In this article we highlight the areas from which professional negligence claims most frequently arise, and some key considerations for protecting your position.
Valuations and surveyors
If you are lending against a property or asset, a surveyor or valuer is usually instructed to assess its market value, and you rely on that valuation to determine the adequacy of that security, and your loan-to-value ratio.
A professional negligence claim relating to valuations could arise in the following scenarios:
- Failure to take account of readily available comparable evidence at the date of valuation, resulting in a market value figure significantly above what the property could realistically achieve on sale.
- Providing a valuation on assumed planning permission or projected gross development value without verifying the permission or making appropriate assumptions as to build costs, leading to an inflated residual land value.
- Failure to identify or adequately report on adverse factors affecting the property such as contamination, flooding risk, or the absence of access rights which, had they been disclosed, would have led you to decline the facility or require additional security.
- Material underestimate of rebuild costs in the event of damage or destruction for insurance purposes, leaving you inadequately insured and exposed to a shortfall in the event of damage or destruction.
An overvaluation can result in you lending a sum that is insufficiently secured from the outset. Subsequently, if the borrower defaults and the security is realised at a figure materially below the valuation, the shortfall may be recoverable from the valuer.
If you are providing finance in connection with a development and an independent monitoring surveyor is instructed, a claim could also arise from:
- Negligent certification that works have reached a particular stage of completion when they have not, causing you to release funds that cannot be recovered.
- Failure to identify significant structural defects in a report such as subsidence or defective foundations that materially affect the value of the security and the cost of any remedial works required.
- Failure to identify that a borrower’s development is materially behind programme or that the remaining contingency is insufficient to complete the build, so funds are advanced on a project no longer commercially viable.
- Failure to report on defective or non-compliant building works including missing building regulation approvals, leaving you exposed to enforcement risk and an impaired security position.
Due diligence
Professional advisers will routinely carry out due diligence during a transaction, whether instructed by you directly or by the borrower with a duty of care owed to you by way of a reliance letter or third-party assumption of responsibility. Where you instruct the adviser directly, the contractual and tortious duties are usually straightforward. Where you rely on work produced for the borrower, your position depends on whether responsibility was assumed to you.
Negligent due diligence can take many forms:
- An accountant’s failure to identify material liabilities such as undisclosed tax exposures, contingent liabilities, or overstated receivables within a working capital or financial due diligence report.
- An accountant’s failure to identify fraud, stock discrepancies, or irregularities in a target company’s management accounts.
- An auditor providing a financial statement that materially overstates the borrower’s revenue, profitability, or asset base.
- A solicitor’s failure to identify restrictive covenants, oversights in verifying the borrower’s title, or a failure to fully report on matters revealed within property searches and enquiries.
- A solicitor’s failure to adequately report on the relationship between a facility agreement and a share or business purchase agreement.
- A solicitor’s failure to adequately (or at all) report on or provide information it has acquired during the transaction which would impact your decision to lend.
However, note that it will rarely be the case that a professional advisor (unless expressly instructed to do so) has a duty to advise on the wisdom of the transaction.
Protecting securities
On completion of a transaction, your professional advisor (usually your solicitor, but in some cases this may be your accountant) will protect your security interest by registering a charge either at the Land Registry, Companies House or both.
A failure to perfect your security interest may involve:
- A failure to register a charge within the requisite timeframe;
- A defect in the execution of security documents;
- A failure to obtain necessary consents or waivers; or
- An oversight in ensuring priority over prior-ranking interests.
The consequence is that, upon the borrower’s default, you discover that your security is either unenforceable or ranks behind other creditors leaving you with an unsecured or inadequately secured exposure. In such circumstances, the solicitor or professional responsible for the security work may be liable for the full extent of your loss, subject to the usual principles of causation and mitigation.
Emerging risks: technology-assisted due diligence
As professional advisers increasingly deploy AI-enabled tools and outsource elements of due diligence to third-party service providers, lenders should be alert to new directions of potential negligence. The Prudential Regulation Authority and Financial Conduct Authority expect firms to treat AI applications in credit and underwriting as high-risk, with documented governance covering explainability, bias detection, and human oversight. Where a professional adviser relies on automated document extraction, AI-driven financial analysis, or outsourced verification processes, a failure to exercise adequate oversight of those tools or providers may itself constitute a breach of the duty of care.
Practical recommendations
To strengthen and protect your position as much as possible when instructing professionals, we recommend the following steps:
- Ensure that all professional engagements contain clear terms as to the scope of the duty owed, reliance and any limitations on liability;
- Ensure that the terms of engagement clearly allocate responsibility for the accuracy of any AI-assisted or outsourced work product, and that any reliance letters obtained from the borrower’s advisers extend to work produced with the assistance of such technology;
- Verify that each professional adviser maintains adequate professional indemnity insurance for the value of the transaction, and consider including within your terms of engagement a requirement that the adviser notify you of any material reduction in or non-renewal of its PI cover during the currency of the retainer
- Obtain and review reliance letters from advisers instructed by borrowers;
- maintain complete transaction files including all reports, valuations, and correspondence; and
- Ensure your professional advisors are kept up to date with any changes in the circumstances or nature of the transaction as it progresses and ask them if the change will have a material impact on their advice.
If a potential claim is identified you should act swiftly. Limitation periods are strict, and delay may extinguish what would otherwise be a strong claim. If you are in any doubt as to whether a time limit is approaching, seek legal advice immediately.
If you have concerns about the conduct of any professional adviser in connection with a lending transaction prompt investigation is essential, both to preserve limitation and to secure contemporaneous evidence while it remains available.
Our dispute resolution and litigation team has significant experience in pursuing professional negligence claims on behalf of lenders and can advise on the merits and quantum of a potential claim, the appropriate limitation analysis, and the most effective strategy for recovery.
If you have concerns about the conduct of any professional adviser in connection with a lending transaction, please get in touch via email or call +44(0)3333 231580
