A legal take on… Lenders considering bringing professional negligence claims: Watch out for limitation issues

By David Bailey, partner and head of services to lenders group at SGH Martineau LLP

Not so much A legal take... this month as a reminder that for lenders considering any professional negligence claims arising out of the loans they made in the mid-2000s limitation must be a primary consideration. This does not, admittedly make for riveting reading, but it can save your potential claims.

For claims in contract any action must be brought within six years of the date on which the breach of contract takes place, which is usually deemed to be: for solicitor claims, the date the Certificate of Title was signed and dated; and for valuer claims, the date the original mortgage valuation report was sent to the lender (usually taken as the date of the original mortgage valuation report). There may also be a continuing breach up to the date the loan was made.

For claims in tort an action shall not be brought after the expiration of six years from the date on which the cause of action accrued; namely once (a) the defendant has committed a breach of duty of care; and (b) the claimant has actually suffered legally recognised “actual” damage.

But the real question is when does a lender incur damage for limitation purposes? There are at least five possible dates on which it could be argued a lender suffers actual damage for limitation purposes, namely:

a)      The date on which the advance was made;

b)      The date on which the value of the security became less than the value of the lender’s claim;

c)      The date on which the borrower defaulted;

d)      The date on which the benefits acquired by the lender (namely the security and the borrower’s covenant) became worth less than the burdens undertaken (the sum advanced plus interest); or

e)      The date on which the security was realised.

At present, based on the judgment in Nykredit the approach noted at (d) is the correct one to adopt. This however poses difficulties particularly for risk management purposes not least because this is potentially an extremely difficult factual exercise involving an equation whose variables (including the value of the security and the valuer of the borrower’s covenant) may vary from day to day.

The “latent damage” provisions in the Limitation Act 1980 are a handy safety net, if the primary limitation period for claims in tort have passed. This period is three years from “...the earliest date on which the claimant or any person in whom the cause of action was vested before him first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action.”

The difficulty with relying on section 14A remains the notion of an ascertainable “date of constructive knowledge”, which sets the three-year extended limitation period running.

The obvious moral of this captivating story is that time is running out for many of these claims and a clear strategy to identify potential claims at risk of being statute barred is required.