“But for” battle: Professional liability in refinancing transactions

A recent Court of Appeal judgment will have significant ramifications for both lenders and the professionals who act for them.

The case, “Tiuta International Ltd v De Villiers Surveyors” (2016) EWCA Civ 661, concerned a loan advanced by the claimant lender to fund a residential development in Sunningdale. An initial facility of just over £2.5m was made available in February 2011. In November 2011, the borrower sought to increase this to slightly over £3m. Following a valuation by the defendant surveyor, the lender agreed to increase the facility in January 2012.

The loan was structured as a ‘refinancing’, which operates in much the same way as a residential re-mortgage. Firstly, the lender advanced an amount of just over £3m to the borrower under the January 2012 facility. Secondly, and more or less immediately, the borrower repaid all amounts due to the lender under the February 2011 facility, just over £2.5m. This left just the second, £3m, facility outstanding.

The second facility was not repaid and a sum of £2.84m remained outstanding at its expiration. After taking possession of the secured property, the lender received only £2,141,280 upon its sale, well under the surveyor’s valuation of £3.25m. The lender issued a claim against the surveyors for the full amount of the shortfall.

At first instance the surveyors were only held to be liable for losses arising from the additional sums lent under the second facility. This was on the basis that the substance of the transaction, if not the form, was merely to increase the existing borrowing, so the surveyors should not be held liable for those amounts lent for the purpose of repaying the existing loan. In essence, but for the negligent valuation the lender would not have agreed to lend any amount above that it had already advanced under the first facility.

The lender appealed to the Court of Appeal, which held the judge at first instance had failed to take proper account of the structure of the transaction. The leading judgment explained that courts should not look behind the structure of a transaction agreed between commercial parties, particularly given the surveyors were aware of the structure and instructed to provide a report on the property’s suitability as security for the full amount of the second facility. Consequently, the surveyors could be held liable for the full shortfall under a correct interpretation of the “but for…” test of causation. Put simply, but for the surveyors’ negligence, the lender would not have lent the borrower over £3m secured against the property and subsequently lost money when the security was inadequate; how the money was used is irrelevant.

This decision provides comfort for lenders, who can increase a customer’s borrowings by refinancing, safe in the knowledge this will not diminish their professional advisers’ liability for any negligence.

Lenders should, however, be on alert in the next few months for professionals, prompted by this judgment, amending the terms of their retainers to limit liability in refinancing transactions. It is also worth noting this was a split decision of the Court of Appeal, so, if they want to, the surveyors are likely to be granted permission to appeal to the Supreme Court. Lenders have won this battle, but the “but for” war may not be over yet.

If you would like to discuss this article in further detail, please contact Frances Mitchell on 0113 227 0210 or at frances.mitchell@gordonsllp.com or Catherine Woodward on 0113 227 0366 or at catherine.woodward@gordonsllp.com