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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Dunvale Investments Ltd v Burness Paul & Williamsons Llp [2015] ScotCS CSOH_32 (26 March 2015)
URL: http://www.bailii.org/scot/cases/ScotCS/2015/[2015]CSOH32.html
Cite as: [2015] ScotCS CSOH_32
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OUTER HOUSE, COURT OF SESSION
[2015] CSOH 32
CA79/14
OPINION OF LORD TYRE
In the cause
DUNVALE INVESTMENTS LTD
Pursuer;
against
BURNESS PAULL & WILLIAMSONS LLP
Defenders:
Pursuer: Keen QC, G Walker; MBM Commercial LLP
Defenders: Clark QC, O’Brien; bto
26 March 2015
Introduction
[1] The pursuer is the holding company of a group of companies whose business consists principally of investment in commercial property. Its sole owner and managing director is, and has since incorporation been, Mr Douglas Wheatley. The defenders are a firm of solicitors who, at the time of the events with which this opinion is concerned, acted on behalf of the pursuer and its subsidiaries, as well as Mr Wheatley as an individual, in connection with various matters including the financing of property acquisitions. The pursuer seeks reparation from the defenders for loss which it claims to have sustained as a consequence of the defenders’ breach of contract and negligence. That loss consists of cost incurred by the pursuer in entering into a forward starting hedging instrument which was insisted upon by its lender, the Royal Bank of Scotland plc, after the pursuer was found to be in breach of the loan‑to‑value covenants contained in two revolving credit facility agreements.
[2] The action came before me for proof before answer on the issue of whether the pursuer had sustained loss as a consequence of negligence on the part of the defenders, quantum having been agreed. Evidence on behalf of the pursuer was given by Mr Wheatley and by Mr David Smith, a retired solicitor with a specialisation in commercial property law. Evidence on behalf of the defender was given by Mr Scott Wilson, a partner of the defenders specialising in banking law; by Mrs Caroline Allan (who was at the time Ms Caroline Elder; I refer to her in this opinion as Ms Elder), a senior associate within the defenders’ banking team; by Mr Michael McGrane, a former partner of the defenders who specialised in commercial property; and by Mr Andrew Meakin, a practising solicitor with a specialisation in corporate lending transactions. I accept the evidence of all of the witnesses to fact as credible and (except in so far as I indicate otherwise) as reliable. I also accept that Mr Smith and Mr Meakin were fully qualified to give expert evidence on the matters contained in their respective reports and oral evidence to the court.
The pursuer’s property interests and loan facilities
[3] Before 2002, Mr Wheatley was a director of Allied London and Scottish Properties plc (“ALSP”), a subsidiary of Allied London plc. When Allied London decided in 2001 to dispose of two properties in Scotland, namely Granite House, Glasgow and New Cross Shopping Centre, Hamilton, Mr Wheatley agreed to purchase them from ALSP and to resign from its board. He set up a joint venture company called Grandyard Ltd with the United Bank of Kuwait, whose name was subsequently changed to Ahli United Bank (“AUB”). ALSP incorporated a new company called Elandome Ltd to which it transferred the two properties. Grandyard then bought all of Elandome’s shares. Loan finance for the purchase was provided to Grandyard by the Royal Bank of Scotland plc (“RBS”). Elandome also acquired a property in Oxford known as Tyndale House.
[4] In 2003, Mr Wheatley set up another joint venture company with AUB, this time to purchase land at Osborne Street, Glasgow, with a view to pursuing a residential development there. The joint venture company was called Osborne Street Estates Ltd (“OSE”). Shares in OSE were held by Mr Wheatley and AUB to the extent of 50% each.
[5] In 2004, Mr Wheatley decided that he wished to buy AUB out of the original joint venture. The pursuer was incorporated and acquired the whole of the share capital of Grandyard, the 100% owner of Elandome, which in turn owned Granite House, the Hamilton property and the Oxford property. Purchase by the pursuer of AUB’s shares in Grandyard was financed by a credit agreement entered into between the pursuer as borrower, RBS as lender, and Grandyard as guarantor. This agreement was amended and restated in a credit agreement dated 16 August 2005, in terms of which RBS agreed to make available to the pursuer loan facilities up to the lower of £43,400,000 and 85% of the aggregate open market values of “the Properties”, ie Granite House, the Hamilton property and the Oxford property. The agreement provided for the loan to be secured by various interests and rights granted in favour of RBS, including a floating charge over the pursuer’s assets and standard securities over each of “the Properties”. The maximum indebtedness figure of 85% reduced on a stage basis so that by February 2007 it stood at 75% of the aggregate open market values.
[6] On 9 February 2007, the pursuer entered into a separate credit agreement with RBS, providing for a revolving credit facility for one year in the sum of £1.5 million. This facility, which had no specified purpose, was referred to by parties as “RCF 1”. The loan facility agreement stated that the pursuer’s obligations “shall be secured by” various securities including “all existing security held by the Bank for the [pursuer’s] liabilities”, including the floating charge, a charge over the Oxford property, the standard securities over Granite House, the Hamilton property and an area of land at Lamb Street, Hamilton, and “all future security which the Bank may from time to time hold for the [pursuer’s] liabilities”. It also contained a loan-to-value (“LTV”) covenant providing that if the pursuer’s indebtedness at any time exceeded 75% of the combined value of properties charged to the bank, the pursuer was obliged within 30 days to prepay a sufficient amount to bring the indebtedness down to 75% of such value.
[7] At some time during 2007, AUB expressed a desire to withdraw also from the Osborne Street joint venture. The pursuer acquired AUB’s shares in OSE for the sum of £3.5 million, using funds provided by RBS in the form of a revolving credit facility. This funding transaction, which was referred to by parties as “RCF 2”, is at the core of the present dispute and I return to it in more detail below. After the pursuer’s acquisition of AUB’s shares in OSE, the latter company was owned by the pursuer and by Mr Wheatley to the extent of 50% each.
The defenders’ role in the group’s property and funding transactions
[8] The defenders acted on behalf of Mr Wheatley and his companies, including the pursuer, in the conveyancing required in connection with the purchase of the various Scottish properties. They also advised him in relation to the terms of funding agreements with lenders including RBS. In relation to the latter field of advice, Mr Wilson was Mr Wheatley’s primary contact, but much of the day to day work was handled by Ms Elder. The defenders did not participate in negotiations with RBS regarding the principal heads of terms of loan facility agreements, such as the amount borrowed, the bank’s fees or the financial covenants, including LTV covenants, undertaken by the borrowing company. Those matters were negotiated and agreed directly between Mr Wheatley and his relationship manager at RBS, and were typically set out in a Term Sheet prepared by the bank which was then used as the basis of a formal loan facility agreement. Nor did Mr Wheatley seek or rely upon advice from the defenders regarding the open market value of any of the properties within the group’s portfolio. So far as the loan facility agreements were concerned, the duties undertaken by the defenders (and reflected in the terms of their invoices) consisted of reviewing heads of terms contained in a Term Sheet, reviewing the terms of a draft facility agreement, advising Mr Wheatley of any matters of significance including any such matters concerning the financial covenants, and, if necessary, negotiating amendments to the draft with members of RBS’s estate finance group. The defenders also acted for Mr Wheatley and his companies with regard to the terms and execution of security documentation including standard securities. When a standard security was to be executed, it was RBS’s practice to instruct a firm of solicitors to draft the security documentation and to deal with the defenders regarding its negotiation and execution.
