Background
Supreme Court case concerning agreements between RBS and a property developer. In July 2007 the bank and the developer entered written agreements for loans of £845k and £560k in respect of the purchase of two plots of land at Gleneagles on which the developer was to build two houses.

Argument
The repayment date for the loans was in August 2008 and, when the developer failed to repay the loans at that date, the bank sued the developer for recovery of the funds. However, the developer counter claimed arguing that he had only entered into the loan agreements on the basis of assurances given by the Bank that it would make additional funding (of up to £700k) available to fund development on the plots and claimed damages in respect of the bank’s breach of those assurances. The assurances said to have been given by the bank included a telephone call prior to the signing of the agreements in which the developer was told that, in addition to the sums lent to buy the land, the bank would advance further funding for development of the land.

The central issue for the court was whether, on an objective assessment of the exchanges between the parties, the bank had entered into a legally binding agreement to lend Mr Carlyle the money for development of the plots in addition to money for their purchase.

Court of Session decisions
In the Outer House Lord Glennie found that bank had agreed a “collateral warranty” obliging them to lend for the development of the plots. However, the Inner House allowed an appeal finding that the telephone call only amounted to a statement of future intention and that legal obligations would only arise when the parties entered a written contract[1].

Supreme Court decision
The Supreme Court have allowed an appeal of the Inner House decision.

The court found that the Inner House had disagreed with Lord Glennie on questions of fact without having sufficient regard to the limited role an appeal court has in such questions. (Generally speaking, a court of appeal can only interfere with the decision of the judge at first instance on a question of fact where the decision of the judge cannot be reasonably be explained or justified on the evidence before him[2].)

In this case the court found that, although Lord Glennie could have interpreted the evidence differently and concluded that there was no obligation on the bank to lend the money for the development, he had a reasonable evidential basis for coming to the conclusion he had (i.e. that the bank had made a legally binding promise to provide the development funding).

The court also found that use of the term “collateral warranty” had been a distraction in this case and that the bank’s obligation could equally have been described as a “promise” or “unilateral undertaking”. In coming to its conclusion the court noted that, in Scots law, unlike the situation in England, a unilateral undertaking such as a promise can be binding without consideration from the recipient of the promise and that the undertaking or promise does not require to be collateral to another contract.

The full judgement is available from the Supreme Court here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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 [1] The court said “If the [developer] considered that the [written agreements] did not properly reflect what he understood was to be agreed, or had been agreed orally, then he ought not to have signed the agreements. At all events, whatever the [developer] thought was the position, the informed observer would understand the written agreements to cover all matters agreed to date. It may well be that, at that time, the [bank] fully intended to enter into a further bargain with the [developer] to advance additional funding for the building works. However, they had not done so and did not do so. That may have been contrary to the spirit of the negotiations prior to the signing of the written agreements, but that spirit, or its moral content, cannot be taken as creating a legally binding voluntary obligation.”

[2] Lord Hodge’s judgement refers to the reasons for the restriction on the role of the appeal court highlighting that it is the judge at first instance who hears the evidence and is best placed to assess the credibility of the witnesses and, having heard the evidence over an extended period, will have “greater familiarity with the evidence and a deeper insight in reaching conclusions of fact than an appeal court whose perception may be narrowed or even distorted by the focused challenge to particular parts of the evidence”. Lord Hodge also noted the increased cost which would be incurred if all questions of fact were open for redetermination on appeal.

The issue
Inner House case in which RBS sought payment of sums due under a personal guarantee granted by Mr O’Donnell and Mr MacDonald the directors of Whinhill Developments Ltd which had been formed to purchase a potential development site at Stone Farm in Greenock. The directors argued that the guarantee had been induced by negligent misrepresentations made on behalf of RBS.

The background
RBS and Whinhill entered a one year loan agreement in September 2007 whereby RBS would provide a loan of £1.65m to fund the purchase. Whinhill bought the site for about £1.5m and planned to obtain planning permission then sell the site to a builder or developer. Whinhill granted a standard security and floating charge in favour of RBS (the site being Whinhill’s only asset).  Whinhill were unable to repay the loan at its expiry in September 2008. The parties then agreed to refinance the loan facility with a new loan of £1.695m to be repaid by March 2011; the Whinhill directors providing a personal guarantee for the company’s liabilities to a maximum aggregate value of £300k.

Whinhill failed to repay the sums due after a default event occurred and RBS sought payment of the sums due under the guarantee in February 2011. Central to the case was the property crash in 2008 and the falling value of the property. The loan was originally advanced in mid-2007 on the strength of a market valuation of £3m. When the facility was refinanced in 2008, property values had “fallen off a cliff” and the credit division of RBS was enforcing a 70% loan to value ratio. However, Whinhill’s relationship director in RBS’s commercial banking division was keen to avoid the crystallisation of, what may have been by then, a worthless security. He received word from Ryden that the property could be valued at £2m which, with a personal guarantee from Whinhill’s directors, would allow the 70% loan to value ratio to be met.

On three separate occasions RBS told the directors that Ryden would or had re-valued the subjects at £2m. The directors had understood the revaluation could be relied on for lending and guarantee purposes and, in the Outer House, Lord Malcolm took the view that it was reasonable for them to do so. Shortly after the first occasion (but before the second), RBS’s relationship director received the updated valuation from Ryden by letter. However, the letter made it clear that the report was not suitable, nor to be relied on by the bank, for lending purposes (it was also based on an assumption of increased development density which had not been discussed with the Whinhill directors). The directors were not informed of this and there was no evidence that the report had been received by the directors who then granted the personal guarantee in favour of the bank.

