Lsref III Wight Ltd v Gateley LLP
| Jurisdiction | England & Wales |
| Judge | Lord Justice Briggs,Lord Justice McFarlane,Lord Justice Moore-Bick |
| Judgment Date | 13 April 2016 |
| Neutral Citation | [2016] EWCA Civ 359 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2015/0043/CHANF |
| Date | 13 April 2016 |
[2016] EWCA Civ 359
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
HH Judge Dight
HC-2013000168
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Moore-Bick
Lord Justice McFarlane
and
Lord Justice Briggs
Case No: A3/2015/0043/CHANF
Michael Pooles QC and Paul Mitchell QC (instructed by Berrymans Lace Mawer Llp) for the Appellant
Roger Stewart QC and Nicholas Trompeter (instructed by Ingram Winter Green Llp) for the Respondent
Hearing date: Wednesday 9 March 2016
Introduction
This is an appeal and cross appeal from the order of HHJ Dight sitting as a Deputy Judge of the High Court, Chancery Division, made on 12 December 2014 after the quantum only trial of a professional negligence claim against the appellant firm of solicitors Gateley LLP. The firm had been retained by a subsidiary of Anglo Irish Bank, which I will call "the Bank", to provide a report on title in relation to property being offered by the Bank's borrower, a single purpose vehicle company called Method Investments Limited ("MIL") as security for a development loan facility in the maximum sum of £1.1m, to be used mainly for the development as commercial premises with residential flats above them of a building in Rutland Street, Leicester ("the Property").
For present purposes, the relevant part of the security offered consisted of a first legal charge ("the Legal Charge") over a newly granted 199 year lease of the Property ("the Lease") to MIL by the then freehold owners of the Property, a Mr Owen and a Mr Van Oppen, who was the prime mover behind the development project and beneficial owner of MIL. The Bank's then valuers assessed the value of the Property at £275,000.
Gateley's report on title, delivered shortly before the grant of the loan facility in September 2007, was negligent because it failed to draw to the Bank's attention the existence and serious consequences of clause 35.1(c) of the Lease. It provided for the Lease to be forfeited where the Tenant, if a corporation, suffered any of a number of specified insolvency events, including administration, receivership, winding up, striking off or dissolution. The effect of that provision was seriously to impair the Legal Charge as a security, because its enforcement would be likely to require, or at least to occur at the same time as, one of those insolvency events affecting MIL, thereby triggering a forfeiture. Even if the Bank obtained relief from forfeiture under section 146(4) of the Law of Property Act 1925 as a mortgagee, in the form of a grant of a new lease, realisation of the security by the sale of the Property would still require the purchaser to take a lease of it containing the same forfeiture clause. It is no surprise therefore that, when the Bank turned its mind to enforcing its security in late 2012, and this serious defect in the marketability of the leasehold title first came to its attention, Gateley promptly admitted liability in negligence and breach of its contract of retainer.
As the judge said (judgment paragraph 2), his task at the trial was therefore limited to deciding what if any damages had been caused by Gateley's negligence, and whether, as Gateley alleged, the Claimant had failed to mitigate its loss. The Claimant LSREF III Wight Limited had taken an assignment of the Bank's rights under the facility, the Legal Charge and the retainer in May 2014 during the currency of these proceedings. The Claimant is a special purose vehicle formed for the purpose and owned by Lone Star Funds, a private equity firm.
Gateley's case that the Bank, and latterly the Claimant, had failed to mitigate its loss was based on the assertion that they had failed to negotiate a variation of the Lease with the landlord. By the time of the trial in December 2014, that case was based upon the fact that the freeholder (then Mr Owen alone) had by August 2014 indicated his willingness to agree a variation of the Lease to remove the insolvency forfeiture provision on payment of £150,000, that this variation would increase the value of the Lease by double or treble that amount and that the payment of £150,000 could be added by the Claimant to the amount recoverable by enforcement of the Legal Charge as security. More generally, Gateley's case at the trial was that, if the defect in the marketability of the Lease as security was so easily remediable at that price, then the Claimant would be able by sale of the Lease as varied to make a full recovery of the amount lent (inclusive of the payment of £150,000) so as to have suffered no transactional loss by reason of the Bank, its predecessor, having lent on defective security.
