A downturn in the property market could mean that secured peer-to-peer lending platforms need to pursue recovery claims against valuers or solicitors, say Sam McCollum and Neil Franklin of law firm TLT
While the property market has been buoyant, we anticipate that to change over the next year. We expect that firms that have facilitated secured loans will need to manage shortfalls after appointing receivers and/or realising their security.
There are a number of professional negligence claims that property finance firms should consider in order to ensure they recover fair value for investors. There will inevitably be recovery claims against valuers, where they have over valued properties, or solicitors if there were title issues or other issues with the security.
For those who experienced the impact of the 2008-2009 financial crisis on lenders, they will be aware of the level of losses caused by the sudden fall in the property market. The crash also uncovered large numbers of property frauds (which can sometimes be masked in a rising market).
Property developers were hit especially hard because of the way land sites are valued – based on the residual valuation approach, which relies on the end value of units (minus projected build costs and profit). As a result, land sites’ values can fall at a ratio of three to four times greater than property values, and that could be exacerbated by the spiralling building costs we are seeing.
Against this backdrop, it would be wise for firms to assess their processes and options for recoveries against their professionals and put contingency plans in place.
There are three types of professional negligence claims to consider:
- Valuer/surveyor claims: For property finance and bridging finance, the value of the security is key. If this is substantially wrong, the lender will recover much less than they expected and the valuer may be liable. Because valuation is an art and not a science, valuers are rightly afforded a ‘margin of error’, which is usually five to 15 per cent, depending on the property type. The valuer’s liability will normally be limited to the extent to which they got the valuation wrong.
- Solicitor claims: The viability of claims against solicitors (and the scope of the potential recovery) has improved following a Supreme Court decision last year. Lender claims normally relate to the solicitor’s failure to identify an issue with the title or extent of the property, or the solicitor’s failure to identify a property fraud.
- Project monitor claims: With development finance, project monitors will often be instructed. If they negligently sign off on drawdown requests, or if their costs advice is negligent, the lender may have a claim against the losses caused by the negligent advice.
How long do lenders have to bring claims?
Normally six years but it can be shorter or longer depending on the circumstances. Generally, the sooner steps are taken the better. This is because there can be risks related to insolvency or insurance coverage and these risks can increase over time.
Whose claim is it to bring?
With P2P lending, this can be a complex question and depends on the underlying loan documentation, security and terms of engagement with the professionals – and ultimately what was envisaged when the structure was set up.
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If firms have, or anticipate, substantial shortfalls, they should take steps to investigate any claims now. It would also be worth revisiting processes to manage future shortfall cases. For those actively lending, it’s worth reviewing the terms on which professionals are engaged so there are no unexpected difficulties further down the line.