The Bowerman Duty: Definitely Alive and Well

The Court of Appeal decision in Goldsmith Williams v E.Surv  – handed down on 11th November 2015 – is likely to be of particular interest to lenders, and to solicitors acting for lenders.

Although the appeal related to a judgement in proceedings between a firm of surveyors and a firm of solicitors, the greater significance of the Court of Appeal’s judgement in Goldsmith Williams v E.Surv concerns the scope of the duties owed by solicitors to mortgage lenders, when acting for both the proposed buyer of a property and the lender.

In the well-known case of Mortgage Express v Bowerman [1996] the Court of Appeal held that solicitors acting for buyer and lender owed a general duty to report to the lender information discovered by the solicitors during the course of investigating the title to a property, if that information might reasonably be considered to have a material bearing upon the valuation of the property or the lender’s decision to lend.  This duty became known as the Bowerman duty.

With the subsequent development of standardised instructions from lenders to conveyancing solicitors, by way of the CML Lenders Handbook, and the standard form Certificate of title under the Solicitors Practice Rules, many commentators argued that the Handbook was intended to provide an exclusive statement of the solicitor’s duty to his lender client, and that the Bowerman duty could no longer apply.  

The Court of Appeal rejected this argument.

The key facts in Goldsmith Williams v E.Surv were as follows:-
 
(1)    The buyer, Mr Gayler bought Quarnford Lodge (the property) in September 2005 for £390,000.

(2)    E. Surv was instructed to value the property in November 2005.

(3)    E. Surv valued the property at £725,000.

(4)    Mr Gayler applied to the Mortgage Business (“the Lender”) in December 2005 for a loan of £580,000, based upon an estimated value of £725,000.  His mortgage application stated that he had bought the property in October 2005 for £450,000.

(5)    E. Surv’s valuation was provided to the Lender before the mortgage offer was issued.  

(6)    In the course of their investigations of title, Goldsmith Williams obtained HM Land Registry entries which stated that the property had been bought by Mr Gayler in September 2005  for £390,000.  They did not report this to the Lender.

(7)    The loan of £580,000 was advanced on 13 February 2006 and the mortgage was completed.

(8)    The mortgage account went into default: the Lender repossessed the property and sold at a significant loss.

(9)    The Lender asserted claims against E. Surv and Goldsmith Williams, but in the event only pursued the claim against E. Surv in respect of its allegedly negligent valuation.

(10)    E. Surv settled the Lender’s claim on terms which included a settlement payment of £200,000, and pursued contribution proceedings against Goldsmith Williams on the ground that Goldsmith Williams would also have been liable to the Lender had it sued Goldsmith Williams on account of Goldsmith Williams’ failure to report the discrepancy between the purchase price and e.Surv’s valuation.

In his judgment delivered in April 2014 Judge Stephen Davies held that Goldsmith Williams’ duties to the Lender did require them to report the discrepancy between the valuation and the earlier purchase price, notwithstanding that no specific duty to report that discrepancy arose under the express instructions contained in the CML Handbook.  The Judge held that Goldsmith Williams had breached that duty and ordered it to pay £100,000 together with interest and costs.

Goldsmith Williams appealed on two grounds, namely that:-

(i)    They owed no duty to report the discrepancy between the valuation and the earlier purchase price; and
(ii)    If they had owed, and breached, such a duty, that breach did not cause the Lender’s loss, because the Lender was itself already in possession of information which strongly suggested that the valuation was excessive.

The Court of Appeal upheld the appeal on the second ground.  At the time of entering into the loan the Lender held information which suggested that the property had been bought shortly before the valuation date, at a price of £450,000.  That information strongly suggested that the valuation was excessive and therefore it had not been proved that any part of the Lender’s loss was caused by Goldsmith Williams’ failure to report the true purchase price.

However the Court of Appeal rejected Goldsmith Williams’ appeal on the issue of the scope of the solicitor’s duty to the Lender.

The Court of Appeal confirmed Judge Davies’s finding that no duty to report the true price arose under the express instructions contained in the CML Lenders Handbook.  The price could not be a discrepancy between the description of the property in the valuation report and the title documents (CML 4.1.1.1).  Nor did the solicitor’s obligation under CML 5.1 to report to the Lender that the borrower had been registered as the owner of the property for less than 6 months, carry with it an obligation to inform the Lender of the purchase price that the borrower had paid.

However, the Court held that the Bowerman duty does continue to apply as a general duty upon solicitors to report to their Lender client information which comes into the solicitor’s possession in the course of carrying out the work which the solicitor has been instructed (under the CML Handbook) to undertake provided that:-

1.    The information is not confidential (if it is, the solicitor’s duty under clause 5.1.2 of the Handbook will oblige the solicitor to cease acting for the buyer and lender);

2.    Disclosure of the information is not expressly excluded by any other provision in the CML Handbook; and

3.    A reasonably competent solicitor would recognise that the information might adversely affect the title to the property or the value of the Lender’s security.