The alleged transactional loss sustained by a lender that had advanced money to a company for a first legal charge over a property on the basis of negligent legal advice was calculated as at the trial date, not the transaction date, in circumstances where the loss had not been crystallised by realisation of the relevant security.
The appellant law firm (Gateley) appealed against the level of damages awarded to the respondent special purpose vehicle following Gateley’s admission of liability in negligence.

Gateley had failed to draw a bank’s attention to an insolvency forfeiture clause in the lease of a property over which first legal charge was to be granted as security for a loan facility. The clause seriously impaired the charge as a security. The issue came to light when the bank enforced its security in 2012. During the proceedings the bank assigned its rights to the respondent. Gateley had asserted that the respondent failed to mitigate its loss by failing to negotiate a variation of the lease with the freeholder. Before the trial, the freeholder indicated his willingness to remove the clause on payment of £150,000. The respondent declined Gateley’s offer to advance £150,000 to fund the variation. The trial judge held that the respondent had suffered its loss at the commencement of the transaction in September 2007, that the amount of loss attributable to Gateley was represented by the diminution in the value of the lease as a security attributable to the forfeiture clause, and that the respondent had not failed to mitigate its loss by not pursuing variation of the lease. The judge awarded damages of £240,000 plus interest at 2% per annum from September 2007. Subsequently, the respondent used part of the damages to pay £150,000 to the freeholder to vary the lease. In December 2015, the property sold at auction for £645,000. The sale was incomplete at the date of the instant hearing.

Gateley argued that (1) the alleged loss should have been calculated at the trial date, not the valuation date; (2) by December 2014, the respondent had failed, unreasonably, to mitigate its loss by varying the lease, for which Gateley had offered to advance £150,000.

HELD: (1) When quantifying loss caused by a negligent report on title by solicitors, the test established in South Australia Asset Management Corp v York Montague Ltd [1997] A.C. 191 and Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (Interest on Damages) [1997] 1 W.L.R. 1627 applied, Lloyds Bank Plc v Burd Pearse [2001] EWCA Civ 366, [2001] Lloyd’s Rep. P.N. 452 considered. The court had to consider first, whether loss had been suffered from entering into the transaction (transactional loss), and second, what part of that loss was properly attributable to the solicitors’ negligence, York Montague and Nykredit applied. The first step did not have to be carried out as at the date of the transaction. On principle, and as a matter of common sense, the court would not blind itself from knowledge of relevant facts occurring thereafter. A lender’s transactional loss would be most easily identified once it had crystallised by realisation of the security and the application of the proceeds to the outstanding debt. Where the transactional loss of someone who had loaned money on negligent advice remained uncrystallised at the date of trial, it would be a rare case in which a quantification of that loss would be better calculated by reference to any earlier date than the trial date. While the judge had rightly concluded that the respondent suffered some loss at the date of the transaction, he was not absolved from having to quantify the transactional, but uncrystallised, loss as at the trial date. The fact that a lender could be shown to have suffered some immediate loss on the transaction date said little about whether that would prove to be its real transactional loss (see paras 25-36 of judgment).

(2) None of the judge’s reasons, singularly or in aggregate, justified the conclusion that the respondent had not unreasonably failed to mitigate its loss. The offer to vary the lease was there, the benefit exceeded the outlay, the respondent did not lack the funds with which to do the deal and it was a sophisticated investor in distressed assets about whom it could not possibly be said that such a deal would be outside the ordinary course of its business (paras 44-53).

(3) While the property remained uncrystallised due to the non-completion of the sale, the court was better placed than the trial judge to calculate the transactional loss. The proper course was to assess the transactional loss at the instant date, on the basis of all the reliable information known to the court. The respondent had fully mitigated the part of its loss attributable to Gateley’s negligence, namely the diminution in the value of the security attributable to the forfeiture clause. That had been removed so that any shortfall in recoveries experienced on the property’s sale was a risk which the respondent undertook, and not a consequence of Gateley’s erroneous advice. The question remained as to whether the respondent was entitled to its cost of mitigation together with interest from January 2015, when that cost was incurred. The respondent claimed that the costs incurred included the cost of variation, legal fees, and administration expenses and associated legal fees. The latter would not be included as part of the cost of mitigating the loss because administration, or some other insolvency process, at a similar cost would have been necessary in any event for the beneficial realisation of the security. It formed part of the calculation of the respondent’s transactional loss, but not a part of its cost of fully rectifying the defect in its title to the security for which Gateley was responsible. The judge’s award of damages would be replaced with an award of £157,100, being the price and associated legal costs of the variation of the lease, together with interest from 27 January 2015 at 2% per annum from that date (paras 56-64).

Appeal allowed, cross-appeal allowed

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