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.

Sheriff Court case in which Mr Heary sought damages after suffering injury when climbing over a locked gate whilst attempting to leave a breakers yard he had been visiting.

Facts
Mr Phinn carried on a business known as Phinn Parts Auto Breakers from a yard in Dundee. Mr Heary had arrived at the yard and was directed by Mr Phinn to the part of the yard where he might find the parts he was looking for. Shortly afterwards, Mr Phinn left the yard and went home. Before leaving, Mr Phinn’s son had entered the yard and shouted to ask if anyone was there but had received no answer. When Mr Heary sought to leave the yard, he found that there was nobody else in the yard and that a communal gate, shared with four or five neighbouring businesses, was locked. He then attempted to climb over the gate to get out but fell. Mr Phinn denied locking the gate (he, along with the proprietors of the other yards, held keys to it) and it was not established who had done so.

Occupier’s Liability (Scotland) Act 1960
When considering Mr Phinn’s potential liability under the Occupier’s Liability (Scotland) Act 1960, the sheriff found that, although Mr Phinn was not the owner of the communal gate, he was an occupier in terms of the Act by reason of the control he exercised over the access. However, it was found that a gate operating normally could not be said to constitute a danger and accordingly there was no obligation on Mr Phinn under the Act.

Common Law
In contrast, it was found that, as Mr Phinn invited people on to the premises, he owed Mr Heary a duty to take reasonable care for his safety at common law. It was foreseeable that, if Mr Phinn allowed Mr Heary to be locked into the yard, he might injure himself whilst taking steps to escape. It was also foreseeable that, even if Mr Phinn did not lock the gate himself, one of the occupiers of the neighbouring yards may have done so. There was therefore a duty on Mr Phinn to take reasonable care to ensure that no one was left in the yard when he vacated it. The sheriff found that, although a check may have been carried out, given the size of the yard, the check had been inadequate. That failure to carry out an adequate check had caused Mr Heary’s injuries. However, after taking account of the fact that the incident had taken place during the day, the fact that the site was not completely isolated and that Mr Heary had decided to climb the gate (which was a significant obstacle) after waiting only 25 minutes, the sheriff found that there had been contributory negligence on the part of Mr Heary and reduced the award of damages by 50%.

 The full judgement is available from Scottish Courts here.

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

Outer House case concerning a Property Enquiry Certificate obtained by Manorgate from First Scottish which failed to reveal that the site for which the certificate was obtained was designated as being one of archaeological significance. It intended to demolish the existing buildings and erect new commercial premises. One of the new units was to be used as a retail branch for its flooring business. The other units were to be let to complementary traders. However, following purchase of the site, the designation led to Manorgate mothballing it after concluding that the intended development was uneconomic. Manorgate then sued First Scottish for damages in respect of (a) the lost capital value of the Site (b) site investigation costs; (c) trading losses; and (d) development losses.

First Scottish accepted that the Certificate should have referred to the archaeological designation and that they had been negligent in omitting it. However, amongst other things, they argued that (1) the omission had not caused Manorgate’s losses (2) that there had been contributory negligence on Manorgate’s part and (3) Manorgate’s losses were too remote to have been foreseeable by First Scottish.

Lord Woolman rejected the First Scottish defences and awarded damages (albeit the damages were reduced as some of the losses were not foreseeable).

Causation
Lord Woolman found that Manorgate had relied on the certificate and would have withdrawn from the missives for the purchase of the site if the certificate had been accurate.

Contributory negligence
First Scottish argued that Manorgate should have queried or double-checked the accuracy of the information in the certificate. Lord Woolman found that a surprising position for it to adopt noting that, if purchasers were obliged to carry out their own separate investigations, it would deprive Property Enquiry Certificate of any real utility.

Foreseeability
Whilst the diminution in value of the site, site investigation costs and loss of business profits (First Scottish knew the site was zoned for commercial use) were foreseeable, First Scottish could not have reasonably foreseen a sequence of events that led to the buildings being demolished. Nor could they have foreseen that the purchaser of the site would both seek to carry on business there and also sell the site and generate development profit and, as a result, no damages were awarded for development profit.

