Calculating non-crystallised losses in professional negligence claims

20th June 2016

The Court of Appeal has clarified the correct approach to the calculation of damages in professional negligence claims where losses have not crystallised. Banking Litigation specialist reviews LSREF III Wight Ltd v Gately LLP and explains the implications for lenders and legal advisors.

LSREF III Wight v Gately: The Latest Piece of the Puzzle

The point at which losses are assessed in a professional negligence claim brought by a mortgage lender can be crucial, both in terms of establishing when the limitation period begins to run (and therefore the point at which a claim becomes time-barred) and in relation to the calculation of any damages.

In an earlier briefing we reviewed a useful case which provided a worked example of how, in accordance with the Nykredit case [1], the courts take into account both the true value of the charged property and the borrower’s covenant strength to ascertain when a lender claimant suffered loss. In this briefing we look at LSREF III Wight Ltd v Gately LLP [2] in which, leading on from Nykredit, the Court of Appeal confirmed the correct approach to the calculation of damages in those cases where the security has not yet been realised and the lender’s loss has therefore not yet crystallised. This recent case provides the latest piece of the puzzle in this complex area.

Legal and Factual Background

The defendant solicitors had failed to draw their client bank’s attention to an insolvency forfeiture clause in a lease of a property which was charged as security for a loan in 2007. The clause impaired the value of the property, which became clear when the bank subsequently took action to enforce its security. The bank issued a negligence claim against the solicitors and assigned its cause of action to a special purpose vehicle (the claimant). The solicitors did not dispute liability and in fact offered to pay the sum of £150,000, which the freeholder had confirmed it would accept in return for a variation of the lease to remove the offending clause.

The claimant did not pursue the lease variation and a hearing on quantum took place, at which the judge held that the loss had occurred immediately the charge had been granted in 2007, and awarded damages for the full diminution in value of the property attributable to the offending clause (£240,000), plus interest.

The claimant subsequently used £150,000 of its damages to vary the lease and agreed a sale of the property. The solicitors appealed the damages award. At the date of the appeal hearing the sale had not yet completed, and so the loss had still not crystallised.

Court of Appeal Clarification

The issues before the Court of Appeal were the solicitors’ arguments that:

1. alleged non-crystallised loss should be assessed at the date of trial, not the original valuation/transaction date; and
2. the claimant had unreasonably failed to mitigate its loss by refusing to accept the solicitors’ early offer to fund variation of the lease.

Finding for the solicitors, the Court of Appeal held:

• As with surveyors’ negligent overvaluation claims, when quantifying loss caused by a solicitor’s negligent advice, the court has to consider first whether any loss has been suffered as a result of entering the transaction and second, if it has, what part of that loss is attributable to the negligence [3].
• However, the first question does not have to be assessed as at the date of commencement of the transaction. On principle and as a matter of common sense, the court should not blind itself to relevant facts occurring thereafter which are known about by the date of trial.
• A lender’s transactional loss is most easily identified where it has been crystallised by realisation of security.
• In those cases where loss remains un-crystallised it will, in most cases, be better to calculate loss by reference to the trial date and with the benefit of all relevant facts known by that time.
• The fact that a lender may well have suffered some loss immediately upon commencement of the transaction says little about what may ultimately be its true loss.
• In refusing to accept the solicitors’ early offer to fund variation of the lease, the claimant had unreasonably failed to mitigate its loss. The benefit to the claimant of completing an early variation would have exceeded any outlay; funds to facilitate the variation were available; and the claimant was a sophisticated investor in distressed assets for whom such a deal would be within the ordinary course of its business.
• The judge’s award of damages would be replaced with an award which assessed loss at the date of trial and which took into account all relevant facts. That would be just £157,000 (the price of variation plus associated legal costs), plus interest.

Practical Implications for Lenders and Professional Advisors

As well as providing helpful, authoritative guidance as to the correct approach to the assessment of damages, this case is clear confirmation that lenders definitely can sue for non-crystallised losses. This means that they do not have to wait for buyers to be found and sales to be completed before taking action against negligent advisors, especially when doing so could risk the claim being time-barred. In an area in which pinning down limitation deadlines can be difficult, being able to take pre-emptive action as early as possible is likely to be of significant assistance to lenders, as it will minimise the risk of otherwise valid and valuable claims becoming time-barred.

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[1] Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) [1998] 1 All ER 305
[2] [2016] EWCA Civ 359
[3] Nykredit; South Australia Asset Management Corp v York Montague Ltd [1997] AC 191; Lloyds Bank Plc v Burd Pearse[2001] EWCA Civ 366