Court Of Appeal Gives Lenders Boost On Mortgage Valuations

The Court of Appeal decision has given a significant boost to lenders over mortgage valuations.

In an important judgment for the mortgage market, The Court has confirmed that the Council of Mortgage Lenders (CML) Handbook does not supersede the Bowerman principle, where a solicitor is duty-bound to report to the lender client on all matters relevant to a valuation.

In the case of Goldsmith Williams Solicitors v E.Surv Limited EWCA Civ 1147 the Court of Appeal found in favour with e.surv, meaning that from this case onwards lenders should expect to receive all relevant valuation information from their legal team.

Georgina Squire, Head of Dispute Resolution at Rosling King LLP said:

“This is a welcome decision for lenders. There is no longer any doubt that the CML Handbook does not preclude the operation of the Bowerman Duty. A solicitor must therefore continue to advise lender clients of any information which may cast doubt on a valuation, or any other ingredient of the lending decision.

“Although the Court of Appeal suggests that the application of the Bowerman Duty is dependent on the terms of the written retainer, in most cases it will be difficult to argue that the Bowerman Duty does not apply.

“Mortgage Express v Bowerman is the Court of Appeal precedent case from the last recession on which my firm acted for the lender. The Master of Rolls gave the leading judgment which endorsed the test set at first instance – namely that any information which comes into the possession of a solicitor acting for a lender which may have a bearing on the lending decision, must be passed across to the lender client – it is not for the solicitor to sift and decide what to tell their client.

“Some have argued that this principle was overridden by the CML Handbook when published after the Bowerman decision. This case at both first instance and now Court of Appeal, has restated the principle that the Bowerman duty remains good.

“This is excellent news for lenders as it clarifies the position and gives them the comfort that their lawyers are passing them all information they hold about a transaction.”

The case is considered unusual as it came about as a contribution claim. The valuers, e.surv, sought a contribution to a payment they had made to a lender from the solicitors on the same transaction under the Civil Liability (Contribution) Act 1978.

e.surv was instructed by a lender to value a Property, but was subsequently sued by the lender for preparing a negligent valuation. That claim ended with e.surv paying the lender a sizeable sum in damages. They then sought a contribution from Goldsmith Williams who had acted as solicitors on the same transaction, on the basis that, if the lender had decided to sue the solicitor, it too would have been found to be in breach of duty and would have had to pay the lender damages.

e.Surv argued that the solicitor was under a duty to advise the lender in relation to facts discovered by them in the course of investigating title, 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 (the “Bowerman Duty”).

The solicitors argued that they were not under a duty to report facts such as the date of sale and purchase price of the property and their obligations were limited to investigating and reporting on title, save where there was evidence of fraud. They relied on the CML Handbook as the basis of their retainer and argued it was to be read as a “comprehensive and exclusive code” setting out the duties of a solicitor to a lender.

The Court of Appeal considered the scope of the duties of a solicitor when acting for both borrower and lender and recognised that there may, on occasion, be situations were a solicitor faces a potential conflict of duty. However, no such conflict arose in this case.

Lord Justice Patten held:

“The duty to draw the differences between the price and the valuation to the lender’s attention was…a necessary incident of the solicitor’s instructions to investigate and report on title, unless expressly excluded by the terms of the retainer”. In particular, Lord Justice Patten rejected the solicitor’s argument that the CML Handbook was deliberately intended to limit the duty of disclosure to instances of fraud.