A recent appeal decision by the Scottish Court of Session highlights the duty of care owed by a borrower’s solicitor to an outgoing lender, as well as serving as a reminder to lenders to be certain of outstanding liabilities when they discharge security.
Headway Caledonian Limited ("HCL") purchased four units in Cadzow Business Park, Hamilton in 1997. To fund the purchase HCL borrowed money from the pursuers, NRAM plc (then Northern Rock) ("NRAM") and granted standard securities in favour of NRAM over all four units.
S, a solicitor, acted for HCL in the sale of two of the units in 2005. In 2006, HCL entered into heads of terms for the sale of a further unit. Ahead of the completion date, S, acting for HCL, emailed NRAM requesting that discharges of all of the standard securities be signed and returned as soon as possible "as the whole loan is being paid off for the estate and I have a settlement figure for that." NRAM, as secured lenders did not (as is common in this type of sale transaction) instruct solicitors.
Further to S’s email, NRAM provided the signed discharges and, in turn, received part of the sale proceeds from HCL to reduce the loan. This was however despite a substantial part of HCL’s loan remaining outstanding (and something which NRAM did not realise at the time of signing the discharges). The standard security discharges were then registered at Registers of Scotland.
HCL continued to make interest payments to NRAM until it was put into liquidation in 2010. Only at this stage was it discovered that the outstanding loan amounts owed to NRAM were unsecured and that the remaining units had been sold without any further repayments having been made to NRAM. NRAM raised a court action against S, the Borrower’s solicitors, to recover the loss they suffered as a result of having discharged the standard security.
The court at first instance held that S did not owe NRAM a duty of care because "it was not reasonable for a bank in the position of the pursuers to rely on the misstatement information without checking its accuracy; and that a solicitor in the position of [S] would not foresee that such a bank would reasonably rely on that information without first having carried out such a check".
However, the Inner House of the Court of Session allowed the appeal by NRAM against S. The Court said it was established that a solicitor, acting as agent, may owe a duty of care to another party in a transaction where the solicitor communicates with that party and oversteps their client authority. Liability can arise in such circumstances where the agent/solicitor chooses (without clear client authority) to provide information and does so in such a way that it can be reasonably inferred that he undertook a duty of care in respect of it.
The court stressed that the particular facts and circumstances must be considered and in this case it was of central importance to look at whether a solicitor in S’s position could be said objectively to have assumed responsibility. It was significant that S was acting within her area of professional skill; that she had demonstrated to NRAM in two previous transactions that she was trustworthy; that the representations made in her email were her own and were unqualified by the borrower; that there was a sense of urgency relative to the pending sale completion; and that it was an arm’s length transaction that would be financially beneficial to both HCL and NRAM.
Based on the facts and circumstances the Court allowed the appeal and held that S did owe a duty of care to NRAM; awarding £370,000 damages to NRAM.
The case serves as a salutary lesson to solicitors acting for borrowers who are selling secured property to be clear on (a) what is being sold, (b) whether the full secured loan is being redeemed and (c) what is then communicated to the outgoing lender. However it also serves as a reminder to lenders to check closely what security they are being asked to discharge and whether any loan amounts will remain outstanding post-sale. If all parties are clear on these key points, significant time, liability and expense can be avoided.