The High Court has considered the long-standing point of debate in conveyancing and professional negligence circles, namely, whether the ‘Bowerman duty’ to report matters relevant to the lender’s valuation still stands, despite the introduction of the CML Handbook. Shail Patel explains how this judgment finally makes clear what the duties of the solicitor are in respect of reporting in property valuation cases.
What’s happened?
The claim concerned proceedings brought under the Civil Liability (Contribution) Act 1978 (the 1978 Act) by valuers who valued a property against solicitors that acted for the lender in relation to a remortgage by the borrower. The borrower defaulted and the bank suffered a loss on sale.
The bank sought to recover its losses on sale initially from both solicitors and the valuer. However, it ultimately pursued only the valuers, who settled with the bank for £200,000.
The valuers brought fresh proceedings against the solicitors, alleging that the solicitors were liable to the bank for the same loss as the valuers were liable for, and that accordingly the valuers were entitled to a contribution to their settlement outlay of £200,000.
The transaction concerned the remortgage in early 2006 of a property in Buxton. The claimant valuer valued the property at £725,000 in November 2005, and the valuation was retyped for the borrower’s new bank.
There were a number of curiosities regarding the information provided by the borrower as to how much the property had been purchased for. In his mortgage application (provided only to the bank) he had stated he had purchased it in October 2005 for £450,000. However, he had told the claimant’s valuer he had purchased it 6-12 months earlier for £600,000. The reality, not known to the bank or the valuer, was that the borrower had purchased it in September 2005 for £390,000. That information was recorded on the Office Copies for the title which the defendant solicitors had on their file. The valuers alleged that it was negligent of the solicitors to have failed to notify the bank of the huge discrepancy between the valuation of £725,000 and the purchase price of £390,000 only a few months earlier.
There were three issues in the claim:
- Whether the solicitors were obliged to advise to the bank on the earlier purchase price.
- Whether the valuers could prove that had the solicitors done so, the valuation would have been revised such that the loan would not have proceeded.
- The proper apportionment under the 1978 Act as between the respective professionals.
The court held that:
- The solicitors did breach their duty by failing to report on the purchase price.
- The valuers had proved on the balance of probabilities that the bank would not have proceeded had the solicitors done their job properly;
- There was no basis for departing from an apportionment of 50/50.
Accordingly, the valuers were awarded a contribution of £100,000 to their outlay.
Why is it important?
The first issue raised a point which has been the subject of debate in conveyancing and professional negligence circles since the introduction of the CML Handbook in 1999, the standard form of solicitors’ retainer used in most residential conveyancing transactions where the bank and borrower jointly instruct the solicitor.
Before the introduction of the CML Handbook, a solicitor’s duty to report matters relevant to the lender’s valuation had been held to be part of his duty of care and skill. In Mortgage Express v Bowerman [1996] PNLR 62, which set down what has become known as the ‘Bowerman’ duty the Court of Appeal held:
“If in the course of doing the work he is instructed to do the solicitor comes into possession of information which is not confidential and … clearly of potential significance to the client, I think that the client would reasonably expect the solicitor to pass it on and feel understandably aggrieved if he did not […][…] if, in the course of investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender’s security or some other ingredient of the lending decision, then it is his duty to point this out.”
The first question for the court was thus whether the Bowerman duty survives a CML Handbook retainer - or conversely whether the express obligations under that retainer are exhaustive, leaving no ‘wriggle room’ for wider duties. There was no express obligation to report the prior purchase price absent evidence of fraud, so the question in E.surv turned squarely on this point. The solicitors’ case was that such a duty was incompatible with the restrictions in the Practice Rules and Certificate of Title.
The court (HHJ Stephen Davies QC) held as follows:
“66. … in my judgment what the Lenders Handbook, read with the Practice Rules and the certificate of title, is intended to do is to identify and to delimit the precise scope of the specific activities which the solicitor is being retained to do, in circumstances where the solicitor is faced with the difficult position of acting for two parties with potentially conflicting interests. It is not intended to exclude the general obligation to exercise reasonable care and skill in the performance of such activities or, as part of such general obligation, the obligation to report to the lender as one of the clients where, through the performance of such obligations, the solicitor comes into possession of information which has a material bearing on the valuation of the lender’s security or some other ingredient of the lending decision.”
The second potentially important point was that the court felt able to infer how the bank would have acted without direct evidence from any of the relevant underwriters. The court concluded that a letter from a solicitor to the underwriters setting out the prior purchase price was likely to have been taken seriously and acted upon, as opposed to ignored. It was straightforward to refer matters back to the valuer, who did give evidence (which was accepted) that if he were told the true purchase price (as opposed to the £600,000 the borrower had given) he would have changed his valuation. More likely than not, the loan would not have proceeded.
How does this fit into existing law and practice?
It has for many years been uncertain to what extent a solicitor remained obliged to comply with the Bowerman duty when instructed on the basis of the CML Handbook. At least two leading works in the area have argued that the Bowerman duty does not survive a CML Handbook retainer; see Solicitors Negligence and Liability (Flenley & Leech) and Lender Claims (Tomlinson & Grant).
The question has been resolved by the court in E.surv but only on the narrow basis set out above. The effect of the decision is that the Bowerman duty does not require the solicitor to carry out any further or new enquiries which are beyond the express terms of the CML retainer. However, if in the course of carrying out searches etc which the solicitor is expressly obliged to carry out under the terms of the CML Handbook, the solicitor comes across information which a reasonably skilled and competent solicitor would consider might have a material bearing on the value of the lender’s security, the solicitor is obliged to inform its lender client, subject to any confidentiality issues. If confidentiality issues arise, there is a mechanism in the Handbook for resolving those.
In what ways does this affect practitioners?
Before E.surv a conveyancer might defensibly have argued that he was not required to advise the bank about anything not expressly covered by the CML Handbook. However, it would be risky for a solicitor following E.surv to take such a formulaic approach.
The key message is that the CML Handbook retainer does not negate a conveyancing solicitor’s wider duties of reasonable care and skill owed to the lender (or indeed borrower) client. Clearly that imposes potential difficulties in high volume conveyancing practices where the work is largely done by junior individuals. On the other hand, however, the decision in E.surv seeks to strike a balance between the legitimate expectations of the clients and the burdens on the solicitor. The solicitor does not need to do any more or obtain anything more by way of information. To that extent, the burdens on him are not extended. However, the information which is obtained does need to be read carefully so that any potentially important issues going to the valuation are picked up. In reality and in the vast majority of cases, most documents obtained (requisitions, environmental searches, land charges, etc) will not have any bearing on the lender’s valuation. The Land Registry office copies will however normally show the previous sale price, so is more likely to be a source of relevant information. The decision may therefore require more of a tweak in conveyancing practice than any wholesale reorganisation of how the work is done.
