When instructed in a purchase transaction in which a client is seeking to rely on the aid of a mortgage, it is important to note that a Solicitor owes a duty not only to their client, but also to the client’s lender. Does a Solicitor, however, owe a general duty to report any information which may materially affect the valuation of the proposed security for the Lender?
The answer to this question is evident in the recent High Court judgement of E.Surv Ltd v Goldsmith Williams Solicitors, published on April 10th 2014, which saw a conveyancing firm ordered to pay costs of £100,000.00 for failing to disclose information on the value of a property to their client’s lender. This article examines the decision of E. Surv Ltd v Goldsmith Williams Solicitors, which is likely to be of particular interest to lenders.
The case centres on Mr Gayler – the client – who bought a property in September 2005 at a cost of £390,000.00. The client sought to remortgage the property and consequently instructed E Surv Surveyors to value the property in November 2005, at which time he informed E Surv that he had bought the property six to twelve months earlier at a cost of £600,000.00. E Surv valued the property at £725,000.00. The client applied to a lender in December 2005 for a loan of £580,000.00 to be secured against the property, which was based on an approximate value of £725,000.00. E Surv’s valuation was not provided to the lender at the time of the application, yet the application erroneously stated that Mr Gayler had purchased the property in October 2005 for £450,000.00. During the course of their instructions, Goldsmith Williams Solicitors – who acted for client and lender alike – obtained the Land Registry’s Official Copies for the property, which disclosed that Mr Gayler had indeed purchased the property for £390,000.00 in September 2005; the Solicitors did not divulge this information to the Lender. The remortgage transaction completed on February 13th 2006 on the basis outlined above. Mr Gayler defaulted on his mortgage payments and the lender took possession of the property, selling the same at a significant loss. Consequently, the lender pursued the Surveyors and Solicitors, but only followed through their action against the Surveyors for their supposed negligent valuation. The Surveyors agreed a settlement with the Lender for £200,000.00, only to later pursue contribution proceedings against Goldsmith Williams – it is this resultant case with which this article concentrates. This case centred around two principal issues: whether the solicitors were under a duty to advise the lender as to the recent disposition of the property and correct purchase price, as well as whether the surveyors could prove that, had the solicitors done so, they would have issued a revised valuation to the lender. Whilst the solicitors argued that there was no causative effect as between any breach on their part and the lender’s decision, the Court held that the solicitors breached their duty by failing to report the purchase price, with the surveyors evidencing that, on the balance of probabilities, the bank would not have proceeded had this information been communicated. The Court ordered the solicitors to pay 50% of the surveyors’ cost to the lender - £100,000.00. The solicitors have since stated that they will be seeking to appeal.
In anaylsing the impact of the judgement made, it is important to examine a solicitors’ duties to a lender during the course of a transaction. The Council of Mortgage Lender’s Handbook (CML), which was introduced in 1999, provides comprehensive instructions to solicitors when acting on behalf of lenders in residential conveyancing transactions; in addition to this, there is also the Building Societies Association Handbook (BSA Handbook), which was brought into force in 2010. Prior to the introduction of the CML handbook, a solicitor’s duty to report matters relevant to the lender’s valuation was derived from common law and had been held to be a part of his duty of care and skill. This ‘Bowerman Duty’ was outlined in Mortgage Express v Bowerman  PNLR 62, which held 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 valuation of the lender's security or some other ingredient of the lending decision, then it is his duty to point this out”. Nevertheless, the case of E Surv v Goldsmith Williams focused on provisions 188.8.131.52 and 5.1.1 of the CML Handbook, which respectively note the following:
184.108.40.206: You must take reasonable steps to verify that there are no discrepancies between the description of the property as valued and the title and other documents which a reasonably competent conveyancer should obtain, and, if there are, you must tell us immediately
5.1.1: Please report to us immediately if the owner or registered proprietor has been registered for less than six months.
It is important to note that selling or remortgaging a property so soon after a disposition of the same does not fit within the usual pattern of residential home ownership; you would need to question why the proprietor is looking to dispose of the property so quickly after its purchase. There are, of course, certain situations which have been excluded from provisions 220.127.116.11 and 5.1.1, which include, but are not limited to, a sale of a property by way of a personal representative of the proprietor, or a receiver or trustee-in-bankruptcy. As aforementioned, one of the key issues in this case was whether the Solicitors were obliged to inform the lender of the fact that Mr Gayler had purchased the property within the last 6 months for £390,000.00. Clearly, under the CML, there is no obligation on the Solicitor within provisions 18.104.22.168 and 5.1.1 to report to the lender the purchase price of the property. Therefore, a crucial question of the case was whether the ‘Bowerman Duty’ survived despite the introduction of the CML, or whether the obligations listed therein are exhaustive, leaving no scope for any further duties. However, the Court held the following:
‘…in my judgment what the Lenders Handbook, read with the Practice Rules and certificate of title, is intended to do is to identify and delimit the precise scope of the specific activities which the solicitor is being retained to do, in circumstances where the solicitor is faced with the difficult position of acting for two parties with potentially conflicting interests. It is not intended to exclude the general obligation to exercise reasonable care and skill in the performance of such activities…’
What can we draw from the judgement of this case? It is clear that from this case that the CML handbook does not negate solicitors’ wider duties of reasonable care and still owed to the lender, or indeed the client; the ‘Bowerman Duty’ should thus be read in conjunction with the CML guidelines. E Surv Ltd v Goldsmith Williams serves to find a happy medium between meeting the client’s and lender’s expectations with the responsibility in acting as a solicitor, as the solicitor has not been placed under an extended burden to obtain further information. What the case does underscore to a Solicitor, however, is the importance of reading and reviewing the information obtained carefully, so that any potentially prejudicial matters affecting the valuation of a property are brought to the attention of the lender.