CONTENTS
Paratus AMC Ltd v Countrywide Surveyors Ltd 2
[2011] EWHC 3307 (Ch)
Mortgage valuation – negligence – measure of loss – contributory negligence
Kensington Mortgage Co Ltd v Carr 4
(unrep) Court of Appeal 7 December 11
Mortgage – appeal - costs
Liddle v Cree 5
[2011] EWHC 3294 (Ch)
Undue influence – presumed undue influence – 2-party case
Publication: FA published revised package of reforms in CP11/31 7
Mortgage Market Review
CASE REPORT
Paratus AMC Limited v Countrywide Surveyors Limited
[2011] EWHC 3307 (Ch)
LEGAL POINTS
Mortgage valuation – negligence – measure of loss – contributory negligence
SUMMARY
On the facts, a mortgage valuation fell within an acceptable range of values and was not negligent. However, had the court upheld the claim, it would have made a significant deduction for contributory negligence by the lender.
FACTS
In July 2004 a borrower applied to GMAC RFC Ltd (now Paratus AMC Ltd) for a 10-year interest-only loan of £166,500 on the security of a 1st-floor 2-bedroomed flat. GMAC instructed Countrywide Surveyors to provide a mortgage valuation of the property. The open market value was stated to be £185,000. In reliance, GMAC made an offer of loan which completed in September 2004 with GMAC making a net advance of £166,430.
In March 2005 GMAC sold a package of mortgage loans including the present loan to RMAC 2005 NS1 Plc, a special purpose vehicle. At law GMAC remained the mortgagee.
In 2007 the borrower defaulted and fell into arrears. In May 2008 GMAC obtained an order for possession. The property was sold in September 2008 for £123,500. The net sale proceeds were £118,103.20.
GMAC and RMAS sued Countrywide for damages for professional negligence for overvaluing the property.
There were four issues:
(1) What was the value of the property in July 2004?
(2) Was the valuation of the property negligent?
(3) Has GMAC/RMAS suffered any recoverable loss?
(4) Should any award of damages be reduced on account of contributory negligence?
HELD
On issue (1), the court heard expert valuation evidence from two valuers, and concluded on the evidence that the open market value of the property in July 2004 was £175,000.
On issue (2) the court considered whether Countywide’s valuation fell within the range of values that might have been given by a competent valuer exercising reasonable skill and care: Merivale Moore Plc v Strutt & Parker [1999] 2 EGLR 171; Legal & General Mortgage Services Ltd v HPC Professional Services [1997] PNLR 567. On the evidence an acceptable margin of error was 8%, giving an acceptable range of values of £160-£190,000 (either side of £175,000) so that the valuation of £185,000 fell within the bracket and was not negligent.
On this basis, the claim was dismissed. However, the court went on to determine issues (3) and (4) in the event that the Claimants’ evidence was to be preferred.
On issue (3) the court first determined the quantum of the claim as being £31,000 (difference between impugned valuation of £185,000 and Cs’ valuation of £154,000): Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191. However, the court also noted that it was necessary to quantify the entire loss both recoverable and irrecoverable because any reduction of an award of damages on account of contributory negligence is calculated by applying a percentage discount to the entire loss, both recoverable and irrecoverable: Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190. The total loss was £65,960.76 representing the difference between the total expenditure in respect of the advance, interest and costs and the total receipts in respect of payments by the borrower and the net proceeds of sale.
The mortgage sale agreement between GMAC and RMAS did not prevent GMAC suing for its losses. There had been no legal assignment of the cause of action against Countrywide so that in principle GMAC was entitled to assert that it had suffered a recoverable loss.
On issue (4) the question of contributory negligence was relevant both to the claim in tort and contract because the liability in contract would have related to a contractual obligation to exercise care and skill which was coextensive with the duty of care existing at common law independently of the contract: Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852.
Countrywide raised two main points: (a) failures to carry out sufficient enquiries and investigations into the borrower’s honesty and reliability, and (b) the operation of an imprudent policy of lending up to 90% loan to value. Both sides relied on expert evidence concerning the underwriting process.
On the evidence, the court rejected the contention that GMAC’s business model of 90% LTV loans on a self-certified basis was negligent.
However, had GMAC made proper enquiries as to the borrower’s financial position it would have found that he was unable to verify his declared income or to give satisfactory explanation for his inconsistent statements of earnings or his failure to give proper disclosure of his liabilities. The probability was that GMAC would have concluded that the borrower’s stated income was insufficient to justify the loan that he sought.Further the reasonable conclusion in the circumstances would have been that the borrower was dishonest. In those circumstances GMAC would not have made the advance.
Accordingly, if the court had found Countrywide liable, it would have found that GMAC was contributorily negligent. The court would have made a deduction of 60% of the entire loss (60% of £65,960.76 = £26,384.30). As this figure would have been less than the full measure of recoverable damages, judgment would have been given in that lower amount.