The funding of the proposed Osborne Street development
[9] At the time when Mr Wheatley was negotiating the buy-out by the pursuer of AUB’s share of OSE, his plan was to construct a residential building, to be known as Osborne Tower, on the Osborne Street site. Mr Wheatley sought funding from RBS for both land acquisition and construction costs. The bank’s response to the proposal was set out in an email dated 16 April 2007 from Mr Richard Smart, a director in RBS’s real estate finance group, to Mr Wheatley, as follows:
“Further to our conversation on Friday, please find below my initial thoughts on a potential funding structure for Osborne Tower. Obviously, this is subject to Credit Committee approval in due course – once we have agreed an outline I can then price this with our mezzanine team and progress to Heads of Terms shortly thereafter.
We would look to provide a 6-month land acquisition facility of £3.5m subject to completion of a professional valuation (confirming MV £4.3m) security as outlined below, and the necessary facility documentation. The mezzanine tranche would be drawn first as part of the land acquisition.
Prior to the development tranche being drawn down we would look for pre-sales of £4m to be achieved.
The total bank debt proposed of £17m (split £15m senior / £2m mezzanine) allows for a ‘fully-funded’ scheme including interest roll-up for the duration of the development.
By way of security we would require a first legal charge over the site, a mortgage debenture from the devco SPV and a capital guarantee from Grandyard limited to £3.5m.”
[10] From the above it may be noted that at the time when this email was sent (i) the bank viewed the provision of a £3.5 million facility for land acquisition (although it must be borne in mind that what was actually being purchased was a shareholding in OSE) as the first tranche of a larger funding arrangement for the residential development, and (ii) it was envisaged that the development would be undertaken by a “devco SPV”, ie by a special purpose vehicle and not, for example, by the pursuer. A draft development facility agreement to be entered into between RBS and OSE was prepared by solicitors instructed by the bank.
[11] By 24 April 2007, Mr Smart was able to provide Mr Wheatley with an indication of “pricing”, ie bank charges, for the proposed loan facility. In his email Mr Smart described the arrangement as “one development facility for 24 months” broken down into Tranche 1, “acquisition debt”, amounting to £3.5 million and Tranches 2 and 3, “development debt” amounting in total to £13.5 million. For the acquisition debt, the “CPs”, ie conditions precedent, were “satisfactory valuation, completion of security & documentation”. For the development debt, the CPs were £4m residential pre-sales and completion of construction due diligence.
[12] The Osborne Street proposal was referred to RBS’s credit committee for consideration. It was favourably received, and an internal RBS document dated 30 May 2007 and entitled “Sanction Summary Sheet” records that the credit committee approved facilities which included:
- loans totalling £14 million to “New Residential SPV”; and
- various loans to “Dunvale Residential SPV” including two revolving credit facilities of £1.5 million and £3.5 million respectively.
The pre-drawdown conditions of sanction for the £14 million facility included:
“All new/offered Security to be completed to Banks satisfaction [Bank lawyer confirmation that valid security in place to include First Standard Security over the Development…]”.
A Term Sheet dated 30 May 2007 was prepared for the £14 million facility, in which the borrower was named as “Douglas Wheatley SPV”. The purpose of the facility was stated to be
“to finance the development of [Osborne Tower] in accordance with the budget and related fees and expenses net of VAT… site acquisition to be funded by equity injected ahead of Bank debt”.
The financial covenants were to include a LTV covenant that the aggregate debt drawn under all tranches of the project would not at any time exceed 75% of the residential element of the gross development value of the property. As regards security, the Term Sheet stated inter alia that a first-ranking standard security would be granted in favour of RBS.
[13] At about the same time, a draft agreement was prepared by the bank in relation to the £3.5 million acquisition loan. This loan took the form of a revolving credit facility (RCF 2), and the draft agreement was emailed to Mr Wheatley by Mr Ed Jennings of RBS’s real estate finance group on 14 June 2007. The following day, Mr Wheatley emailed it “for your comments please” to Mr Wilson, who in turn forwarded it to Ms Elder with a request to review it and provide comments. She was also asked to review a draft agreement supplemental to RCF 1 which amended the LTV covenant in that agreement upwards from 75% to 80%. Ms Elder replied with comments on 18 June 2007; none is material for present purposes and they were addressed by Mr Jennings. However, prompted by Mr Wheatley, Ms Elder then raised a query with RBS in connection with the purpose of the facility, which was stated in the draft as being “to assist with the acquisition of [the site at Osborne Street]”. Ms Elder pointed out that this was not strictly correct as the £3.5 million was to be used to acquire shares in OSE, not the site itself, and that the pursuer would be in breach of the facility agreement if it did not use the loan for the stated purpose. There appears to have been some reluctance on the part of RBS to amend the draft. However, Mr Jennings replied on 25 June, stating:
“I have managed to change the £3.500m Purpose clause to ‘assist with the acquisition of the Property’ – which should be broad enough to allow the Ahli Bank deal to go through but mean that the £3.500m could remain a Land facility should the development not proceed. If we are to remove all reference to ‘the Property’ or ‘the Development’ I will require a change of Credit sanction.”
Ms Elder acceded to this suggestion, and the draft was amended. RCF 2 was signed on behalf of RBS on 26 June 2007 and by Mr Wheatley on behalf of the pursuer on 27 June 2007.
The terms of the RCF 2 agreement
[14] It is necessary to set out some of the terms of the RCF 2 agreement in full. Having narrated the purpose for which the bank agreed to make available to the Borrower (ie the pursuer) a revolving loan of a maximum of £3.5 million as being “to assist with the acquisition of the Property”, the agreement defined the property as being the development site at Osborne Street. The pursuer was entitled to draw down the loan in tranches, subject to certain time restrictions, and was bound to repay the loan in full no later than 31 October 2010. Clause 7 was entitled “Conditions Precedent” and provided inter alia:
“7.2 The Bank shall furthermore not be obliged to make the Loan or any Tranche thereof available unless the following conditions are satisfied on the date on which the Loan or any Tranche thereof is drawn:-
(a) any new security to be granted in terms of Clause 10 is completed to the Bank’s satisfaction.
(b) the availability as security for the Loan of any existing security is confirmed to the Bank’s satisfaction.
(c) …”
[15] Clause 9 was entitled “Undertakings”. Sub-clause 9.9 contained the LTV clause, in the following terms:
“If Bank Indebtedness at any time exceeds 80% of the combined market value of the properties charged to the Bank from time to time pursuant to Clause 10… the borrower shall within 30 days of the Bank giving notice prepay a sufficient amount to ensure that Bank Indebtedness does not exceed 80% of such value. Such prepayment shall be applied to such part of Bank Indebtedness as the Bank sees fit.”
