Allyson Colby looks at a case confirming the duty of a solicitor to advise lenders of facts concerning a security
Key point
- The CML Handbook does not oust a solicitor’s duty to inform a lender if he obtains information, while carrying out his instructions, suggesting that a security has been overvalued
Solicitors have traditionally acted for both borrowers and lenders in matters of title where the lender’s and borrower’s interests coincide. Until 1 October 1999, practitioners were being instructed to undertake a rising number of tasks for lenders, causing concern that the duties that conveyancers were being required to perform were becoming too wide.
The Law Society therefore updated rule 6(3) of the Solicitors Practice Rules, listing the types of instruction that solicitors can properly accept in such cases. At the same time, the Council of Mortgage Lenders produced a set of standard mortgage instructions, contained in the CML Handbook, which are compliant with the rule.
The publication of the handbook postdated Mortgage Express v Bowerman & Partners [1996] 1 EGLR 126. In that case, the Court of Appeal held that solicitors were under a duty to advise lenders of facts discovered while investigating title which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender’s security (for example, indicating that a security has recently changed hands at a much lower price), or on some other ingredient of the lending decision. Did the “Bowerman duty”, as it has become known, survive the introduction of rule 6(3) and the handbook?
There was a school of thought that the duties listed in the handbook constituted a comprehensive and exclusive code, leaving little or no room for any others. However, E Surv Ltd v Goldsmith Williams Solicitors [2015] EWCA Civ 1147; [2015] PLSCS 318 confirms that the Bowerman duty is still alive and kicking.
Overvaluation
The question arose in the context of proceedings under the Civil Liability (Contribution) Act 1978, which applies where two parties are liable in respect of the same damage. A firm of valuers valued a property at £725,000. When the borrower defaulted on the loan, the firm paid £200,000 to settle the lender’s claim that it had overvalued the security, before issuing proceedings against the solicitors who undertook the conveyancing, claiming that they were equally liable for the loss.
The valuers argued that the law firm should have informed the lender that the registers of title revealed that the borrower had acquired the property for £390,000 less than six months previously. They argued that this would have caused the lender to contact them and that they would have corrected their valuation. The trial judge upheld the claim.
Causation
The Court of Appeal has overturned the decision – but only because it was not satisfied that the lender would have reacted differently had it been properly informed. It seems that the borrower stated, on his mortgage application form, that he had acquired the property two months previously for £450,000. The court commented that anyone reading the form would have realised that the borrower was suggesting that the property had increased in value by £275,000 in only two months – but two of the lender’s underwriters had approved the loan without querying the discrepancy.
The court agreed that the price-paid information obtained from the Land Registry was not materially different from the information provided by the borrower and, in the absence of evidence showing how the lender would have reacted on being told that the price paid for the property was only £390,000, the valuers’ claim against the law firm failed.
Bowerman duty
Had the valuers been able to satisfy the court on causation, things might have been different. Despite suggestions to the contrary in textbooks, the court firmly rejected the law firm’s arguments that the terms and conditions on which it was instructed were inconsistent with, or ousted, the Bowerman duty.
The court agreed that the starting point must be the express terms of the solicitors’ retainer and noted that the handbook requires conveyancers to inform them that a property has changed hands in the past six months – but says nothing about price. However, paragraph 1.3 of the handbook states that its contents do “not affect any responsibilities you have to us under the general law”. Additionally, paragraph 5.1.2 states that practitioners must inform lenders of anything that they “should reasonably expect us to consider important in deciding whether or not to lend to the borrower”.
Sir Stanley Burton stated that solicitors acting for borrowers and lenders are not required to be detectives. He accepted that they do not need to report matters that might be of commercial interest to lenders and that they are not required to undertake work outside the ambit of their instructions. However, if, while undertaking work within the scope of the Solicitors’ Practice Rules, conveyancers come into possession of non-confidential information that a reasonably competent solicitor would realise adversely affects the title to, or value of, a security, they are under a duty to report it to the lender.
Scope of retainer
Rule 6(3) lists making searches relating to a property in public registers and reporting any results that solicitors consider may adversely affect a lender as being tasks that practitioners can properly undertake. In addition, the handbook requires solicitors to make all usual and necessary searches and enquiries, and specifically mentions searches at the Land Registry.
The price-paid information, strongly suggesting that the valuation was excessive, was revealed on the registers of title at the Land Registry. Therefore, the solicitors had come across the information while acting within the scope of their instructions and the Bowerman duty had been engaged.
Allyson Colby is a property law consultant