The full judgement is available from Scottish Courts 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.

Inner House case concerning Glasgow City Council’s liability for damage caused to an Indian restaurant on the ground floor of a tenement building following the Council’s demolition of the floors above.

The Council had carried out the demolition work under s13 of the Building Scotland Act 1959 and argued that they should be free of responsibility for the collapse as, after the works had been completed, they had written to the restaurant owners indicating that future maintenance of the structure would be their responsibility. However, in the Outer House, the temporary judge had found that, whilst the Council had initially acted under the 1959 Act, after it had made the decision to demolish part of the building, a relationship had been created between them and the neighbouring proprietors that gave rise to a common law duty of care. The Council had carried out the demolition without carrying out gable stabilisation works, without which, it knew would there would be a material risk of harm to people or property in the vicinity of the wall. There was no evidence of the restaurant owners having been advised that the exposed wall lacked stability and they were entitled to assume that the Council had carried out the demolition works in a manner that did not create a new structural instability. As a result, the Council was found to be in breach of its duty.

The Inner House dismissed the Council’s appeal, finding there to be no error in the temporary judge’s decision. The duty breached was not a breach of statutory duty nor a failure of duty of care in the manner in which the Council exercised their statutory discretion to carry out the works. Rather it was a purely operational duty arising after the decision to carry out the demolition works was made: i.e. a duty not to create a reasonably foreseeable risk of harm by reason of the way in which the Council carried out the works.

The full judgement is available from Scottish Courts here.

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

Case from the Court of Appeal for England and Wales concerning a developer’s claim for damages against a consulting engineer who failed to perform tasks by an agreed date. The developer (a farmer) sought damages in respect of the fall in the value of his development (due to the property slump) during the period of the delay.

In terms of an oral agreement (followed by a formal letter of engagement) reached with the developer on 6 September 2006, the engineer was to design a road and drainage to the developer’s site and to obtain s38 approval (allowing adoption of the road by the roads authority in terms of the Highways Act 1980) by March 2007. An initial s38 approval was not obtained until 17 February 2008 and even then some parts had not been finalised. In April 2008 the developer engaged another consulting engineer who obtained the necessary approval in June 2008. The judge found that the first engineer’s breach of contract delayed the development by 15 months and that had resulted in loss to the developer because of the reduced value of the development.

The question for the appeal court was whether the developer’s loss was too remote to allow recovery. The appeal court dismissed the engineer’s appeal agreeing with the judge’s finding that that the loss was not too remote as it was reasonably foreseeable as a serious possibility if there was a delay. It also agreed with the judge’s finding that the case was not one of the unusual cases where the nature of the contract and the commercial background, or other relevant special circumstances, mean that an implied assumption of responsibility for losses that can be reasonably foreseen was inappropriate.

The Court of Appeal’s comments on the length of delay are also worth noting:

 “It may well be that the reason for the absence of many cases of this kind is that the property market does not move as quickly as certain other types of market involving commodities and other goods, and it takes a very lengthy delay in breach of contract before a provable loss of value can occur. A few days or even a few weeks delay is unlikely to give rise to a demonstrable loss on the property market. It was the appellant’s delay of 15 months, in the Judge’s words an egregious delay, which in the present case gave rise to a quantifiable loss.”

The full judgement is available from BAILII here.

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

Outer House case in which Santander sought to recover losses from the Keeper of the Registers of Scotland after the Keeper accepted a forged discharge (discharging a security held by Santander) for registration. The discharge was subsequently reduced and the Land Register was rectified to show Santander’s security. However, the security only took effect as at the date of rectification meaning that a second security registered in favour of the Bank of Scotland (after the discharge was registered but before the rectification took effect) received prior ranking to the Santander security. The Bank of Scotland later sold the property in terms of their security and no proceeds went to Santander (who were still owed more that £240k in terms of the loan secured). Santander claimed that their loss arose as a result of the fault and negligence of the Keeper.

