and the Fund, other than through the COT, it is, my judgment, difficult sensibly to suggest that Mr Butcher would have been required to do more at this point in order properly to complete and sign off on the COT.
- Prior sale of Property for £2,500,000 - I have already dealt with this point on the discrete basis referred to in paragraphs 236 and 237 above.
- However, as an alternative to that, I consider that much the same analysis would apply under this head as in respect of the Undervalue as referred to in paragraphs 242 to 245 above. Even more so perhaps than Mr Davies, TIL would have had no concern regarding the earlier 2006 valuation of £2,500,000 in the light of the changing market conditions since the date thereof, and its knowledge of TLL's attempts to find a buyer which plainly showed that the price negotiated with the Borrower was a good price, and certainly not an undervalue.
- Planning permission and the £35,000 "commuted sum" - Again, the evidence clearly demonstrates that this is not something that would have troubled TIL. Irrespective of TIL's eagerness to go ahead with the transaction, TIL knew the score, and would have raised no issue had Mr Butcher raised and discussed this issue with TIL, and specifically drawn to its attention the requirement to pay £35,000 prior to the commencement of the development works provided for by the existing planning permission.
- As Mr Bloomfield, the Fund's own expert, himself volunteered as referred to in paragraph 151 above, this was all pretty insignificant in the scale of things, and a matter that the Fund might reasonably expect to be looked after on the Fund's behalf by, as Mr Bloomfield put it, "the partner they tied up with, Tiuta". Having regard to the likely development costs that I have referred to, Mr Bloomfield's comments as to the insignificance of this commuted sum of £35,000 are entirely apposite.
- Against this background, it is, in my judgment, difficult sensibly to argue that having ventilated the point with TIL following the rejection of the earlier application, Mr Butcher would not or could not then have properly provided an unamended and unqualified COT. There is, as I see it, a degree of unreality in the suggestion that this is an issue that would have prevented the transaction from proceeding in any event.
- Restrictive Covenant - As I see it, the overwhelming likelihood is that if Mr Butcher had flagged this up as an issue with TIL, then TIL would have mentioned the title indemnity insurance that Mr Cook of Hobson & Arditti had obtained when carrying out the conveyancing work for TLL in 2006, and who was acting for TLL on the sale to the Borrower.
- It is complained by the Fund that the wording of the policy referred to in paragraph 92 above obtained on 11 August 2006 in respect of the restrictive covenant in the Superior Lease relating to the height of the building was ambiguous, a point that Mr Butcher appeared to accept when pressed under cross-examination. As to this, it is reasonably clear that this additional policy was obtained against the background of obtaining planning permission to develop within the existing roof area of the Building. Whilst the wording quoted in paragraph 92 above is somewhat odd, it strikes me as fairly obvious what the indemnity insurance was intended to cover, and, in the circumstances, I am not satisfied that the wording of the policy was, in fact, ambiguous when properly construed. However, even if there were any doubt in this respect, there is no reason to believe that any ambiguity could not have been resolved by simply clarifying the wording with the relevant insurer.
- In these circumstances, irrespective of any questions of agency, it again strikes me as difficult to sensibly to suggest that having raised the issue with TIL, Mr Butcher would or could not then have been able to provide an unamended and unqualified COT irrespective of any question of agency, not least given the wording of paragraph 5.7 of the CML handbook that I touched on in sub-paragraph 158.2 above. Consequently, I do not consider that any breach, if established, would have prevented the transaction from proceeding in any event.
- Restrictions in Underlease - Again, I do not consider that there would have been any issue if this particular matter had been raised with TIL following the rejection of an initial amended or qualified COT. Even if the Borrower had no settled intention as to what it intended to do with the Property, e.g. sell on with the benefit of the planning permission, develop out in accordance with the planning permission, or put the Property to some other use, I cannot believe that Mr Butcher pointing out these particular provisions would, in any way, have raised any concerns with TIL, particularly bearing in mind that the Property had been valued, i.e. by the CJ Valuation, on the basis of a user consistent with the existing planning permission.
- Further, irrespective of the existence of an agency relationship between TIL and the Fund, but particularly if such a relationship did exist, I find it difficult to see that it could sensibly be argued that, having raised the matter in this way with TIL as the point of contact with the Fund, Mr Butcher could not then have proceeded to provide an unamended and qualified COT without being required to specifically draw these provisions to the attention of the Fund.
