An interest(ing) case: Mortgage Express v Countrywide Surveyors

Summary

In a judgment involving a lending decision taken in the active market of 2005, a lender was not able to prove that the loan money would have been invested elsewhere or that a particular interest rate would have been earned on another loan, so it was not awarded interest as damages. The lender was awarded statutory interest, which is simple (not compound) interest and runs from the accrual of the lender’s cause of action, at LIBOR (London Interbank Offered Rate) plus 0.5%.

Background

This case involved a valuer who had submitted fraudulent valuations. Without the fraud, the lender (Mortgage Express (MEX)/Bradford & Bingley (B&B)) would not have made the loans at all. This was, therefore, a “no transaction case”. The issue was whether the lender could claim simple or compound interest, and at what rate. MEX claimed compound interest. The valuer (Countrywide) admitted liability only for simple interest. Around £1.5m turned on the outcome.

Options available to the court in awarding interest

Any Claimant must plead and prove its loss. That applies to a claim for interest, like any other claim. Awards of interest are discretionary. Any given case will depend on the facts/evidence. Typically, the court has the following options (as set out in Swingcastle v Alistair Gibson (1991):

• The lender recovers damages equal to the interest it would have earned on another loan. Recovering damages for interest on this basis will only be possible if the lender can show an unsatisfied demand for loans (ie the lender was rejecting loan applications at the time). In the heady days of 2005/2006, there was ample cheap money available to lend, and lenders were profligate. In the context of loans made before the financial crisis, therefore, lenders are likely to face considerable difficulty in proving that the prospective borrowers were rejected because funds had been allocated to the subject loan.

• The lender recovers damages it would have earned on the loan amount, had it been placed on deposit. Again, this is an unlikely outcome for loans made before the financial crisis. In that market, there was a rapid turnaround of loans, so lenders would in reality not have placed monies on deposit for any meaningful period.

• The lender recovers damages to compensate for its lost opportunity to invest the loan amount elsewhere. This is unlikely for pre-financial crisis loans, for the same reasons.

The evidence

The lender’s total lending book was around £38.7bn. The loans at issue were only around £8m.

The lender funded its loan book on a general/pooled basis. Accordingly, it could not demonstrate how or at what cost these particular loans were funded. Given the large size of its loan book, and the ample loan finance available, the lender was also unable to prove that it would have rejected any loan applications from any particular borrower. In the very active lending market of 2005, the lender would not have invested the money elsewhere (eg on short-term money markets). Instead, it would have immediately used the money to make other loans.

The court’s conclusions

Given the evidence summarised above, it was unsurprising that the lender had “not come within a measureable distance” of proving entitlement to interest that would have been earned on another loan. The Judge summarised the position as follows.

“Such evidence as there is indicates that [the lender] was able to satisfy whatever demand there was for mortgages. If there had been an unsatisfied demand for mortgages in 2005 I would have expected that some evidence of it would have been available”.

On that basis, the lender failed to recover interest as damages. However, the lender was entitled to statutory interest (under Section 35A of the Senior Courts Act 1981). This is simple (not compound) interest, and runs from the accrual of the lender’s cause of action. This is usually, but not necessarily, when the loan first went into default.

The lender claimed statutory interest at LIBOR plus 1%. Countrywide submitted that the rate of interest should be LIBOR, without any increase. The Judge (pragmatically) split the difference and awarded the lender interest at LIBOR plus 0.5%.

Comment

We may now be nearing the end of the valuers’ negligence cases stemming from the 2008 financial crisis. The collapse of Lehman Brothers (in September 2008) happened nearly eight years ago.

However, whether or not lenders’ claims against valuers, and other property professionals, continue at the same rate, claims for interest will continue to feature. The MEX v Countrywide case demonstrates that such claims will not always be straightforward to establish. Evidential difficulties are likely to be exacerbated where a claim is pursued, not by the original lender, but by an SPV/issuer in a later securitisation of the original loan.