Lord Boyd found in favour of the Keeper. After deciding that the Keeper’s decision to register the discharge was a matter on which the court could adjudicate (i.e. it was not a policy decision purely at the Keeper’s discretion), the question for the court was whether the Keeper owed a duty of care to the Bank. This would depend on whether the Caparo test was satisfied. In order to satisfy the Caparo test Santander had to show that the loss was foreseeable, the relationship between Santander and the Keeper was sufficiently proximate and that it was fair just and reasonable to impose a duty of care on the Keeper. It was the last of these requirements on which Santander’s claim failed. Lord Boyd (after noting that the Bank had assumed certain risks in lending to its client whereas the Keeper had made no assessment of the fraudster’s creditworthiness or honesty or whether the value of the property would fully secure the loan), found that in the circumstances: where the loss was caused by the criminal acts of Santander’s client, it was not fair, just or reasonable that the Keeper should be liable.

The full decision is available from Scottish Courts here.

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

Outer House case concerning RBS’s sale of an interest rate swap agreement to Grant Estates Limited (a property development company) in 2007.  RBS put Grant into administration in February 2011 after Grant had suffered financial difficulties during the economic downturn. Grant claimed that RBS had mis-sold the agreement, which the bank had represented as a device to protect Grant from a rise in interest rates. In actual fact, when interest rates fell sharply and remained low, the agreement prevented Grant from benefitting from those lower interest rates it would have otherwise paid on its borrowing. Grant maintained that, were it not for the agreement, it would not have gone into administration.

Although Grant had accepted RBS’s terms of business which, amongst other things, expressly stated that RBS was not providing advice on the merits of the transaction and advised Grant to obtain independent financial legal advice, Grant contended that:

1      the agreement breached the Conduct of Business Sourcebook issued by the FSA and the Markets in Financial Instruments `Directive (2004/39/EC);

2.1   RBS had entered into a contract to give it advice on financial products and had given negligent advice on those products; and

2.2    the agreement was entered as a result of fraudulent or negligent misrepresentation by RBS.

Grant sought reduction of the agreement and repayment of the sums paid under it together with damages in respect of the breach the Sourcebook and Directive.

Lord Hodge rejected Grant’s arguments.

Conduct of Business Sourcebook
In terms of the Financial Services and Markets Act 2000, breaches of the Sourcebook and Directive are only actionable by “private persons”. As a limited company acting in the course of business, Grant was barred from raising an action.

Negligence and misrepresentation
There had been no contract to provide advice. Although Grant argued that, when they had asked for financial advice and been given it by RBS, a contract arose by implication, Lord Hodge found that the terms of business contradicted any such implied contract and there was no evidence of an express agreement to depart from the terms of business. If Grant had relied on the statements by RBS as investment advice, that reliance had not been reasonable in the face of the contractual arrangements the parties had entered.

The full judgement is available from Scottish Courts here.

Sheriff Court case relating to the blockage of a sewer on Queen Anne Street in Dunfermline which Scottish Water were responsible for maintaining. A monobloc thought to be causing the blockage was discovered by Scottish Water in February 2009 after excavating and opening the pipe.  Scottish Water claimed damages from Dunne who had carried out reconstruction and resurfacing works for Fife Council in November 2007. The works had involved replacing the surface of the road and pavement with monobloc.

At first instance the sheriff found that on the balance of probabilities the blockage had been caused by the monobloc used by Dunne to resurface the road but was unable to make a finding as to how the monobloc had found its way into the sewer. As the Scottish Water had no direct evidence as to what had happened in 2007 and were not able to prove that there was no other way the block could have entered the sewer, the sheriff refused Scottish Water’s action for damages.

However, the sheriff principal allowed an appeal, finding that Scottish Water’s evidence was sufficient to raise a prima facie inference of negligence which had not been answered by Dunne. As such, damages of £12,585 were awarded to Scottish Water.

The full judgement is available from Scottish Water here.

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