[16] Clause 10, entitled “Security”, provided as follows:
“10.1 The obligations of the Borrower to the Bank under this Agreement shall be secured by:-
(a) all existing security held by the Bank for the Borrower’s liabilities including:-
(i) Debenture/Bond and Floating Charge by and an Unlimited Inter Company Composite Guarantee between the Borrower, Elandome Limited and Grandyard Limited
supported by:-
- A first legal charge over Tyndale House… and its associated assets,
- Standard Security over the following properties:-
the Property
New Cross Centre, Quarry Place, Hamilton
Land at Lamb Street, Hamilton
(ii) …
(b) all future security which the Bank may from time to time hold for the Borrower’s liabilities.
10.2 For the avoidance of doubt the Borrower acknowledges that all security held and to be held by the Bank shall unless the security document expressly states otherwise secure all the liabilities of the Borrower to the Bank of whatsoever nature.”
[17] Clause 11 was entitled “Events of Default” and listed 12 such events. Under sub‑clause 11.1(c), in the event that:
“the Borrower fails to comply with any provision of this Agreement or the Borrower or any other grantor of security fails to comply with any provision of the security provided pursuant to Clause 10 and, where capable of remedy, such failure is not remedied to the reasonable satisfaction of the Bank within 7 Business Days of the Bank giving notice to the Borrower or other grantor requiring the Borrower or other grantor to remedy the same;
…then in any such case and at any time thereafter while such event is continuing the Bank may by written notice to the Borrower declare the Loan, all interest accrued and all other sums payable by the Borrower under this Agreement to be immediately due and payable and/or terminate the obligations of the Bank under this Agreement.”
Drawdown of RCF 2 funds and subsequent events
[18] On 28 June 2007, Mr Jennings emailed Ms Elder to confirm that the RCF 2 agreement had been executed by the Bank and that the £3.5 million was ready for drawing on Mr Wheatley’s instruction. Ms Elder replied thanking Mr Jennings for his help. The whole of the £3.5 million was subsequently drawn down on or about 1 August 2007 and applied by the pursuer for the purchase of AUB’s shares in OSE.
[19] Despite the terms of Clauses 7.2 and 10.1 of the RCF 2 agreement, no security over the Osborne Street site was demanded by RBS prior to drawdown of the funds. There is nothing in the contemporaneous documentation produced for the proof to indicate that it occurred either to Mr Wheatley or to anyone within the defenders to raise any query about the funds being drawn down without a standard security having first been granted by OSE, as proprietor of the site, in favour of the bank. Mr Wheatley’s evidence, which I accept, was that he understood at that time that the floating charge in favour of RBS covered the assets of all of his companies, including the Osborne Street site. That understanding was not, however, correct.
[20] In the months following the drawdown of RCF 2, negotiations continued between the defenders, on behalf of OSE, and solicitors instructed by RBS regarding the terms of the development facility loan agreement for Osborne Tower. No agreement had been reached by 11 February 2008, when Ms Elder emailed RBS’s solicitors inviting them to provide draft security documents for the defenders’ approval. By now the Osborne Tower scheme had undergone some modification, and a new Term Sheet was required for Mr Wheatley’s amended proposal.
[21] Also in February 2008, RCF 1, the £1.5 million facility granted to the pursuer in February 2007, came up for renewal. Following discussions between Mr Wheatley and RBS, a new £1.5 million revolving credit facility, referred to by the parties as RCF 3, was granted by RBS and set out in an agreement executed on behalf of the bank on 22 February 2008 and by Mr Wheatley on behalf of the pursuer on 6 March 2008. The RCF 3 agreement contained clauses in terms similar but not identical to those of the RCF 2 agreement set out above. The LTV covenant in sub-clause 9.9 provided as follows:
“If Bank Indebtedness at any time exceeds
(a) during the period commencing on the date the Borrower first utilises the Facility and ending on the date the £3.500m RCF is repaid in full, 80% of the combined market value of the properties charged to the Bank from time to time pursuant to Clause 10;
and
(b) thereafter, 73% of the combined market value of the properties charged to the Bank from time to time pursuant to clause 10
… the borrower shall within 30 days of the Bank giving notice prepay a sufficient amount to ensure that Bank Indebtedness does not exceed such values. Such prepayment shall be applied to such part of Bank Indebtedness as the Bank sees fit.”
As with the RCF 2 agreement, Clause 10 of the RCF 3 agreement was entitled “Security” and was in identical terms except that it provided in sub-clause 10.1(a)(i) for the pursuer’s obligations to be secured by the same floating charge, supported by standard security over the following properties “and their respective associated assets”:
- 173-187 and Granite House, Trongate, 1-43 Stockwell Street and 118 to 122 Osborne Street, Glasgow
- 33 Stockwell Street, Granite House, Trongate and Osborne Street, Glasgow
- Osborne Street, Old Wynd, Glasgow
- New Cross Centre, Quarry Place, Hamilton, and
- Land at Lamb Street, Hamilton.
It is common ground that the first two of these assets are together the property previously referred to simply as Granite House, and that the third asset is the Osborne Street site.
[22] No steps were taken by RBS to obtain an executed standard security over the Osborne Street site (plus any necessary guarantee by OSE) before renewing the £1.5 million facility. There was no discussion of this between Mr Wheatley and either Mr Wilson or Ms Elder. On 5 March 2008, Mr Wheatley emailed the RCF 3 agreement, which had by then been executed on behalf of RBS, to Ms Elder and asked for her views on its conditions. Ms Elder responded the same day with an email summarising the principal terms and advising:
“Please check that the financial undertakings in Clause 9.9 can be complied with – however, as in the existing Dunvale facility there is a provision whereby a prepayment can be made to ensure compliance with the undertakings.”
Mr Wheatley replied confirming that Ms Elder’s summary was in line with discussions with Mr Smart of RBS. He undertook to “check the covenants and call you tomorrow”.
[23] As regards the subsequent history of the Osborne Street project, it is sufficient here to mention that the residential development planned in 2007 has not proceeded.
Breach of the pursuer’s LTV covenant
[24] On 1 March 2008, RBS received a report by CBRE containing opinions as to the current market values of Granite House and New Cross Shopping Centre, Hamilton, being the properties in Scotland over which the bank held standard securities. RBS also received a valuation by Drivers Jonas of the pursuer’s Oxford property. On the basis of those reports, RBS formed the view that the pursuer was in breach of its LTV covenants, including those contained in RCF 2 and RCF 3, as the total amount of its borrowings exceeded 80% of the aggregate current values of the secured properties. On 18 March 2008, Mr Smart sent the following email to Mr Wheatley:
“I am looking to find the easiest way of helping you through this in a manner acceptable to both you and the Bank. I have had discussions internally today and have come up with a proposed way forward as set out below which I hope you find agreeable.