The judge's determination of these issues, set out in an admirably clear ex tempore judgment may be summarised as follows:
a) he concluded that the Bank (and therefore the Claimant) had suffered its loss at the commencement of the transaction, in September 2007.
b) He decided that the amount of that loss attributable to Gateley's negligence was represented by the diminution in the value of the Lease as a security attributable to the insolvency forfeiture provision, measured at that time. Having heard expert valuers for both parties, he concluded that this amounted to £240,000.
c) He rejected Gateley's case that the Claimant had failed to mitigate its loss, for seven specific reasons to which I will have to return. In summary, he regarded the obtaining of a variation of the Lease as such a complicated, risky and uncertain exercise that it was not possible to say that the Claimant had acted unreasonably in failing to pursue it.
d) He therefore awarded damages of £240,000 to the Claimant with interest at 2% per annum from September 2007.
Mindful that this court might be persuaded to take a different view about the appropriate date for assessment of the loss, the judge helpfully resolved a difference of opinion between the experts about the diminution in the value of the lease attributable to the insolvency forfeiture provision as at the date of trial. He found that the amount of the diminution had by then increased (largely due to the fact that the Property had by then been redeveloped as planned) from £240,000 to £497,250.
Within a short period following judgment which, despite the intervening Christmas break, lasted only slightly over five weeks, the Claimant succeeded in obtaining a variation of the Lease by the removal of the insolvency forfeiture provision, at a cost of £150,000 payable to Mr Owen, using the damages ordered to be paid. The transaction involved putting MIL into administration, and it was followed by a marketing of the varied Lease of the fully developed Property. This eventually culminated in an auction in December 2015, at which the Property was sold by the administrators of MIL for £645,000, although the sale has yet to complete, due to difficulties in obtaining the new freeholder's consent to an assignment to a company, rather than to the successful bidder. The facts about the post-judgment variation of the Lease and the subsequent sale of the Property have emerged from the admission, by consent, of fresh evidence from both parties to the appeal.
Gateley's case on its appeal, advanced with commendable economy by Mr Michael Pooles QC was that:
a) The judge had been wrong to assess the alleged loss at the valuation date. It should have been assessed, since it was still un-crystallised, at the trial date.
b) By December 2014 the Claimant had plainly failed, unreasonably, to mitigate its loss by remedying the defect in the marketability of the Lease at a cost of £150,000 which, by then, Gateley had offered to lend, so as to fund the exercise pending the sale of the Property.
c) Had this been done, then on the judge's valuation of the interest in the Property represented by the Lease as varied, the Claimant would have recouped the whole of its transactional loss by realisation of its security, as well as the £150,000 necessary to obtain the removal of the insolvency forfeiture clause.
d) Accordingly, the appeal should be allowed, and the action dismissed with costs, here and below.
I shall have to address in more detail the Claimant's submissions in response, developed by Mr Roger Stewart QC at greater length than those of his opponent. Nonetheless they may be summarised as follows:
a) The judge was entitled to assess the loss at the transaction date, the date of assessment being a fact-sensitive matter for judicial choice in each case, with which an appellate court should not interfere in the absence of an error of principle.
b) By the same token, the judge was entitled to conclude as he did on the issue of mitigation, that being also a multi-factorial question on which the appellate court should be slow to interfere with the judge's decision.
c) But in any event (and in this Mr Stewart relied on the Claimant's cross appeal) if the Claimant ought to have mitigated its loss, the evidence shows that it suffered an irrecoverable cost of £150,000 plus associated expenses in obtaining the variation of the Lease, for which it is entitled to look to Gateley for compensation.
d) For that purpose, this court is entitled to have regard to what is now known about the subsequent history of the sale of the Property by the administrators, which demonstrates that the Claimant will not in fact recover its cost of obtaining the variation of the Lease, even if entitled to add that cost to the amount recoverable under its security.
Disposition
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