The cause for concern generated within the profession by the decision of Graeme Hamilton sitting as a deputy High Court judge, in the case of National Home Loans Corporation v Giffen Couch & Archer (6 December 1996) was almost palpable.

Fortunately, order was restored on 18th June 1997 with the setting aside of that decision by the Court of Appeal (LLJs Leggatt, Peter Gibson and Hobhouse).The factsIn June 1989, National Home Loans (NHL) made a re-mortgage advance to borrowers under a self-certification scheme which it operated at the time.

Under that scheme, the borrowers certified the amount of their income and also gave a declaration that they had never been more than one month in arrears with a loan and had never had a county court judgement recorded against themOn the basis of this certificate and declaration, NHL granted the borrowers an advance of 75% of the value of the property without making enquiries to verify the matters certified and declared by the borrowers.

This policy was adopted by NHL in order to speed up the re-mortgage process (often slowed down by the time taken to obtain references) and also to avoid a borrower's existing lender being alerted to the fact that is borrower was re-mortgaging.

NHL had found in the past that it lost business when an existing lender, so alerted, would take steps to retain its borrower.

The policy was therefore aimed at maintaining and increasing market share.

The admitted philosophy behind it was: provided the loan did not exceed 75% of the valuation, NHL could never make a loss in the event of default by the borrower because there would be sufficient equity in the property to cover the sum lent and arrears on sale.The solicitors discovered during the course of the transaction that the borrowers were £4,000 in arrears with their existing loan and that the mortgagee was threatening to issue possession proceedings.

They did not consider these facts to be matters which they were required to report to NHL.

Although they did not know, they assumed that NHL was aware of the position, since it would have made enquiries of the existing lender.

They had not been instructed otherwise.In their report on title, the solicitors confirmed, in response to a specific request, that there had been no material change in the circumstances of the borrowers since the date of the offer of the loan.

When the borrowers defaulted, NHL eventually realised its security suffering a loss due to the fall in the value of the property.

It was this loss which it sought to recover from the solicitors.

NHL alleged that the solicitors should have informed it that the borrowers were in arrears with their existing mortgage and had they done so, the loan would not have proceeded.The first instance decisionThe judge found the solicitors to have been in breach of contract and negligent in not reporting the arrears (the threat of possession proceedings was found not to have added anything).Although the judge accepted that the report on title in NHL's standard form required the solicitors to report only on whether the circumstances of the borrowers had materially changed since the date of the offer, and he accepted the solicitors' case that there had been no such material change, he found them in breach of a wider, general duty to report the arrears.This finding was based on the decision in Mortgage Express v Bowerman in which the Court of Appeal had found solicitors liable for failing to report a sub-sale transaction and the difference between the head sale and sub-sale prices.The Court of Appeal had held that a reasonably competent solicitor would have realised that such matters cast doubt on the mortgage valuation and should, therefore, have been reported to the lender.

However, it went further than that and further than it needed to on the facts with which it was concerned.

It stated that matters which a reasonably competent solicitor would realise might have a material bearing on some other ingredient of the lending decision were also subject to the duty to report.

The fact that there were arrears with an existing mortgage was, it was held in Giffen Couch & Archer, just such a matter.

The judge found that NHL was not negligent in adopting the self-certification policy referred to above.

This was despite the fact that it knew, at the date of the transaction in question, that other prospective borrowers had given false certificates and declarations.

He awarded NHL damages representing all of the losses it had suffered as a result of entering into the transaction, placing it in the position it would have been in had it not done so.

The issue of liability was appealed.The decision of the Court of Appeal.The appeal was allowed.

The judgement of the court was delivered by LJ Peter Gibson.

He referred to the general question that the judge posed on the issue of liability, namely, 'is a solicitor instructed by a mortgagee under a duty in contract and/or tort to inform the mortgagee if he or she discovers that the proposed borrower on a re-mortgage has a bad record with the previous lender?' The judge, he stated, had answered this general question in the affirmative, but in doing so, had ignored the particular circumstances of the case.

The judge's approach was wrong.

The case law established two things:-- the extent of the duty of a solicitor depends on the terms and limits of the retainer and any duty implied at common law must be related to what the solicitor has been instructed to do (Oliver J in Midland Bank v Hett, Stubbs and Kemp)-- the precise scope of the duty depends on the extent to which the client appears to need advice (Donaldson LJ in Carradine Properties Ltd v DJ Freeman).LJ Peter Gibson conveniently itemised the relevant facts of the case which the judge should have taken into account, as follows:-- The instructions from NHL required the solicitor to act in the preparation of the mortgage together with any other appropriate documents, in accordance with the notes for guidance and the documents provided.-- The primary function of the solicitor was to ensure that NHL obtain ed a first legal mortgage and this meant ensuring that the borrower had a good marketable title.

NHL was an experienced commercial lender.