- Presence of Asbestos – As we have seen in paragraph 98, and sub-paragraph 240.4.2 above, TIL, despite having been made aware of the real likelihood at least of the presence of asbestos at the Property, did not see this as an issue, otherwise TIL would surely have followed up on Robert Diggle of Edmund Symmons' email of 16 September 2008. In these circumstances, it is difficult to see that anything that Mr Butcher might have said to TIL regarding the possibility of asbestos being present at the Property given the age thereof, or as to the advisability of obtaining some form of specific asbestos report, would have made any difference to TIL's approach.
- In these circumstances, and irrespective of the question of agency as between TIL and the Fund, had Mr Butcher done that which it is alleged he ought to have done, and raised the issue of asbestos in the COT or in a covering or accompanying letter, and if the initial application for an advance to the Fund had been rejected on that basis, leading to the matter being taken up as between Mr Butcher and TIL, and had, as I consider likely, TIL raised no point or issue in respect thereof, then I consider that it is difficult seriously to argue that Mr Butcher could not, in those circumstances, having raised the issue in that way with TIL, have then completed and signed off on an unamended and unqualified COT so as to enable TIL to re-submit the application to the Fund.
- In these circumstances, even if a breach in respect of this particular head had been established, I am not satisfied that it would have had any causative effect.
- Good Leasehold Title – If Mr Butcher had raised the fact that title to the Property was good leasehold title rather than title absolute, in or by way of qualification to the COT, and the application to the Fund had been rejected on that basis, and the matter had then been taken up as between Mr Butcher and TIL, as I consider that it almost certainly would have been taken up, then the title indemnity insurance referred to in paragraphs 83 and 91 above would, as I see it, almost certainly have come to light in which case Mr Butcher ought then to have had no difficulty in signing off on an unamended and unqualified COT.
- This does then leave the argument that the Fund might still not have obtained the title that it wanted bearing in mind that paragraph 10 of the letter dated 13 August 2008 containing the Fund's offer to the Borrower made mention of a first legal charge being taken over the leasehold property registered under title number MS 521526, which was therein described as registered with "title absolute". However, it is difficult to believe that the Fund gave any serious thought to the precise nature of the title, provided that it obtained a title that provided good security, and there is absolutely no evidence that the present security was any less a security because the relevant leasehold title was registered with good leasehold title rather than title absolute for the reasons that I have already gone into in paragraph 194 above. Consequently, had this point been taken up as between Mr Butcher and TIL, then it is difficult to believe that it would have prevented the transaction from proceeding in any event.
- Consequently, again, even if a breach in respect of this head had been established, I do not consider that it has been demonstrated to have had any causal effect.
- Lack of Title to the 6th Floor and onerous draft 6th Floor underlease – The final two heads of alleged breach can be taken together. Again, it is necessary to consider what is likely to have happened if Mr Butcher had, as it is alleged that he ought to have done, raised the fact that no immediate charge was to be taken over the 6th floor, and the allegedly onerous nature of paragraphs 3.3 and 15 of Schedule 2 to the draft 6th floor underlease, by way of qualification to, or in a covering or accompanying letter sent with the COT, thus leading to a rejection by the Fund of TIL's application. Had, in these circumstances, the matter then been taken up as between Mr Butcher and TIL, as I consider that it almost certainly would have been, then I am satisfied that TIL would have raised no issue, being content, as had TLL when it took its security in respect of the earlier advance that it had made to CRIL secured on the Property, that the bundle of rights that it had acquired in the form of a charge over the 2nd to 5th floors and a debenture provided it with sufficient security, by giving it effective control over the development, and the ability to develop out and take an underlease of the 6th floor, or to sell on the right to do so in enforcing its security.
- Thus I do not consider it likely that this issue would have prevented the development from proceeding in any event, in which case the alleged breach would have had no causative effect, even if it had been established.
G. RECOVERABLE LOSS AND DAMAGE
(a) Introduction
- In the event that I should be wrong as to the issues of liability, and reliance and causation, I consider the various issues that arise concerning the loss and damage that the Fund seeks to recover damages for.