The Bank will acknowledge the breach for a period of 6 months. This waiver is subject to a £50k one off breach fee and the following being undertaken:
- –cross-collateralisation of Osborne Street with the investment facilities.
- –completion of the extended hedging for an additional period to provide protection against refinance risk
- –the LTV covenant to be tested again in 6 months against an updated valuation.
Some of the breach cure options are:
- –the uplift in value from the completed planning for the rooftop
- –sale of Oxford and subsequent debt reduction
- –application of surplus cashflow in debt reduction
…I am happy for you to progress with developing Osborne Street as previously discussed and would envisage getting the facility agreement signed up by the end of this month.
Provided you are content to progress on this basis I will seek formal Credit agreement and finalise matters…”
[25] Mr Wheatley forwarded this email to Mr Wilson and Ms Elder on the same day, observing:
“The attached is self-explanatory, while perhaps in the scheme of things a fee of £50k relatively small.
There is no breach if the security is taken to include Osborne St. I don’t seem to be able to get the Bank to accept a new valuer at this juncture, however they have suggested they will agree to this in 6 months time (so why not now?)
Am I over a barrel?”
It will be noted that as soon as the breach occurred, Mr Wheatley identified the reason for the breach as being that the pursuer’s additional borrowing under the £3.5 million RCF 2 facility had not been matched by the addition of any property to the assets over which the bank held fixed securities. A calculation contained in an internal bank document dated 20 March 2008 confirms that Mr Wheatley was correct in observing that if the value of the Osborne Street site (then stated as £4.1 million, and subsequently stated by Drivers Jonas as £4.2 million) had been taken into account, the covenant would not have been breached. The bank’s proposed £50,000 “breach fee” was subsequently reduced to £25,000.
[26] Mr Wheatley sought Mr Wilson’s advice. Various possible solutions were discussed. Mr Wheatley wondered whether there was a way of bringing the value of the Osborne Street site into the LTV calculation. Mr Wilson advised that because the breach had undoubtedly occurred, the bank were in a strong position to dictate the basis upon which the matter was to be moved forward. In an email dated 30 March 2008, Mr Wilson observed:
“The legal position is you are in breach of LTV Covenant. RBS can demand repayment of loans, call up its security and force a sale. Show no signs of intending to do that, but they could. You can always reduce your debt from surplus cash (such as Tesco) and if were able to do that now issue goes away, but I assume you are not. You are essentially paying £25k to take away risk of bank enforcing before you remedy the breach.
I thought you were going to agree a trigger rate for hedging – would seem reasonable to me, but so long as you are in breach they do not really need to be reasonable.”
Mr Wheatley also suggested that because the bank held a floating charge over the pursuer’s assets, which included its 50% shareholding in OSE, it could be argued that the Osborne Street site ought to have been included in the LTV calculation. Mr Wilson considered that this argument was unlikely to succeed. It does not appear from the documentation that any solution was suggested by Mr Wilson other than complying with the bank’s proposal. In particular, he did not suggest that the problem could be resolved by asking the bank either to take a fixed security over the Osborne Street site or to exclude RCF 2 from the LTV calculation.
[27] Mr Wheatley agreed to RBS’s proposal, and supplemental agreements giving effect to it by means of amendments to the RCF 2 and RCF 3 agreements were signed by Mr Wheatley on 9 May 2008. It is worth noting that although one of the bank’s requirements was “cross‑collateralisation of Osborne Street with the investment facilities”, it does not appear that any amendment to either RCF agreement was considered necessary to implement this requirement.
[28] On instructions from Mr Wheatley, Ms Elder proceeded to revise the terms of a draft standard security and a draft guarantee by OSE, which documents were prepared by solicitors acting on behalf of RBS. Mr Wilson and Ms Elder insisted, against some resistance from Mr Smart, that these security documents should not be delivered to the bank unless and until the bank amended the pursuer’s facility letters to include a reference to the Osborne Street site. Ms Elder explained her thinking in an email dated 23 October 2008 to the bank’s solicitors:
“We will require that the various amendment letters are signed at the same time as the guarantee, standard security and ranking agreement to give my client the benefit of the property at Osborne Street being taken into account in calculating the LTV covenant given that it is being brought in to secure the existing debt of Dunvale.”
Eventually the bank conceded the point and the terms of an amendment letter were agreed.
The loss sustained by the pursuer
[29] The loss sustained by the pursuer occurred as a consequence of one of the conditions imposed by RBS for not holding the pursuer in default and exercising its right under the RCFs to demand repayment of all sums owed by the pursuer, namely “completion of the extended hedging for an additional period to provide protection against refinance risk”. The pursuer was obliged to enter into two forward starting interest rate hedge instruments on 11 and 15 April 2008, incurring costs and compound interest charges. It is common ground that when the next annual valuation for the purposes of assessing the pursuer’s compliance with the LTV covenant came round in March 2009, the pursuer would in any event have been in breach of the covenant, due to falling property values. By then, however, the hedge instruments that the pursuer would have been obliged to enter into were being sold at significantly lower rates of interest. The effect of the breach in 2008 was accordingly that the pursuer entered into hedge instruments one year earlier and at considerably greater expense than if the breach had not occurred until March 2009. The additional cost to the pursuer is agreed by joint minute to have been £2,716,842.
The pursuer’s allegations of negligence
[30] The parties are agreed that the defenders’ actings fall to be assessed against the test for professional negligence in the well-known opinion of Lord President Clyde in Hunter v Hanley 1955 SC 200, namely that liability is established only if the course adopted by the defenders was one which no professional person of ordinary skill would have taken if acting with ordinary care. The pursuer contends that the defenders are in breach of contract, and in breach of their duty of care, when measured against this test, in two respects.
[31] In the first place, the pursuer contends that the defenders ought, in June 2007 when RCF 2 was entered into and again in or around March 2008 when RCF 3 was entered into, to have taken steps to ensure that the pursuer complied with the provisions of the two RCF agreements by granting a standard security over the Osborne Street site in favour of RBS. Had that been done, the Osborne Street site would have been included in the LTV calculation in March 2008 and the breach would not have occurred. Alternatively, if the defenders deliberately omitted to take steps to cause the pursuer to put in place the security required by the two RCF agreements, they ought to have warned the pursuer of the consequences of not putting any such security in place and obtained the pursuer’s instruction not to do so. Specifically, they ought expressly to have made the pursuer aware of the risk that flowed from creation of an imbalance between debt and assets if the drawing down of RCF 2 was not balanced by including the value of the Osborne Street site in the LTV calculation.
[32] In the second place, the pursuer contends that the defenders ought, when RBS called the breach in March 2008, to have advised the pursuer that the breach was technical and temporary, and to have taken up the point with RBS and its legal advisers with a view to remedying it speedily by the grant and registration of a standard security over the Osborne Street site. The bank had not given formal notice of default and there was time to insist upon the matter being rectified by grant of the security. The bank could not unilaterally waive a condition in the RCF agreements that was material to both parties.
