Overdraft secured on long lease – Solicitor failing to inform lender of onerous covenants – Lender reaching disadvantageous agreement with borrower – Court satisfied that lender would have proceeded in any event – Whether solicitor in breach of duty – Lender claiming for loss of opportunity to strike more favourable bargain with borrower – Damages assessed accordingly
In 1964 Southampton University purchased Chilworth Manor, which stood near the town at the junction of the M3 and M27. In late 1987 the university, exploring the possibility of developing the manor as a conference centre through the medium of a new company, Chilworth Manor Ltd (CML), opened discussions with the claimant bank for the provision of building finance. By letter dated 18 April 1989 the bank, which had been banker to the university for many years, offered to provide CML with a £4.75m overdraft facility, the same to be secured on a 99-year lease to be granted to CML by the university. The offer was accepted by CML, which had appointed the defendant firm to be its solicitors. The bank decided to use the same firm, and in a letter dated 12 May 1989 instructed the defendant to furnish a report on title and to confirm that CML had a “good marketable and unencumbered title to the property”. After acknowledging the letter on 12 May 1989, the defendant wrote to the bank on 13 July 1989, confirming that “the company will acquire upon completion a good marketable and unencumbered title to the property free from any materially onerous covenants”.
Shortly afterwards the bank’s securities department notified the relevant official that a satisfactory report on title had been received. The intended lease was executed on 14 August 1989. Its provisions included an absolute restriction against alienation and the sharing of occupation with others, a similar restriction against using the manor otherwise than for conference centre purposes, and a forfeiture clause entitling the landlord to re-enter, inter alia, in various insolvency-related events (the offending provisions). On 4 May 1990 the facility was increased to £6.52m, and in August 1990 the manor opened for business. At about the same time the bank realised that the required valuation on completion had not taken place. In May 1991 the bank received a report from independent valuers who, having considered the terms of the lease, concluded that the lease was unmarketable and consequently worthless as a security. The manor did not trade successfully, and in March 1992, when the debt stood at £7.3m, the bank concluded that the recovery of any amount could not be made unless a substantial part of the loan was written off and the lease was “cleansed” of the offending provisions. After protracted negotiations such an agreement was eventually concluded in March 1995.
The bank brought proceedings alleging that the defendant, having breached its duty to report the offending provisions, was liable for the overall loss sustained. Alternatively, it claimed that the breach of duty had at the very least diminished the bank’s bargaining power. To that end the bank invited the court to compare the agreement reached in 1995 with the deal (the 1993 deal), which it allegedly could have concluded at no loss if the inadequacy of the security had been known at the outset. The defendant contended that no such duty had been undertaken; alternatively, that the loss complained of was solely attributable to the poor results achieved by the conference centre. The judge found as a fact that, if the covenants had been reported, the bank would not have withdrawn from the transaction but would have sought to eradicate the offending provisions.
Held: The defendant was liable, but not for the overall loss.
1. Unless the retainer was suitably qualified, a solicitor asked by a lender to provide a report on title owed a duty to describe the nature and extent of the property which its customer was acquiring. In the case of a leasehold, that duty extended to informing the lender whether there were onerous covenants in the lease itself. There was nothing in the correspondence between the parties to qualify that duty: Barclays Bank v Weeks Legg & Dean [1998] 3 EGLR 103 explained and distinguished. Furthermore, given that the lease contained a covenant against assignment, the defendant was also in breach in stating that the title was marketable: Re Taunton and Roberts’ Contract [1912] 2 Ch 381 considered.
2. Since the bank would have proceeded even if the covenants had been reported, the defendant could not be held liable for the overall loss which had ensued: see South Australia Asset Management Corporationv York Montague Ltd [1996] 2 EGLR 93, as applied in Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 182. The bank was entitled to recover on the alternative (loss of bargaining power) basis. However, since the bank was seeking to compare the 1995 agreement with a specific hypothetical deal (particularised in the pleadings), the task of the court was to assess the chance that the 1995 deal would have been done: see Allied Maples Group Ltd v Simmonds & Simmonds [1995] 1 WLR 1602. In view of the numerous imponderables, that chance should be valued at 15% of the loss contended for. As the bank had failed to obtain an appropriate valuation before March 1991, a reduction of 50% should be made in respect of its contributory negligence. However, it was only the overall loss which could be so reduced: see Platform Home Loans Ltd v Oyston Shipways Ltd [1999] 1 EGLR 77. It was consequently unlikely that the amount awarded on the alternative basis would be diminished.
Simon Berry QC and Katherine Holland (instructed by Rosling King) appeared for the claimant; Alan Steinfeld QC and Robert Hantusch (instructed by Blake Lapthorn, of Portsmouth) appeared for the defendant.
Alan Cooklin, barrister