The decision
In the Outer House Lord Malcolm found that the RBS statements were material factors in the directors’ decision to grant the guarantee and that the guarantee would not have been granted if they had been aware of the true position. As a result, a reduction of the guarantee was granted.

Whether the Whinhill directors were also entitled to damages for their losses depended on whether the misrepresentations amounted to a breach of a duty of care owed to them. Lord Malcolm found that, in using the assurance given by Ryden before receipt of the report to help persuade the Whinhill directors to agree to the guarantee, the relationship director had to be taken as having assumed responsibility for its accuracy. He then came under an obligation of enquiry or disclosure if he subsequently received material which cast doubt on the information given to the directors. And thereafter, he had a duty not to repeat the misrepresentation. The relationship director had breached that duty and the Whinhill directors were entitled to damages for loss sustained as a consequence.

The Inner House were in agreement with Lord Malcom’s findings and refused an appeal.

The full judgement is available here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Inner House case (for appeal to Supreme Court, see here) concerning agreements between RBS and a property developer. In July 2007 the bank and the developer entered written agreements for loans of £845k and £560k in respect of the purchase of  two plots of land at Gleneagles on which the developer was to build two houses.

The repayment date for the loans was in August 2008 and, when the developer failed to repay the loans at that date, the bank sued the developer for recovery of the funds. However, the developer counter claimed arguing that he had only entered into the loan agreements on the basis of assurances given by the Bank that it would make additional funding (of up to £700k) available to fund development on the plot and claimed damages in respect of the bank’s breach of those assurances. The assurances said to have been given by the bank included a telephone call prior to the signing of the agreements in which the developer was told that, in addition to the sums lent to buy the land, the bank would advance further “funding for the development”.

In the Outer House Lord Glennie found that bank had agreed a “collateral warranty” obliging them to lend for the development of the plots. However, the Inner House allowed an appeal finding that the telephone call only amounted to a statement of future intention and that legal obligations would only arise when the parties entered a written contract.

“If the [developer] considered that the [written agreements] did not properly reflect what he understood was to be agreed, or had been agreed orally, then he ought not to have signed the agreements. At all events, whatever the [developer] thought was the position, the informed observer would understand the written agreements to cover all matters agreed to date. It may well be that, at that time, the [bank] fully intended to enter into a further bargain with the [developer] to advance additional funding for the building works. However, they had not done so and did not do so. That may have been contrary to the spirit of the negotiations prior to the signing of the written agreements, but that spirit, or its moral content, cannot be taken as creating a legally binding voluntary obligation.”

The full judgement is available from Scottish Courts here.

(NB: See Supreme Court decision here.)

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

“As a case study of the causes and consequences of the property crash in 2008, this litigation is probably as good as any.”  Lord Malcolm

Outer House case in which RBS sought payment of sums due under a personal guarantee granted by Mr O’Donnell and Mr MacDonald, the directors of Whinhill Developments Ltd which had been formed to purchase a potential development site at Stone Farm in Greenock. The directors argued that the guarantee had been induced by negligent misrepresentations made on behalf of RBS.

RBS and Whinhill entered a one year loan agreement in September 2007 whereby RBS would provide a loan of £1.65m to fund the purchase. Whinhill bought the site for about £1.5m and planned to obtain planning permission then sell the site to a builder or developer. Whinhill granted a standard security and floating charge in favour of RBS (the site being Whinhill’s only asset).  Whinhill were unable to repay the loan at its expiry in September 2008. The parties then agreed to refinance the loan facility with a new loan of £1.695m to be repaid by March 2011; the Whinhill directors providing a personal guarantee for the company’s liabilities to a maximum aggregate value of £300k.

Whinhill failed to repay the sums due after a default event occurred and RBS sought payment of the sums due under the guarantee in February 2011. Central to the case was the property crash in 2008 and the falling value of the property. The loan was originally advanced in mid-2007 on the strength of a market valuation of £3m. When the facility was refinanced in 2008, property values had “fallen off a cliff” and the credit division of RBS was enforcing a 70% loan to value ratio. However, Whinhill’s relationship director in RBS’s commercial banking division was keen to avoid the crystallisation of what may have been by then a worthless security. He received word from Ryden that the property could be valued at £2m which, with a personal guarantee from Whinhill’s directors, would allow the 70% loan to value ratio to be met.

On three separate occasions RBS told the directors that Ryden would or had re-valued the subjects at £2m. The directors had understood the revaluation could be relied on for lending and guarantee purposes and Lord Malcolm took the view that it was reasonable for them to do so. Shortly after the first occasion (but before the second), RBS’s relationship director received the updated valuation from Ryden by letter. However, the letter made it clear that the report was not suitable for, nor to be relied on by the bank, for lending purposes (it was also based on an assumption of increased development density which had not been discussed with the Whinhill directors). There was no evidence that the report had been sent to the Whinhill directors.

Lord Malcolm found that the RBS statements were material factors in the directors’ decision to grant the guarantee and that the guarantee would not have been granted if they had been aware of the true position. As a result, a reduction of the guarantee was granted.

Whether the Whinhill directors were also entitled to damages for their losses depended on whether the misrepresentations amounted to a breach of a duty of care owed to them. Lord Malcolm found that, in using the assurance given by Ryden before receipt of the report to help persuade the Whinhill directors to agree to the guarantee, the relationship director had to be taken as having assumed responsibility for its accuracy. He then came under an obligation of enquiry or disclosure if he subsequently received material which cast doubt on the information given to the directors. And thereafter, he had a duty not to repeat the misrepresentation. The relationship director had breached that duty and the Whinhill directors were entitled to damages for loss sustained as a consequence.

The full judgement is available from Scottish Courts here.

(See also Inner House decision here)

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.