- It is, as I have indicated, the Fund's case that if Hewetts (acting by Mr Butcher) had done that which it is alleged that it should have done so far as its duty towards the Fund was concerned, then the relevant transaction involving the advance of £1,093,200 to TIL would not have gone ahead, and thus that the Fund is entitled to recover the damages that it suffered as a result of making that advance calculated as follows:
| Advance |
£1,093,200 |
PLUS
Cost of funding (interest from date of completion to date of sale, being cost of lender borrowing the capital sum lent) |
£458,172 |
LESS
Proceeds from sale of the Property |
£458,736 |
LESS
Interest received from TIL to end of December 2011, assuming a rate of 8.15% p.a. (the Funds now accepting that credit should be given for this) |
£292,917.69 |
| BALANCE CLAIMED |
£799,718.40 |
- A number of further issues arise as to the Fund's entitlement to recover damages in this amount, and on this basis, namely:
266.1. Whether the damages sought to be recovered are subject to a "SAAMCO Cap", and, if so, in what amount;
266.2. Whether the Fund is entitled to recover interest on damages at a rate that reflects its own liability to pay interest to investors at a rate in excess of 8%; and
266.3. Whether the Fund is guilty of contributory negligence.
(b) SAAMCO Cap
(i) Legal Principles
- The relevant principles described in Banque Bruxelles Lambert SA v Eagle Star Insurance Co. Ltd [1997] 1 AC 191 ("SAAMCO") are helpfully summarised in Jackson & Powell on Professional Liability, 7th Edn., at paragraph 11-259:
"In [SAAMCO] the House of Lords held that someone under a duty to advise on what is the appropriate course of action will be liable for all the foreseeable consequences of action taken in reliance on the advice, but a person under a duty to take reasonable care to provide information on which someone relies will generally be regarded as responsible for the consequences of the information being wrong, and not all the consequences from the reliance on it. As a result, negligent valuers sued by mortgage lenders were held to be liable only for the difference between their valuations and the correct valuations, and they were not liable for the further loss suffered by the lenders when the value of the security declined as a result of the fall in the property market. This principle is of significance in many solicitors' negligence cases, and most importantly in actions brought by lenders against solicitors who acted for them in the making of loans. A number of cases involving solicitors apply the [SAAMCO] principle … "
- The essential underlying consideration is to identify the kind of loss for which the claimant is entitled to be compensated by the defendant, which question itself depends on the prior question as to what was the scope of the defendant's duty of care – see SAAMCO at 211-212, per Lord Hoffmann. This essentially depends on whether it was a duty to provide the claimant with information for the purposes of enabling the lender claimant to decide what commercial course of action it should take, or whether it was a duty to advise the claimant as to what course of action it should take or as to the commercial risks inherent in making the loan, in other words whether or not it was an advisory retainer – see Gabriel v Little [2013] EWCA Civ 1513 at [74], per Gloster LJ.
- At paragraph 11-262 Jackson & Powell (supra) consider a number of cases where the scope of the duty of care has been held to extend to the consequences of providing advice, and not simply information:
"In some cases, the solicitors may be held to be providing advice and not information. Thus in Carter v TG Baynes Sons [[1998] E.G.C.S. 109] the defendant solicitors failed to note that there were restrictive covenants preventing development of the site which the plaintiff intended to purchase, and advised him to go ahead with the transaction. The plaintiff recovered for all foreseeable losses, including those resulting from a fall in the market, as the advice had been to proceed with the works, and it was not limited to giving information. In Portman Building Society v Bevan Ashford (A Firm)[[2000] PNLR 344] a solicitor failed to report matters relating to the borrower's financial condition to the lender and was liable for the whole lost. The Court of Appeal stated:
" … where a negligent solicitor fails to provide information which shows that the transaction is not viable or which tends to reveal an actual or potential fraud on the part of the borrowers, the lender is entitled to recover the whole of its loss.""
- It follows on, in my judgement, from my findings in respect of the scope of Hewetts' duty of care in paragraph 60 et seq above, that the scope of Hewetts' duty of care was limited to the provision of information, and did not extend to a duty to advise. On that basis, I consider that, as a matter of principle, any damages recoverable by the Fund should be limited to the consequences of that information being incorrect (if it was).
