Company buying vacant building plot – Company selling plot to owners of company – Charge in favour of bank created on each occasion – Failure by solicitors to inform bank of restrictions on building – First solicitor raising defences of limitation and want of causation – Defences rejected – Whether second solicitor required to investigate afresh
A married couple (the borrowers) were the principal shareholders in a property company (the company). They also operated a building business in partnership with each other. Various assets belonging to the company and the borrowers were charged in favour of the claimant bank at different times. On 31 March 1989 the company purchased a vacant building plot near Exmouth for £105,000 with the aid of a £97,000 loan from the bank, which was secured by a first charge. In that transaction (the 1989 transaction) the second defendant (CC) acted as solicitors for both the borrower and the bank. In October 1992 it was agreed that the company should be wound up and its assets transferred to the partnership. The first defendant firm of solicitors (BP), was engaged by both parties to act in an agreed sale of the plot to the partnership for £80,000 and in the creation of a fresh charge to secure the borrowers’ indebtedness to the bank. The requisite transfer and charge were executed on 23 December 1992 (the 1992 transaction).
In March 1995 the borrowers, having obtained planning permission to build a house on the plot, became aware that the plot was subject to two restrictive covenants, given respectively in 1934 and 1944, which prohibited the borrowers from locating the house in accordance with the plans approved by the planning authority. The bank first learned of these restrictions in July 1995 and noted that neither firm of solicitors had brought them to its attention when acting in the transactions. In February 1998 the bank, as mortgagee, sold the plot for £32,000 having issued, on 17 July 1996, proceedings against both firms for losses in the region of £200,000. At the trial CC, while conceding that it was in breach of an express undertaking to “disclose any matters which could affect the value and saleability of the property”, took issue on matters of causation, limitation and quantum. BP claimed inter alia, that a fresh investigation into such matters fell outside the scope of its retainer.
Held: CC alone was liable.
1. CC could not point to the 1992 transaction and contend that, since it was only responsible for the 1989 transaction, that responsibility was discharged when the bank realised its security at no loss to itself, on the conclusion of the 1992 transaction (the plot having been sold to the partnership as if free of any restriction). The 1992 transaction was not to be treated as a realisation of the security as it was cash neutral as far as the bank was concerned, having in no way reduced the total indebtedness of the borrowers and the company.
2. The bank’s claim against CC was not statute-barred. While its cause of action in contract arose on receipt of the defective report on title in March 1989, its parallel right to sue in tort for failure to exercise proper skill and care (acknowledged in Henderson v Merret Syndicates Ltd [1995] 1 AC 145) arose only when it suffered damage. Applying the principles enunciated in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1996] 2 EGLR 93, no cause of action accrued before such date as the court could be satisfied that the sources to which the lender could look to obtain repayment would prove deficient. As the party advancing a limitation defence, CC had not discharged the burden of showing at what particular point in time the various assets charged by the borrowers in favour of the bank ceased to afford adequate security for the amount advanced. In any event, even if its cause of action had accrued more than six years before the commencement of proceedings, the bank would have been entitled to rely on the three-year extension afforded by section 14A of the Limitation Act 1980. There was no time before July 1995 when the bank had reason to check the documents of title to the plot and seek advice on the restrictions that would have been disclosed.
3. The fact that a differently located house could have been constructed on the plot was immaterial, as it was clear from the evidence that the borrowers would not have proceeded with the purchase if the restrictions had come to light. Accordingly, CC could not claim that the bank was unable to recover the full amount of its loss: South Australia Asset Management Corporation v York Montague Ltd [1996] 2 EGLR 93 and Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 considered.
4. BP had correctly maintained that, on a proper construction of the correspondence dealing with its retainer, it was simply required to confirm that the company had validly transferred such title as it held to the partnership so that the borrowers could charge that interest to the bank.
Katherine Holland (instructed by Rosalind King) appeared for the claimant; Julian Picton and Andrew Simmonds (instructed by Bond Pearce, of Exeter) appeared respectively for the first and second defendants.
Alan Cooklin, barrister