The defenders’ response
[33] As regards the first ground of alleged fault, the defenders assert that they were not instructed to put in place a standard security over the Osborne Street site, and that the pursuer was well aware that no such security had been granted. RBS had waived its right to the grant of a security prior to drawdown, as it was entitled to do. In these circumstances the defenders contend that they were under no obligation to take steps to put a security in place, or to advise either that such steps be taken or as to the consequences of not taking them. If they had sought instructions, it is unlikely that Mr Wheatley would have instructed them to insist on the security. In any event, as legal advisers for the borrower, they were not in a position to “ensure” that a security was granted, without instructions from the client or the owner of the site and without it being required by RBS. The pursuer’s case rested upon an erroneous interpretation of the RCF agreements: there was no obligation to grant a security over the site, and no right to insist upon a security being taken. Even if the agreements, properly construed, did create such an obligation, the terms of clause 10 were unclear and it could not be said that any ordinarily competent solicitor exercising reasonable care would have so interpreted it. There was no duty to warn of a risk of imbalance in circumstances where a security was expected to be granted shortly in connection with the development facility.
[34] In response to the second alleged ground of fault, the defenders contended that there was no duty to advise that the breach was technical and temporary: a breach was a breach. It was not the case that any reasonably competent solicitor exercising ordinary care would have sought to persuade the bank to accept a security over the Osborne Street site and disregard the breach. The possibility of a favourable response from RBS was remote and speculative. The security could not have been put in place within a time scale that would have avoided the occurrence of a default.
Expert evidence
(i) Mr Smith
[35] Mr Smith provided a written opinion and three supplementary written opinions, and gave evidence at the proof. In relation to the pursuer’s first allegation of negligence, Mr Smith expressed the view in his first opinion that Mr Wilson ought, when the pursuer entered into RCF 2, to have taken steps to ensure that a standard security was granted to RBS over the Osborne Street site, in order to ensure that there was a security in place over the property to be taken into account when the LTV covenant was being reviewed at the next annual valuation. In his subsequent opinions that view was refined somewhat, and as I understood his position when he gave evidence, it was that the defenders had a duty to alert Mr Wheatley to the potential consequences of the pursuer receiving the funds lent in terms of RCF 2 without granting security over the Osborne Street site as provided for in the loan agreement. One of those consequences was that the absence of such a security was of itself a breach of the loan agreement. Another was the potential effect on the LTV covenant, and in Mr Smith’s view the defenders ought to have alerted Mr Wheatley to this issue in order that he could carry out an informed calculation of whether the covenant might be at risk of being breached. To fail to have any discussion with Mr Wheatley about this was, in Mr Smith’s view, a breach of the duty owed by the defenders to their client. Had that discussion taken place, the defenders would have ascertained that Mr Wheatley was assuming that the Osborne Street site was being taken into account in calculating the value element of the calculation, and would have been able to point out to him that it was not. Whether the absence of any demand by RBS for a security represented an error on the bank’s part or a deliberate decision not to require it before permitting drawdown was not a material issue. Once a risk of breach of the covenant had been identified, RBS could and ought to have been approached with a view to persuading them either to take security over the site or to exclude the sum drawn down under RCF 2 from the LTV calculation. The drafting and signing of RCF 3 in March 2008 afforded the defenders a second opportunity to notice that the loan agreements contemplated security being granted over the Osborne Street site, yet none was being taken, and accordingly a second opportunity to draw to Mr Wheatley’s attention the potential risk of breach of the LTV covenant.
[36] As regards the pursuer’s second allegation of negligence, Mr Smith’s view was that a reasonably competent solicitor would have advised Mr Wheatley, when he became aware that RBS had called a breach, that it could be rectified by agreeing with RBS that the standard security provided for in RCF 2 and in RCF 3 should be completed without delay. The pursuer was entitled to expect the defenders to take an aggressive line on its behalf with RBS by insisting that the bank were not entitled to found upon a breach which they had been partly instrumental in causing by failing to take a standard security over the Osborne Street site before releasing the funds. It was difficult to say how the bank would have reacted, but the defenders did not even try to discuss the problem, as a reasonably competent solicitor exercising ordinary care would have done.
(ii) Mr Meakin
[37] Mr Meakin’s opinion was that nothing which the defenders did or omitted to do fell below the Hunter v Hanley standard of care. By way of context to his opinion, he emphasised two points. Firstly, a change occurred in the attitude of banks to the fulfilment of conditions precedent and to the consequences of breaches of loan terms between the autumn of 2007 and the spring/summer of 2008, due to the banking crisis. Secondly, it had to be borne in mind in the present case that at the time when the RCF 2 facility was granted, it was intended to be the first tranche of a loan for the development of the Osborne Street site and was therefore only part of a larger credit facility, in connection with which a standard security was to be granted. He also placed weight upon the fact that Mr Wheatley was an experienced property investor who was well used to negotiating the terms of his credit facilities directly with his lenders. Against that background, Mr Meakin did not consider that there was a duty on the defenders to advise Mr Wheatley that the pursuer should offer a security in circumstances where the lender was not insisting upon it. Responsibility for ensuring compliance with a LTV covenant rested upon the borrower. An experienced borrower such as Mr Wheatley could reasonably be expected to know which properties were secured and which were not. In any event, the defenders would not necessarily know whether a loan condition was being waived or ignored at the time of drawdown, and there was no obligation incumbent upon the defenders to insist upon deletion of the reference to the Osborne Street site in the RCF 2 agreement. Because security was to be taken in connection with the development loan agreement, the defenders were not negligent in failing to advise of the risk which flowed from any imbalance between assets and debt after drawdown of the RCF 2 facility.
[38] As regards the defenders’ duties to the pursuer after the breach was called by the bank, Mr Meakin did not consider that the breach was properly characterised as “temporary and technical” as Mr Smith had described it. A breach was a breach, and once it had occurred the lender made the key decisions regardless of how easy it would be to remedy it. Even if a security over the Osborne Street site could have been speedily put in place – and this would have taken more time than the pursuer asserted – that would not of itself have prevented the bank from exercising any right available to it as a result of the covenant breach and any additional event of default that had occurred. Although the defenders might have suggested offering a standard security to RBS, there would have been no obligation on the bank to accept it, and the defenders were not negligent in failing to do so.
(iii) Approach to conflicting expert evidence
[39] I am mindful of the well-settled rule, summarised by Lord Hodge in Honisz v Lothian Health Board 2008 SC 235 at paragraph 39, that it is not the function of the court to prefer one of two opposing schools of thought as to the appropriateness of a particular practice over the other. That rule is applicable in cases in which the choice presented to the court lies between conflicting practices, each of which is supported by a responsible body of opinion within the profession concerned. However, as Lord Emslie observed in Atwal Enterprises v Toner 2006 SLT 537, at paragraph 39:
‘But in general it can be said that the Bolam test is typically appropriate where the neglect is said to lie in a conscious choice of available courses made by a trained professional, and that it is typically inappropriate where it is in an oversight that the neglect is said to lie.’ ”
[40] The present case, in my opinion, falls into the latter category identified by Sedley LJ in the passage quoted. I do not have to determine the appropriateness of a practice adopted by a body of practitioners specialising in finance transactions; rather I have to decide whether, in the particular circumstances of this case, the defenders were guilty of an omission that amounted to professional negligence. This is not, therefore, a case in which, as Lord Emslie put it, the mere existence of expert evidence favouring the defence is sufficient to defeat the pursuer's claim. I must assess the evidence of Mr Smith and Mr Meakin and decide, in relation to each of the critical issues, which to prefer.