- Ms Smith places great reliance on the extract from the judgement of Otton LJ in Portman Building Society v Bevan Ashford referred to in paragraph 269 above, and argues that the information that it is alleged that Mr Butcher failed to provide in a number of instances goes to the viability of the transaction, with the consequence that the Fund is entitled to recover the whole of its loss. There is an argument that, as a matter of pleading, and as a consequence of the Fund's unsuccessful applications to further re-amended its Particulars of Claim, any lack of viability argument is limited to the lack of title to the 6th floor and onerous draft 6th floor underlease heads of alleged breach. However, even apart from this pleading point, I consider it difficult if not impossible to see that any of the other alleged breaches could properly be said to have gone to the viability of the transaction as a whole in the way envisaged in Portman Building Society.
- However, even in respect of these latter two heads of breach, I do not consider that they did go to the viability of the transaction as a whole because, even if the matters in question ought to have been drawn to the attention of the Fund, I am satisfied that the effect of the security that was available to the Fund in the form of the sub-charge over the Property, and debenture granted by TIL was, taken together with the charge and debenture granted by the Borrower to TIL well sufficient to make the transaction viable in any event, and certainly not rendered unviable in consequence of these points.
- Further, and perhaps more significantly, I consider that Portman Building Society can in any event be distinguished on the basis that the scope of the duty of care in the present case was truly limited to the provision of information, in a way that, on proper analysis, it was not in the latter case.
- Consequently, I consider that the SAAMCO Cap does apply in the present case.
(ii) SAAMCO applied to the facts
- It is necessary to first consider the findings of Mr King in his report dated February 2016, and his supplemental report dated June 2016 in respect of valuation issues. The relevant points to be taken therefrom are as follows:
275.1. Mr King first valued the Property as at September 2008, on the basis that the various matters in issue had no effect on the valuation, at £1,250,000, as against the CJ Valuation of £1,366,500. As to this, the parties are agreed that this difference in value does not suggest that the CJ Valuation was in any way negligent.
275.2. The existence of asbestos, if it had been taken into account by the valuer at the time, would have led to a reduction in the valuation of £35,000;
275.3. If it had been known for sure that the commuted sum of £35,000 had not been paid, then this would have led to a further reduction in the valuation of £35,000;
275.4. As to the various issues in relation to the 6th floor:
275.4.1. If it could be assumed that title would be obtained to the 6th floor, then the issues relating to the 6th floor would have resulted in no difference in value;
275.4.2. If it could be assumed that the 2nd to 5th floors could be developed for residential purposes, then the valuation would be £960,000, a reduction of £290,000; but
275.4.3. If the only use to which the Property could be put was commercial use, then the September 2008 valuation would have reduced to £275,000, a reduction of £975,000.
(The diminished values described in paragraphs 275.4.2 and 275.4.3 above both include the two sums of 35,000 already referred to.)
- It follows therefore that the two amounts of £35,000 (£70,000 in total) would be recoverable by way of damages even if the SAAMCO Cap were to be applied. There are, however, essentially two issues between the parties:
276.1. Whether the difference of £116,000 between Mr King's valuation and the CJ Valuation ought to be added to the damages recoverable; and
276.2. As to the correct approach so far as the 6th floor is concerned in the light of the options provided by Mr King.
- As to the first of these issues, I consider that it would only be appropriate to add the additional £116,000 to the damages recoverable if I could properly conclude that Mr King's valuation was a better and more accurate valuation of the Property as at September 2008 than the CJ Valuation bearing in mind that what we are essentially concerned with is the effect of the particular items in question on the valuation. There is, in my judgement, no proper basis for concluding that Mr King's valuation is any better or more reliable than the contemporaneous valuation of Copping Joyce. As I have said, there is no suggestion that the CJ Valuation was negligently prepared in any way, and I heard no submissions upon which I could properly conclude that there was a basis to prefer one report as against the other. This being the case, I do not consider it appropriate to add the additional £116,000 to the damages that would otherwise be recoverable had the Fund succeeded on the issues of liability, and reliance and causation.
- This then leaves the question of the 6th floor. For the reasons that I have already expressed (see e.g. paragraph 272 above), I do not consider that there would have been a difficulty in getting in the title to 6th floor at the appropriate stage of the development of the Property in accordance with the planning permission existing in respect of it. In those circumstances, and in the light of Mr King's findings as referred to in sub- paragraph 274.5 above, I do not consider that any additional damages under this head would fall within the SAAMCO Cap.
