Solicitors’ duties to lenders: not to be detective but to use common sense
Tuesday 17th November 2015
The Court of Appeal has given a useful steer on the reporting duties of solicitors to lenders in the recent case of Goldsmith Williams v ESurv  EWCA Civ 1147.
The lender (the Mortgage Business) brought a claim against its surveyors (ESurv Limited) for a negligent valuation of a property. The claim settled with ESurv agreeing to pay £200,000 in damages. ESurv claimed, and was awarded, a 50% contribution towards the damages it was ordered to pay to the lender from the solicitors who had acted for the lender in the transaction (Goldsmith Williams). Goldsmith Williams appealed.
The borrower had bought the property for £390,000 in September 2005. He applied to the Mortgage Business for a remortgage in December 2005, for a loan of £580,000. In his mortgage application form, he stated that he had bought the property for £450,000 in October 2005. ESurv valued the property at £725,000 in November 2005, the borrower having told the valuer that he had bought it for £600,000 around 6 months earlier.
The apparent leap in value of the property from £450,000 to £725,000 in a matter of months was not questioned by the underwriters and the mortgage application was approved.
Once instructed, Goldsmith Williams obtained office copy entries which showed that the borrower had bought the property for £390,000 in September 2005. It is not clear whether they appreciated that there was a huge discrepancy between the price he paid for it in September 2005 and ESurv’s valuation; if they did, they did not report it to the lender.
The Judge decided that a solicitor instructed to act for both borrower and lender is not required to “act as a detective or bloodhound” or to “advise on the wisdom of going ahead with the mortgage loan nor on valuation”. However, if, while carrying out his instructions, he comes across non-confidential information that a reasonably competent solicitor would realise adversely affected the title to the property or the value of the security, he was under a duty to report it to the lender.
There was a catch though, and the appeal was allowed. The Judge decided that ESurv had not proved that the lender would have reacted to any report by Goldsmith Williams as to the discrepancy in price. Goldsmith Williams should have reported that the borrower had bought the property in September 2005 for £390,000. However, the borrower had told the lender that he had bought the property for £450,000. The judge held that the difference between what the lender thought the borrower had paid for the property (£450,000) and that which he had actually paid (£390,000) was not materially different. The mortgage application was still approved, based on ESurv’s valuation of £725,000, without any query being raised by the lender.
What it boils down to is that a common-sense approach should be taken. A discrepancy with the purchase price is clearly something you could expect a lender to be interested in, whether or not there is an express obligation in the retainer with the lender to report it. Whilst this claim was brought by the surveyors against the solicitors, it perhaps acts a subtle reminder to lenders too that they can’t just turn a blind eye and expect to be able to shift all of the blame to the professionals.