Analysis: what went wrong, and why?
[41] The written and oral submissions presented by the parties, for which I am grateful, are complex and lengthy. In order to focus attention on what appear to me to be the core issues, I begin by asking and answering the following basic questions:
- Did something go wrong?
- If so, what went wrong, and when?
I will then assess, under reference to the evidence of the expert witnesses, whether negligence on the part of the defenders has been established.
[42] As regards the first question, it seems to me to be self-evident that something did go wrong. The pursuer was found by the bank to be in breach of its LTV covenant, at a time when, as is common ground, the pursuer’s total indebtedness to RBS had not in fact risen above the specified percentage of the aggregate value of properties held by entities within the control of Mr Wheatley. Putting the matter bluntly, the breach called in March 2008 ought not to have occurred. The specialty of the Osborne Street site was that it was not wholly owned by the pursuer or by a company wholly controlled by the pursuer, but rather by a company half of whose shares belonged to Mr Wheatley as an individual. That, however, is no more than a technicality; it was not disputed by the defenders that there were means by which an effective security in favour of the bank for the RCF 2 facility could have been granted over the Osborne Street site. Mr Wheatley’s position in evidence was that if the defenders had explained to him the potential consequences of not granting a security, he would have instructed them that it should be granted. I found Mr Wheatley to be an impressive witness and I have no difficulty in accepting that evidence. Having regard to the nature and extent of remedies available to the bank under the various credit facility agreements in the event of a default by the pursuer, it would have made no commercial sense for the pursuer avoidably to put itself in default or at material risk of being in default.
[43] I turn then to consider what went wrong, and when. The RCF 2 agreement was executed on 26 and 27 June 2007. On 28 June 2007, Mr Jennings emailed Ms Elder, copying in inter alia Mr Wilson and Mr Wheatley, stating that “the £3.500m is ready for drawing on Douglas’s instruction”. In fact the drawdown, which was required for the purchase of AUB’s shares in OSE, did not take place until the beginning of August. During the intervening period of weeks, it does not appear to have occurred to either Mr Wilson or Ms Elder that RBS had made the funds available to the pursuer without requiring the execution of a standard security over the Osborne Street site in accordance with the express terms of clause 10.1(a)(i) of the RCF 2 agreement. I did not understand either Mr Wilson or Ms Elder to suggest in their evidence that they gave consideration to the absence of a grant of security prior to drawdown, still less that they drew the matter to Mr Wheatley’s attention. Both agreed that there had been no such discussion. Their explanation of why no consideration was given, and why no discussion took place, had a number of strands.
[44] Firstly, Mr Wilson regarded it as entirely a matter for the bank to decide whether they were willing to release the funds without insisting upon security being put in place. At least in 2007, prior to the banking crisis, there was nothing unusual about a lender, and in particular RBS, not insisting upon the implementation of a condition precedent. There was accordingly no reason for the discussion to take place. Mr Wilson assumed that Mr Wheatley had discussed the absence of need for security with the bank directly. It seemed to him to be incredible that security was not discussed at all or that the bank simply forgot to take it. Where a lender chose not to require implementation of a condition precedent, it was not for the borrower to insist upon it. If the true position was that the bank did not overlook the requirement for security, it would seem that, notwithstanding the terms of clause 10 of the RCF 2 agreement, they had had no intention to take it in the first place. Indeed, it was quite possible that the reference in the RCF 2 agreement to security over “the Property” had been inserted in error. In any event, the pursuer could not have forced the bank to take a security if it did not wish to do so. Mr Wilson was confident that if he had discussed the question of security with Mr Wheatley and advised him that RBS did not appear to be insisting on it, he would not have received instructions to offer it.
[45] Mr Wilson also emphasised that the granting and drawdown of the £3.5 million credit facility had to be seen as the first stage of the facility for development of the site which was then in contemplation. There was no doubt that a security over the site would be taken by the bank when the development facility was made available to whichever company was to be used as the vehicle for the development. Work did progress during the latter part of 2007 between the defenders and the bank’s solicitors on the drafting of the necessary security documents. It was reasonable to assume that the bank did not wish a security for the funds advanced for acquisition of AUB’s interest when they would shortly receive a security for the whole development facility. Further, there would have been a positive downside to granting a security for RCF 2, because the existence of such a security could introduce a complication for the grant of another security later, especially if a different lender was involved. It made good business sense to leave the site unencumbered for the time being, especially when the bank were not insisting upon a security.
[46] Ms Elder pointed out that if RBS had wished security for the £3.5 million facility they would have required not only a standard security but also a guarantee by OSE of the pursuer’s debt. There was no provision for this in the RCF 2 agreement, suggesting that it was not intended that security be taken for the £3.5 million facility. She too assumed that the bank had not sought security for this facility because it was only a tranche of the larger facility to be made available in due course for development of the site, at which time security would have been taken. She did not recall giving express consideration to whether the reference to “the Property” ought to be removed from the RCF 2 agreement, but suggested that the view might have been taken at the time that to raise this issue might have created problems, in that it might have caused the application to be referred back to RBS’s credit committee.
[47] In support of the explanations provided by Mr Wilson and Ms Elder, senior counsel for the defenders made extensive reference to the bank’s internal credit control records in relation to the pursuer’s various applications for loan facilities. These had been recovered under commission and diligence procedure for the purposes of the present action and had not, of course, been available to the defenders or indeed to the pursuer at the material time. Looked at now, they were said to demonstrate two things: firstly, that RBS did indeed see the £3.5 million facility as the first tranche of a larger development facility and, secondly, that the bank’s position as to which securities were to be required in connection with particular loans was not consistent over time, so that it could not be assumed that there had ever been any real intention on the part of the bank to insist upon the granting of a standard security as a condition of drawdown of RCF 2.
[48] It was further contended on behalf of the defenders that the RCF 2 agreement, properly construed, did not impose an obligation on the pursuer to grant a security over the Osborne Street site. Clause 10(1)(a) did not create any obligation to grant a new standard security. It referred to security over “the Property” in the same way as it referred to various securities already in existence. The clause merely recorded the fact that existing and future securities would be used as security for the loan and could be looked to for cover. Its function was to identify securities referred to elsewhere in the agreement. On a proper construction, the agreement read as a whole simply left it to the lender to decide whether it wished to refuse drawdown if a desired security was not provided. If it did not, there was no event of default merely because the list of securities was inaccurate.