- Consequently, applying the SAAMCO Cap, I consider that damages would be limited to £70,000.
(c) Interest
- The short point that arises in respect of interest is as follows. As I have already indicated, the Fund seeks to recover interest at a rate comparable to that which it was required to pay to investors, namely a rate in excess of 8% per annum. However, Hewetts argues that it knew nothing about the Fund's arrangements for its own funding, and that interest at this rate is irrecoverable in accordance with ordinary remoteness principles established by Hadley v Baxendale 9 Exch 341, Victoria Laundry v Newman Industries [1949] 2 KB 528 etc., Hewetts having no notice of special circumstances so as to fall within the second limb referred to in Hadley v Baxendale.
- However, it does seem to me that there was sufficient within the instructions provided to Hewetts to identify the Fund as an investment fund of some kind and, in those circumstances, I consider that Hewetts was on sufficient notice of the type of entity that it was dealing with to enable the Fund to rely upon the second limb referred to in Hadley v Baxendale. Having said that, it does seem to me that different principles may apply once the Fund had entered into liquidation, and the investors were left to prove in the liquidation with a mere entitlement to statutory interest.
(d) Contributory Negligence
- In view of my earlier findings, I will deal with this particular issue shortly.
- It is common ground between the parties based on the authority of Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190, that contributory negligence will be of no application where the SAAMCO Cap applies. Consequently, having found that the SAAMCO Cap does apply, it follows that it would not be open to Hewetts to further rely upon any contributory negligence on the part of the Fund.
- However, in the event that I should be wrong as to my finding in respect of the application of the SAAMCO Cap had liability, and reliance and causation been established, I have reached the conclusion that a case of contributory negligence on the part of the Fund has not been made out by Hewetts. My reasoning, briefly, is as follows:
284.1. In my judgment, and for the reasons explained by Mr Bloomfield in the course of giving his expert evidence, I do not consider that there was any negligence involved in the Fund basing its lending criteria upon the security that it was obtaining over the Property, and the LTV in respect of that in the light of the CJ Valuation and the amount of its advance to TIL, and the existence of the guarantee provided by the parent company, TPlc. I do not consider that there was any negligence involved in being unconcerned as to the personal status of the Borrower and the lending arrangements as between TIL and the Borrower, an approach that was supported by Mr Bloomfield, without Mr Bryant having any real answer to the point. Whilst Mr Bloomfield was not prepared to support the method of lending in question in terms of "prudence", he did regard the lending in question as being an "acceptable risk".
284.2. I consider that the Fund had sufficient reason to believe as at September 2008 that TPlc would be good for the guarantee that it had provided, without there being any negligence on the Fund's behalf so far as concerns any examination, by reference to accounts and trading history, of the financial position of TPlc and its subsidiaries within the Tiuta Group. Whilst TPlc's balance sheet does show that it was highly geared, a closer examination of its own borrowing reveals a number of "soft" loans which caused Mr Bryant to make a number of concessions when cross-examined in respect of them.
284.3. For reasons that I have already explained, I regard it as unduly simplistic to regard the Fund's processing of loan applications to be a mere tick box exercise without any proper reliance on the information underlying the relevant applications.
284.4. Whilst the advance in question was made a matter of days after the collapse of Lehman Brothers and against the background of a difficult property market, I do not consider that it can properly be said that this alone was a factor that amounted to contributory negligence bearing in mind all the relevant circumstances, including the nature of the advance, namely to enable TIL to make a bridging advance, the existence of the TPlc guarantee, and the LTV of the Fund's own advance as against the CJ Valuation.
H. OVERALL CONCLUSION
- In the light of my findings in respect of liability, reliance and causation, it follows that the Fund's claim must be dismissed.
- It will not be necessary for the parties to attend when this judgment is handed down. I would hope that the parties might be able to agree any outstanding issues that follow on therefrom, including issues as to costs. However, in the event that this is not possible, I would invite the parties to consider whether the outstanding issues would be more appropriately determined on paper or at a further hearing, and, if the latter, make the necessary arrangements with the Court.
