About this case:

• Judgment:
  External link

In 2007 Capital Home Loans Limited had funded Nendrum Propertes Limited’s purchase of a number of properties owned by Geoff Young (GY), the sole owner of the Nendrum company.

The High Court of Justice noted that from the initial mortgage application, “here were enough clues in the application of who owned the properties and the nature of the transaction for a competent underwriter to understand that GY was transferring the Properties to Nendrum and hence, for example, stamp duty had to be paid”.

It is also clear from the evidence that was led that part of the purchase price was paid in shares in Nendrum, which did not pass through the solicitors’ accounts, and that the full amount of the consideration was not paid. Instead part of the loan from the plaintiff was used to discharge stamp duty due by Nendrum, and other outlay.

On 18th December 2013 the plaintiff wrote to Hewitt and Gilpin Solicitors Limited, claiming that the instructions given by the plaintiff were for a re-mortgage, but were in fact sales from GY to Nendrum, and that the full purchase funds did not pass through the solicitors’ client accounts.

In the proceedings, the plaintiff claimed that had they known the true nature of the transaction, which was part of a tax avoidance scheme, they would never have funded the transaction.

They would therefore have avoided losing the money loaned as a result of the property market’s collapse, a loss they claimed amounts to £325,848.99.

The Court observed that when acting for a lender the primary task of the solicitor is to ensure that the lender obtains a good enforceable title to the property which will secure the lending.

Citing Mortgage Express Limited v Bowerman and Partners (Firm) 2 All ER 836, it was found that: “The question which the judge has to ask himself was whether a solicitor of ordinary competence could have regarded the information in question as information which might cause the (lender) to doubt the correctness of the valuation which they had obtained.”

It was also noted that a solicitor is not a guarantor, but must ascertain the client’s business accurately, citing Credit Lyonnais SA EWCH 1310 and Gray v Buss Murton PNLR 882.

The Court considered the terms of the retainer, which included reference to Capital Homes Loans’ Handbook.

It was found that in light of the specific requirements of the Handbook, there were a number of matters that the plaintiff could reasonably have expected the solicitor to have mentioned.

These included that this was a sale, not a re-mortgage; that part of the consideration involved shares; that full consideration was not being paid as part of the money was being used to pay stamp duty and other outlay, leading to the sale being at an undervalue; and that the legal costs were being paid out of the monies advanced by the plaintiff, which could amount to a “kick back”.

Delivering the judgment, Horner J observed that “In respect of the nature of the transaction, I am satisfied that the plaintiff’s underwriting department knew that this was a sale of Properties by GY to Nendrum, a company he owned absolutely and not a re-mortgage of the Properties by GY or Nendrum. At the very least the underwriter must have turned the Nelsonian blind eye as to what was actually happening.”

However, the solicitors should have expressly drawn all these relevant matters to the plaintiff’s attention, unless they were wholly satisfied that they had the requisite knowledge.

As this was not the position, the Court found that the solicitors had not discharged their duties to the plaintiff.

In relation to causation: “The court’s view is that in the febrile atmosphere that existed at this time with a bull property market, apparently limitless credit and boundless optimism that property prices would continue to rise ever upwards, even if the plaintiff did not know and could not have known that this was a sale by GY to Nendrum, a company he controlled, it would still have lent the money secured on those Properties.”

It was noted that there had been a deliberate decision on the part of the plaintiff not to call the underwriter as a witness, and the Court was therefore being left to guess as to what knowledge the underwriter had, and as to whether the plaintiff would not have proceeded with this particular transaction if it had had full knowledge of all the actual details of what was happening.

As a result of this, the plaintiff had failed to discharge the onus of proof on the issue of causation.

Horner J then set out briefly his views on the issues of contributory negligence, duty to mitigate and quantum.

On the issue of contributory negligence, it was observed that if the plaintiff had not known the nature of the transaction, then it must have been hopelessly incompetent.

Thus, if the Judge was wrong in his finding that the plaintiff had not established causation, then the award would have to be reduced by 66.7 per cent to take account of the contributory negligence of the plaintiff in entering into the transaction which, if its own expert is correct, it should have shunned.

On the duty to mitigate, it was found that: “The plaintiff has on the face of it a clear claim under the guarantee given by GY in respect of Nendrum on the information before this court. The plaintiff has been able to offer no good reason why it is not sought to enforce that guarantee, other than some general policy of the plaintiff about taking proceedings against guarantors in Northern Ireland which makes no sense.”

Thus, the plaintiff should have mitigated its loss by seeking to enforce the guarantee against GY, rather than seeking to recover its loss in their entirety from the solicitors.

In fairness to the parties who made detailed submissions on the issue of damages, and in case the matter should go to an appeal, the Judge concluded with some observations on damages.

It was found that if the plaintiff had satisfied the Court on liability and causation, then “the amount of its loss will equal the amount lent, plus interest less repayments made and the value of the properties as realised or retained. From that will need to be deducted an amount to represent the failure on the part of the plaintiff to mitigate its loss by seeking to enforce the guarantee. Finally there will need to be a reduction of 66.7% to take account of this contributory negligence.”