Claim dismissed
COMMENT
This case raises three key points.
First, it is difficult to establish negligence by a valuer, bearing in mind the ‘bracket’. The impugned valuation was £185,000. C’s expert valued the property at £154,000 with a bracket of 4% which would have comfortably placed the impuged valuation well outside the bracket. D’s expert valued the property at £175,000 with a bracket of 12.5% which would have placed the impugned valuation well within the bracket. The judge accepted D’s valuation of £175,000 but opted to fix the bracket at 8% which just brought the impugned valuation within the bracket.Claimants need to bear in mind a degree of tolerance in valuing their claims. The bracket is not necessarily 10%
Second, it helpfully explains the court’s approach to contributory negligence by a mortgage lender and in particular (a) the way in which the court will review a lender’s underwriting process both in principle, bearing in mind the relatively high loan to value ratio, and specifically having regard to failures to follow up obvious lines of enquiry on the mortgage application form, and (b) the correct approach to quantum - requiring the court to identify first the amount of recoverable loss, secondly making a discount for contributory negligence against both the recoverable and irrecoverable loss, but allowing the claim up to the limit of the recoverable loss. Note the significant deduction of 60% for lender negligence.
Third, it confirms that a cause of action in a lender can on the particular facts survive the sale of the mortgage debt to a special purpose vehicle.
CASE REPORT
Kensington Mortgage Co Ltd v Carr
(unrep) Court of Appeal 7 December 2011
LEGAL POINTS
Mortgage – appeal – costs
SUMMARY
When a lender offered to dispose of an appeal by consent it would not be liable for the appellant’s costs thereafter.
FACTS
K granted a mortgage to C and his wife. K obtained an order for possession. C applied to set it aside on the basis his wife had forged his signature on relevant papers. K claimed the mortgage advance had been used to pay off C’s debts including previous mortgage.
The judge held that C had been unjustly enriched to the extent of £7,500 being monies paid as costs to C’s solicitors in divorce proceedings.
C produced evidence that he was legally aided in the divorce proceedings and did not use the money to pay legal costs. He was granted permission to appeal on this one ground.
By letter dated 11 November 2010 K accepted that C had not been unduly enriched by the £7,500 and enclosed a consent order to dispose of the appeal. C refused and sought permission to rely on a number of other grounds.
HELD
Appeal allowed on the one ground for which permission was granted. C entitled to his costs up to 11 November 2010. No order as to costs thereafter.
CASE REPORT
Liddle v Cree
[2011] EWHC 3294 (Ch)
LEGAL POINTS
Undue influence – presumed undue influence - two party case
SUMMARY
On the facts, a claimant was unable to raise the presumption of undue influence arising out of the partition of jointly owned property.
FACTS
Mr L and Mrs C were formerly the joint legal and beneficial owners of a farm including a farmhouse and a substantial barn. In 2010 the farm was partitioned into two titles – Mr L taking the barn and most of the land; Mrs C taking the farmhouse and remainder of the land.
Mr L subsequently sought to set aside the partition on the ground of undue influence by Mrs C.
In summary Mr L claimed that from the early 1990s Mrs C had assumed complete control over his property and financial affairs, that a relationship of trust and confidence had built up between them during a long cohabitation at the farm since 1999, and that he had executed the partition under her domination while mentally debilitated, not understanding the disadvantageous nature and consequences of the partition. The effect was to leave Mrs C with a comfortable home to enjoy mortgage free with her husband with whom she had become reconciled, whereas he was left to live in poor health in a small touring caravan located in the Barn, without the financial resources with which to convert it into a residence either for himself or for sale. It is common ground that there was a significant disparity in value in Mrs C's favour between the partitioned parts of the farm, for which no equality money or other compensation was paid.
Mrs C denied control over Mr L affairs or any abuse of any relationship of trust and confidence. She says that the partition was the final and mutually agreed stage of their disengagement, resulting from the break-down of their personal relationship, preceded by their physical separation in December 2008 and the cessation of their partnership farming business at the farm (and elsewhere) in September 2009. She says that partition rather than sale of the farm was the fully negotiated and agreed solution to their continuing wish to remain at, rather than leave, the farm while nonetheless leading separate lives and that the disparity in value was the natural and agreed consequence of her having contributed the lion's share of the purchase price of the farm from Mr L's mother's estate, and of her having provided the main financial support to their loss-making partnership thereafter.
HELD
Following Royal Bank of Scotland plc v Etridge (No 2)[2002] 2AC 773, the law in relation to undue influence is well settled. It may for present purposes (which involve no third parties) be summarised as follows:
(1) Undue influence consists of the abuse of a relationship of trust and confidence. Leaving aside cases of improper pressure, coercion or threats, where equity follows the common law doctrine of duress, undue influence arises “out of the relationship between two persons where one has acquired over another a measure of influence, or ascendancy, of which the ascendant person then takes unfair advantage”. (per Lord Nicholls in Etridge at paragraph 8).
