UK: Lenders’ Claims Against Professionals: Limitation Periods – A Timely Reminder

Last Updated: 11 July 2012
Article by Louise Woods

Introduction

A significant amount of sub-prime lending took place around six years ago, meaning that 2012 is set to be an important year for lenders' claims against professionals.

Since the global recession, increased borrower defaults have led to a surge in repossessions. And with property prices still relatively depressed (compared with 2006 levels), lenders often suffer shortfall losses on repossessed properties.

Lenders often review the facts of each mortgage transaction to identify whether they are able to recover losses occasioned by a professional's negligence. Recent years have seen an increase in the number of claims against surveyors and solicitors.

These claims are likely to fall into one of two categories – a claim for negligent overvaluation against the surveyor and/or a claim against the completing solicitors, often arising from a failure to report on matters that would have been material to the decision to lend.

Primary limitation period

Often in professional negligence claims, both contractual and tortious claims are pursued, as the lender relies on a breach of contract and on the professional's negligence in performing its duties under that contract. The basic limitation period in both types of claim is six years. In contract, the limitation period starts to run from the date of the breach, regardless of whether any loss has been suffered by the lender. The date on which the lender becomes aware of the breach is irrelevant for limitation purposes.

In negligence, the lender must show that it has suffered actual, recoverable damage. Determining the date on which damage occurs – and therefore the six year limitation period starts to run – is not always easy.

The 1997 case of Nykredit v Edward Erman Group established that a lender's professional negligence claim calls for a comparison between the amount of money lent and the value of the rights acquired. The lender's cause of action arises when, in applying that comparison, the lender can be said to have suffered a loss due to the professional's negligence.

In practice this is a difficult analysis to undertake and lenders are advised to work from the earliest possible date, which will always be the date of the valuation report or the date of the solicitors' Certificate of Title. Other possible dates should be used as a last resort, as they are inherently uncertain.

Special rules apply to extend the limitation period where, at the time the lender's cause of action accrues, it does not have knowledge of all the material facts. In that case, the limitation period is the later of six years from the date the damage is suffered and three years from the date the lender knows, or ought to have known, the material facts about the loss suffered, the identity of the defendant and its cause of action.

Where a lender's claim is based on the fraud of the defendant, the six year limitation period does not start to run until the lender has discovered the fraud or could, with reasonable diligence, have discovered it.

What lenders can do

A significant amount of sub-prime loans were made in 2006-2007, such that lenders should be particularly vigilant this year in reviewing their mortgage loans and deciding whether there is a claim worth pursuing.

Lenders should consider putting in place processes to ensure the facts of the professional's negligence are discovered in a timely manner. Once a property is repossessed and a shortfall seems imminent, for example, lenders might consider instructing their solicitors to carry out a title check and review of the completing solicitors' papers to rule out any negligence. Where a property sells on repossession for considerably less than the original mortgage valuation, lenders might also do well to instruct a surveyor to prepare a retrospective valuation report at minimal cost.

Once a potential claim has been identified, lenders should act quickly to ensure proceedings are issued before the limitation period has expired. If time is tight, lenders can issue a protective claim form immediately. They might also consider entering into a standstill agreement with the potential defendant in order to suspend time for the purposes of limitation.

Finally, even where primary limitation has expired, lenders might be able to bring a claim by virtue of the special rules on knowledge and fraud mentioned above. The key is for lenders to act promptly and to seek legal advice where necessary, to ensure they do not fall foul of the constructive knowledge test.

An edited version of this article was published in Mortgage Strategy on 25 June 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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