The present recession and property downturn sees the return of 1990s' conditions for lender claims. Those of us who were in the front line for the professionals have the benefit of the lessons we then learned, but equally face new challenges in dealing with the anticipated new onslaught.
What Have We Learned From Last Time?
First, we inherit the legacy of the 1990s' case law, in which lenders won early battles but the professionals fought back. The law is clearer than it was at the start of the last wave of claims. Lenders cannot, for example, expect to recoup 100 per cent of their losses simply by alleging a breach of trust or other fiduciary duty. Following SAAMCo, nor can they expect professionals to make good the entirety of the losses caused by falls in the property market.
We know too that, unless the victims of fraud or deliberate breach of duty, lenders will have to accept the consequences of their own imprudent lending. There will again be significant reductions in damages for contributory negligence and in the past there have been reductions of as much as 90 per cent (in the Nationwide cases for example) because of lenders' failure to check borrowers' credit-worthiness or lending excessive amounts in proportion to the value of the security property. Arguably, lenders' conduct will be judged even more harshly by the courts this time if they have not learned from their 1990s' experiences.
What Differences Will There Be This Time Round?
In relation to residential claims, the adoption by many lenders of the Council of Mortgage Lenders Handbook will reduce the scope for argument about a solicitor's duty to report, while at the same time making it more difficult for lenders to rely on implied reporting obligations, for example as to borrowers' ability to repay.
Professionals' exposure may be increased by compound interest claims (following the case of Sempra Metals v Her Majesty's Commissioners of Inland Revenue (2007)) and a much altered costs climate in which many lenders' solicitors will be working on conditional fee agreements. Our internal costs unit is already actively challenging these and they can expect to remain busy for some time to come.
We have already seen more commercial loans leading to claims. Some will be high value, like the Nationwide Building Society case reported in the Footnotes section of this bulletin, making it more economic to litigate legal points which remain unclear (in that case the contribution issues between the professionals). Buy-to-let loans are already resulting in many, often multiple, claims. Coverage issues are common, particularly in relation to aggregation.
On the upside for defendants, there may be increased scope for mitigation arguments where lenders have delayed in pursuing borrowers or enforcing their security, delays perhaps exacerbated by Government part ownership of some lenders, and political pressures to reduce repossessions.
In terms of practical claims handling, the insurance market for solicitors has fragmented since the 1990s, when the Solicitors Indemnity Fund was able to coordinate the defence of multiple claims with us and its other advisors. Ensuring a unified defence strategy, including selecting appropriate test cases, will now present new challenges. It should nevertheless still be possible, for example by selecting appropriate test cases, and scrutinising particular lenders' lending practices across a range of cases, so long as insurers and their lawyers adopt a coordinated approach. We foresee the need for innovative claims handling models to commoditise smaller multiple claims which fit a standard pattern, as well as the need to take a strategic overview on the defence side to avoid "divide and rule" tactics by lenders.
Providing the lessons and experience of the 1990s' lender litigation are not forgotten, it should again be possible for professionals to make common cause and successfully coordinate the impending fight.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
