Case comment: Guidance on measurable loss

Paul McIntosh, Associate, examines a case of a lender claim for professional negligence.

Since the decision in David T Morrison & Co Limited t/a Gael Home Interiors v ICL Plastics Limited and others [2014] UKSC 48, the key issue for commencement of the prescriptive period has date of knowledge of loss.

In lender claims for professional negligence, one analysis used to determine the issue of when loss arises is the approach outlined in the House of Lords judgement in Nykredit Mortgage Bank Plc. v. Edward Erdman Group Ltd. The value of the outstanding loan is to be weighed against the rights obtained, being the borrowers covenant and the value of the security subjects.

Canada Square Ltd v Kinleigh Folkard & Hayward Ltd

In the recent English judgement of Canada Square Ltd v Kinleigh Folkard & Hayward Ltd (September 2015), the issue of when measureable loss occurs has been considered in detail.

The valuer had failed to identify a right of way which adversely affected the value of the property. The main facts are:

• Loan funds were advanced on 16 March 2006; 
• The loan went into arrears in February 2007;
• The property was surrendered in August 2008;
• The property was sold in July 2009 at a significant shortfall; and
• Claim was issued against the valuer on 23 October 2013.
  

It was argued for the valuer that the claim was subject to limitation and should not proceed.

In assessing the date of loss, the judgement applied Nykredit principles. The approach taken was to consider the value of security subjects and the ability of the borrowers covenant to bridge the gap between the loan funds advanced and the value of the security subjects.

Property value

Despite the fact that neither the valuer nor the solicitor acting in the transaction had noticed the right of way and despite the fact that parties were agreed that the lender was unaware, it was held that the right of way was reasonably discoverable. 

As such, the value of the property was not considered to be the negligent valuation for purposes of the Nykredit exercise but rather the actual value. 

Borrower’s covenant

The basic test of the borrower’s covenant was confirmed as whether i) the Covenant appears good and ii) interest payments are being duly made. In this situation the lender need only show prima facie evidence to this effect.

It was not accepted that the borrower’s covenant was worthless following a single missed payment. A “single hiccup” could occur for any number reasons. The judgement indicated that detailed consideration of the correspondence between the borrower and the lender to determine the facts and circumstances of each case at the stage at which the covenant is no longer valuable.   

Expert evidence

The valuer’s agents had instructed experts to consider the borrower’s financial position and it was established by the expert examination that the borrower’s covenant could not have covered the deficit from inception of the loan. Accordingly, that loss in terms of Nykredit had occurred at the date of advance and the claim was subject to limitation.

Implications

When considering this judgement from a Scottish perspective, there are several procedural differences between the jurisdictions which must be considered:

• In English law, claims are subject to primary limitation of 6 years from the date of accrual of an action and in cases of negligence where the loss arising from the negligence was not known at the date of loss, a further secondary limitation period of three years from the date of knowledge. In this case, the issue of the date of knowledge was not relevant due to the timings involved; and
• The prescription in Scotland differs in that the five year prescriptive period commences from the date at which the lender was aware or should have been aware using reasonable diligence that they had suffered a loss. As the key issue is the lender’s knowledge, the consideration of the actual loss position established by expert evidence in the Canada Square case is mostly irrelevant.

Conclusion

The guidance on valuation of a borrowers covenant following arrears is of interest and lenders would be best advised to raise proceedings at the earliest opportunity where borrower default occurs.