(2) Such influence or ascendancy may typically occur when one person places trust in another to look after his affairs and interests, such that he is predisposed to agree a course of action proposed by the other. That ascendancy may be abused if the other betrays that trust by preferring his (or her) own interests (ibid para 9).
(3) The principle is not strictly confined to cases of abuse of trust and confidence. It extends to cases where a vulnerable person has been exploited: (ibid para 11). That vulnerability may arise from mental infirmity falling short of incapacity, from youth or old age, or from a position of economic dependency.
(4) The question whether a transaction has been brought about by undue influence, whether by the abuse of a relationship of trust and confidence or by the exploitation of vulnerability, is always a question of fact, save in certain narrowly defined relationships such as solicitor and client or medical adviser and patient. As always, the burden lies on the claimant to establish undue influence, but it may be established by demonstrating both the requisite relationship of trust and confidence and a transaction calling for explanation, if the defendant cannot produce evidence sufficient to counter the prima facie case of undue influence thereby disclosed. The claimant's proof of those two facts leads to a rebuttable evidential presumption of undue influence: (ibid paragraphs 14 and 17).
(5) The force of such a rebuttable presumption is of infinitely variable weight, depending upon the degree of trust, confidence or vulnerability in the relevant relationship and upon the extent of the disadvantage to the claimant inherent in the impugned transaction. As Lord Nicholls put it, (at paragraph 24) “the greater the disadvantage to the vulnerable person, the more cogent must be the explanation before the presumption will be regarded as rebutted”.
On the facts, whilst the partition may have been unwise from Mr L’s point of view, it was discussed and agreed at arms length at a time when Mr L was no longer looking to Mrs C for advice and guidance. Accordingly there was no confidential relationship which might give rise to a presumption of undue influence. The law does not protect persons with the requisite capacity from making unwise or even foolish bargains.
Claim dismissed.
COMMENT
This is not a mortgage case, but it illustrates the court’s approach to a 2-party case involving undue influence. Most mortgage cases typically involve three parties- the lender, the borrower and a surety, usually the borrower’s wife. Occasionally (for eg. in private mortgage cases) issues of undue influence arise as between lender and borrower.
The judge in the present case (Briggs J sitting as the newly appointed Vice-Chancellor of the County Palatine of Lancaster in Leeds) also made some fairly telling remarks about the conduct of the case, noting as follows:
“5. That short summary of the dispute conceals a remarkable depth and breadth of factual disagreement between the parties, leading to the preparation of no less than 7 full lever arch files of trial documents, three days of oral evidence (necessitating extended hearing hours) and a frequently minute examination of the details of a personal and business relationship extending over 15 years, all for the determination of the validity or otherwise of a single property transaction, at a cost which is, I fear, bound substantially to exceed the agreed disparity in value between [Mr L's] rights (if the Partition is upheld or set aside) of £75,000. It is a dispute which, because the parties are not married to each other, the court has a very limited power to resolve, and a case which therefore cried out for mediation.”
PUBLICATION
FSA publishes revised package of reforms in CP11/31 Mortgage Market Review
On 19 December 2011 the Financial Services Authority published a revised package of reforms in its Mortgage Market Review consultation paper CP11/31. In its Press Release, the FSA says:
The Mortgage Market Review aims to prevent a recurrence of the irresponsible lending which resulted in some borrowers taking on mortgages which only seemed affordable on the assumption that house prices would always rise. Many of those borrowers ended up struggling to repay their mortgage and in danger of losing their home.
The proposals will see prospective borrowers - whether they are first time buyers, right-to-buy tenants or home movers - get the right information and advice, at the right time, and ensure mortgage lenders will be properly checking each applicant’s realistic ability to repay their mortgage.
The FSA has significantly amended the proposals following detailed feedback from lenders, consumer groups and other stakeholders and informed by a cost benefit analysis which is also published today. The FSA is now encouraging consumers, industry and all other interested parties to give their opinions on this new, full, set of proposals as well as on the accompanying cost benefit analysis.
Following consultation, the FSA Board will make a decision on the final form of rules in summer 2012, but implementation will not be before 2013.
At the core of the proposals are three principles of good mortgage underwriting:
- Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability;
- This affordability assessment should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever; and
- Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.
The FSA believes it is important to have the rules well established long before any future upturns in the economy.
Key features of the proposed future regime include:
- Income will have to be verified in every mortgage application;
- Lenders do not have to consider in detail what borrowers spend but cannot ignore unavoidable bills, such as heating and council tax;
- Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay the capital. But relying on hopes of rising property values is not enough;
- Lenders will have to consider the impact of increases in interest rates in line with current market expectations;
- Some applicants, such as those trying to consolidate debts with a mortgage, will have to get advice to ensure they understand the full implications and costs; and
- Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements.
The FSA is also calling for feedback on developing a specific approach for entrepreneurs who borrow against their home to fund their business.