It provided detailed instructions and its own form of report on title specifying the matters in respect of which it needed to be advised.

Some of these matter went beyond title.

For example, the instructions specified matters going to the valuation and required the solicitor to inform it if the property was not to be used as the borrower's principal residence.

In these circumstances, there is limited room to extend the duty to require the solicitor to take steps going beyond those specified.-- The only action that NHL required the solicitor to take in respect of the financial circumstances of the borrower was to carry out a bankruptcy only search and to report back anything adverse revealed by the search.NHL did not send the solicitor the mortgage application form and there was no evidence that the solicitor knew its content.-- The report on title, in requiring the solicitor to certify that there were no material changes in the circumstances of the borrower since the date of the offer of the loan' naturally led the solicitor to believe that subject to a clear bankruptcy search, NHL was satisfied that, as at the date of the offer, it was appropriate for it to lend to the borrowers.The judge reached his conclusion on liability independently of and unaffected by these facts because of his understanding of the decision in Mortgage Express v Bowerman (a case that the Master of the Rolls had stated in the judgment was closely dependent upon its facts).In Bowerman it was held that 'if, in the course of investigating title, a solicitor discovers facts which a reasonable competent solicitor would realise might have a material bearing on the valuation of the lender's security or some other ingredient of the lending decision, then it is his duty to point this out'.However, in the same judgement, it was said that the question of whether information should be passed on to either client depends on the relevant interest of each client which the solicitor is engaged to serve.

In Bowerman the information affected the security in respect of which the solicitor had been instructed.

In this case, the information had little to do with NHL's security.

The judge rejected NHL's argument that the personal covenant was part of the security.

He agreed with the solicitor's submission that 'security' refers to the security for the performance of the borrower's personal covenant and not to the covenant itself.

He therefore found that the information about the arrears in this case did not relate to any matter in respect of which the solicitor had been instructed by NHL to advise and, therefore, did not accept that it was a matter of potential relevance to NHL.

The judge in this case thought that the solicitor was wrong to assume that NHL had made the enquiries it considered it needed to make.

That conclusion was wrong.

It was arrived at without regard to the factors referred to above and was inconsistent with Carradine Properties and Birmingham Midshires v David Parry & Co.

In the latter case Sir John Vinelott had said that a solicitor is not required to investigate the financial position of the borrower and is entitled to assume that the lender has made such enquiries as it thinks necessary.In respect of the information in this case, unlike in Bowerman, it was reasonable for the solicitor to assume that NHL would have obtained it had it wanted it.LJ Gibson held that the threat of legal proceedings was not a mate rial change in circumstances.

In its own evidence, NHL had stated that the relevant information was the arrears and that the existing lender's reaction to the arrears, namely the threat or issue of legal proceedings was irrelevant.

He concluded that the solicitor did not breach its duty in respect of either the arrears or the threat of possession proceedings by not reporting these to NHL.

He concluded that in Omega Trust v Wright Son & Pepper, Douglas Brown J stated that the judgement of Graeme Hamilton QC was 'plainly wrong' and he endorsed that view.CommentThe important features of this judgement are as follows:-- it goes a long way towards achieving a degree of certainty in the lender/solicitor relationship.-- On matters going beyond title, lenders now need to be clear about what they require from their solicitors in the absence of clear instructions to the contrary, it places the burden of investigating the borrowers' financial position back where it belongs -- with the lender.It prevents those lenders who adopted risky lending policies for the sake of increasing market share, having reaped the initial rewards, from then looking to solicitors to underwrite the almost inevitable losses that were subsequently suffered.It emphasises the fact that the judgement in Bowerman was accepted by the Court of Appeal as being a decision limited to its facts and that when defining the duty as it did, the Court of Appeal qualified it by stating that whether or not the information needed to be passed on depended upon the relevant interests of each client which the solicitor was engaged to serve.

What those interests might be depended on the terms of the retainer.-- it therefore limits the effect of the words any other ingredient of the lending decision' which appear in the Master of the Rolls' definition of the duty in the Bowerman judgement, which had been relied on by NHL to cover the situation that arose in this case.Those words have, until now, been widely interpreted by many lenders, this case being just one example.

The decision restores some balance between lenders and solicitors and highlights the need for lenders, first to be more prudent in their lending policies and, secondly, to provide clear instructions so that solicitors will know exactly what the lender considers to be important in deciding whether or not to proceed with the loan.

After all, lenders are commercially aware institutions with huge reserves of knowledge and experience in the lending field.Solicitors are not lenders and, as has now been accepted, the onus should not be on them to assess what might be considered relevant to a lending decision.

The decision will therefore come as good news to the legal profession and will, hopefully, see some reduction in the number of claims brought by lenders looking to recover losses incurred as a result of risky lending policies, the effect of economic factors that affected the ability of borrowers to meet mortgage commitments and the fall in the property market.