[49] In my judgment, these explanations and contentions are largely beside the point. The breach founded upon by RBS as an event of default was not the pursuer’s failure to grant a security. If, properly construed, the RCF 2 agreement imposed an obligation upon the pursuer to grant a security as a condition precedent for receipt of the funds drawn down, then it may be that the defenders had a duty to advise Mr Wheatley that by drawing down funds without any security in place he was placing the pursuer in default unless an express waiver was obtained from the bank. I do not, however, have to decide this because there is no causal link between any failure by the defenders to advise that the failure to grant a security prior to drawdown of itself constituted a default and the loss sustained by the pursuer. Nor do I require to reach a view on why reference to the Osborne Street site was included in the RCF 2 agreement yet the bank did not take any steps to obtain the security to which it was entitled prior to drawdown. Whether this was an oversight or a deliberate decision by the bank is a matter of speculation, in the absence of evidence from a bank witness, and is irrelevant to the point that I have to decide. Equally speculative and irrelevant is the question whether the reference to the Osborne Street site was included in the RCF 2 agreement by error. As senior counsel for the defenders noted, amendment of the agreement by deleting the reference to “the Property” would have done nothing to avoid the occurrence of the problem that did arise, namely breach of the LTV covenant.
[50] The point, as I see it, is a much shorter one. The effect of drawing down the RCF 2 funds without the grant of security over the site whose acquisition was being indirectly funded by the loan was to add £3.5 million to one side of the loan-to-value calculation for the purposes of the covenant without adding anything to the other. It is obvious, purely as a matter of arithmetic, that this impacted adversely on the loan-to-value percentage and thus increased the risk of the total amount of borrowing exceeding the permitted percentage of the value of properties secured. Whether or not that was a material risk in the circumstances depended on the value of the properties at the time of drawdown and a projection of their values during the loan period. It was not the task of the defenders to assess the value of the properties secured; that was a matter for Mr Wheatley. The issue, in my opinion, is whether the defenders were under a duty, measured against the Hunter v Hanley standard, to draw to Mr Wheatley’s attention that the absence of security affected the loan-to-value calculation, in order to enable him to assess whether drawdown of the funds would result in breach or risk of breach of the pursuer’s LTV covenant.
[51] I have noted that Mr Smith’s opinion was that it was the duty of the defenders to alert Mr Wheatley to this issue in order to enable him to make the calculation required for an informed decision as to whether the LTV covenant was at risk of being breached. As he put it (at paragraph 10 of his third supplementary opinion):
“If that conversation had taken place at the time of the £3.5 RCF negotiation, [the defenders] would have been able to ascertain that Mr Wheatley was assuming that the OSP [i.e. the Osborne Street site] was being taken into account in calculating the percentage figure. Mr Wheatley was, in my opinion, entitled to take that view as the draft agreement obliged him to grant a standard security to RBS over the OSP. If that discussion had taken place, Mr Wilson would have been able to point out to Mr Wheatley that the OSP would not be included in the property valuation as there would be no security over that property despite the wording of the agreement to the contrary. In my opinion that would have been the usual and normal practice in such circumstances.”
I accept that opinion. Without being informed of the effect of drawdown of RCF 2 in the absence of a grant of security, Mr Wheatley was put in a position where he was unable to assess whether or not there was a risk of breach of the LTV covenant. Mr Wilson was not, in my judgment, entitled without enquiry to assume that Mr Wheatley was alive to this issue. I have already noted that at the time of drawdown Mr Wheatley believed incorrectly that the Osborne Street site was secured in favour of the bank. I accept his evidence that although he was experienced in property management and development, he had for many years relied, and continued at the material time to rely, upon the defenders to advise him in relation to legal matters such as the extent to which the group’s properties were subject to security and, if so, what form of security.
[52] Mr Meakin’s opinion was that the defenders were not negligent in failing to advise Mr Wheatley of the risk which flowed from any imbalance between the assets and debt. At paragraph 3 of his opinion, he stated:
“In my opinion, once a solicitor has given initial advice on the terms of financial covenants, and where no specific questions of compliance are identified, covenant compliance becomes a matter for the borrower and their lender. The fact that a lender has advanced loan monies to the borrower is widely regarded as evidence that the lender is satisfied with the borrower’s compliance with loan terms… In other words, I do not believe that RBS had given any indication that they were not satisfied with the borrower’s compliance with their loan terms which would have alerted [the defenders] to the existence of outstanding conditions precedent.”
I find nothing exceptionable in this statement of opinion, but in my view it misses the point that the default which gave rise to the loss sustained was not the pursuer’s failure to grant a security. Whether RBS were satisfied with the borrower’s compliance with their loan terms was neither here nor there so far as breach of the LTV covenant was concerned. It respectfully seems to me that Mr Meakin’s opinion focuses unduly on what the absence of insistence on security might tell us about the attitude of the bank to security, and fails to address the problem of the potential effect on the LTV covenant from the point of view of the borrower.
[53] Commenting in the course of his oral evidence on the paragraph of Mr Smith’s report that I have set out above, Mr Meakin stated that he would not typically ask a borrower client to confirm anything more than that the LTV covenant was in accordance with expectation. He would expect the client to know what securities he had granted and what he had not. He accepted in cross-examination that a reasonably competent solicitor would alert his client to the possibility of a default occurring before the client signed the loan agreement, and also that the solicitor would advise the client if the bank appeared to be waiving its entitlement to insist on the grant of a security. In the present case, however, the absence of insistence could not, in Mr Meakin’s view, be divorced from the wider context of the anticipated development funding agreement. He thought that the bank’s attitude to delivery of security over the Osborne Street site was a “fudge”, and that the bank did not wish the security until a development facility agreement had been concluded. I have to say that I consider that Mr Meakin, in reaching conclusions of this kind, strayed beyond his function of providing expert evidence of the practice of an ordinarily competent banking solicitor, and that in this connection there is some force in the criticism in the submissions on behalf of the pursuer that he had been drawn into assuming an advocacy role on behalf of the defenders. In so far as Mr Meakin’s opinion appeared to be that the expectation that a development facility agreement would subsequently be concluded absolved the defenders from responsibility from alerting Mr Wheatley to the risk of breach of the LTV covenant on drawdown of RCF 2 without security, I reject it. The risk of breach was immediate and, as turned out to be the case, not easily rectified once it had occurred. In this respect, therefore, I do not consider that Mr Meakin’s opinion stands up to logical analysis.
[54] As regards the justifications put forward by Mr Wilson for not alerting Mr Wheatley to the potential effect of the absence of a security over the Osborne Street site, I reject Mr Wilson’s assertion that even if he had mentioned it he would not have been instructed to take the matter up with the bank. Mr Wheatley’s evidence was unequivocally to the opposite effect. I do not accept that the grant of a security prior to drawdown of RCF 2 would have had the potentially adverse effect described by Mr Wilson and Ms Elder. As Mr Wheatley observed, if he had been unable to reach agreement with RBS for development funding, he could not in any event have borrowed elsewhere without RBS’s consent because of certain negative pledges in his credit facility agreements. Mr Wilson also referred to the increase in loan-to-value ratio in RCF 2 from 75% to 80% as suggesting that both the bank and Mr Wheatley envisaged an increased drawdown against property already secured. There was, however, no evidence of such an understanding and I find that there was none.
[55] Drawing all of this together, I conclude that what went wrong was that the defenders failed, during the period between execution of the RCF 2 agreement providing for security to be taken over the Osborne Street site and the drawdown of the £3.5 million facility, to alert Mr Wheatley to the adverse effect on the loan-to-value percentage of drawdown without additional security. I further conclude that that failure constituted a breach of the defenders’ duty owed to the pursuer to carry out their instructions to the Hunter v Hanley standard.
[56] There remains an issue of causation. It was submitted on behalf of the defenders that even if Mr Wilson had alerted Mr Wheatley to the risk of breach of the LTV covenant, it was entirely a matter for speculation as to what would have happened then. The bank could not have been forced to accept a security. Deletion of the reference to the site from the RCF agreement would not have resolved the problem. There was no evidence that the bank would have consented to excluding RCF 2 from the LTV calculation. If the pursuer had wished to establish this, evidence should have been led from a bank official such as Mr Smart, who had been cited as a witness but not called.
[57] Mr Smith’s view was that the defenders ought to have sought and obtained instructions to revert to RBS with a proposal that either (a) a security be taken over the Osborne Street site, or (b) if no security was to be taken, the £3.5 million facility be ring-fenced so that it was excluded from the LTV calculation. In my opinion the bank could not rationally have refused to accept one or other of those alternatives, given that the former at least had no discernible downside for the bank and that the consequence of accepting neither would have been to put the pursuer actually or potentially in default by triggering a breach of the covenant. That would not have been a commercially sensible course of action. I therefore find that it is likely that one or other of those solutions would have been adopted, that the breach called by the bank in March 2008 would not have occurred, and that the loss incurred by the pursuer would not have been sustained.
RCF 3 – a second chance?
[58] The pursuer contends that a second breach of the defenders’ duty occurred in March 2008 when the defenders again failed to draw to Mr Wheatley’s attention that drawdown of the £1.5 million facility referred to as RCF 3 was being offered without grant of the security provided for in the credit facility agreement. This, it was submitted, was a second missed opportunity for the defenders to identify and explain to Mr Wheatley the potential consequences of obtaining loan finance without providing the security which he was obliged in terms of RCF 3 to provide.
[59] I can deal with this branch of the pursuer’s submission more briefly. I accept that the grant by the bank of RCF 3 afforded the defenders a second opportunity to notice that these facilities were being made available to the pursuer without insistence by RBS on the grant of a security over the Osborne Street site. I do not require to express any view on whether this constituted a breach of duty, because no causal link has been demonstrated between, on the one hand, any failure in March 2008 to draw the absence of demand for security to Mr Wheatley’s notice and, on the other hand, the loss sustained by the pursuer. The grant of RCF 3 did not of itself result in any increase in the pursuer’s actual or potential indebtedness to the bank because it simply replaced RCF 1, which had also been a £1.5 million facility. It did not therefore have any effect on the loan-to-value calculation. Moreover, by the time the RCF 3 agreement was entered into, the breach of the LTV covenant, based upon valuations already obtained by the bank, had occurred, albeit that it was not intimated by Mr Smart until a few days after Mr Wheatley had signed the RCF 3 agreement. If, hypothetically, perusal of the RCF 3 agreement had alerted the defenders to the fact that drawdown of RCF 2 had adversely affected the pursuer’s loan-to-value calculation, any action which might then have been taken would have been too late to prevent the breach of the LTV covenant from having occurred.
Advice given after breach called
[60] The second branch of the pursuer’s case concerns the advice given by the defenders to Mr Wheatley immediately after the bank called the breach and sent the email dated 18 March 2008 containing their “proposed way forward”. I have already set out the respective views of Mr Smith and of Mr Meakin as to the actions which could or should have been taken by Mr Wilson when Mr Wheatley sought his advice on how to respond to the bank, posing his plaintive question.
[61] I accept Mr Smith’s view that Mr Wilson could have fought the pursuer’s corner rather harder than he did after the breach was called. There were undoubtedly arguments that could have been made on the pursuer’s behalf that the breach had occurred at least partly due to the fault of the bank, in that they had inserted a requirement for security over the Osborne Street site and then disregarded it when allowing drawdown of RCF 2. It could have been pointed out to the bank that the matter was capable of resolution by the immediate grant of a security over the site, together with whatever guarantees were necessary in order to bring its value within the pursuer’s covenant. The documentation lodged appears to me to disclose a surprising lack of activity on the part of the defenders in response to the situation that had arisen, and it did not appear from the evidence at the proof that Mr Wilson had done much more than reinforcing Mr Wheatley’s impression that he was over a barrel. It may be that the extent of the loss which the pursuer might sustain as a consequence of the bank’s extended hedging requirement was not foreseen at that time either by Mr Wheatley or by Mr Wilson.
[62] I am not, however, persuaded that the defenders’ failure to take a more active and, if appropriate, aggressive line towards the bank constituted a breach of duty measured by the Hunter v Hanley standard. Mr Meakin agreed that the defenders might have suggested that the pursuer offer a standard security quickly on the basis that the bank take no further action in relation to the breach, but he described any proposal along these lines as “wholly a commercial matter and not one which RBS would have been obliged to accept”. This, as it seems to me, is the crux of the matter. Senior counsel for the defenders submitted, and senior counsel for the pursuer accepted, that at best for the pursuer on this branch of the case the loss sustained was the loss of a chance to persuade the bank that the breach could be remedied merely by granting a security over the Osborne Street site. It was submitted on behalf of the pursuer that it was for the court to determine what the likelihood was of a favourable outcome, and (if the first branch of the claim had been unsuccessful) to grant decree for an appropriate percentage of the sum sued for. In my opinion, however, the matter goes further than that. As Mr Meakin pointed out, the breach had occurred and the bank could, if it wished, either insist upon its rights in terms of the credit facility agreement or specify the terms upon which it would not so insist. In accordance with Mr Smith’s view, I am satisfied that many, if not most, solicitors would have done more than Mr Wilson did to attempt to get the pursuer out of the hole in which it found itself. However, in circumstances where the bank had a contractual entitlement in terms of clause 9.9 of RCF 2 to demand repayment of a sum sufficient to bring the loan-to-value percentage down to 80%, or alternatively to dictate the terms on which it would be willing not to enforce its entitlement, it cannot in my opinion be said that no ordinarily competent solicitor would have failed to demand that the breach be remedied simply by the grant of a security over the Osborne Street site or by disregarding RCF 2 in the loan-to-value calculation. There would have been no solid basis in law for such a demand. The damage had been done.
Disposal
[63] I shall sustain the pursuer’s second plea-in-law and, in accordance with the terms of the joint minute, grant decree for payment by the defenders to the pursuer of the sum of £2,716,842, with interest thereon at the rate of 4% per annum from the date of citation until the date of decree. All questions of expenses are reserved.