Law Report: Solicitor's duty to borrower and lender in flat purchase: Mortgage Express Ltd v Bowerman & Partners (a firm). Chancery Division (Mrs Justice Arden), 11 May 1994

A solicitor who acted for a mortgage lender as well as the borrower purchasing a property was under an obligation to protect the interests of both his clients, and if he became aware of information that called into question the accuracy of a valuation obtained in connection with the loan, he should inform the lender, as well as the purchaser, so that it could exercise its right to withdraw from the mortgage.

Mrs Justice Arden gave judgment for the plaintiff, Mortgage Express Ltd, and awarded it damages on a negligence claim against the defendants, Bowerman & Partners. They had been acting for both the plaintiff and the borrower, Ali Hadi, in respect of his purchase of a flat at 119 Queen's Court, Queensway, London, and the execution of a first mortgage for a loan of pounds 180,150 towards the purchase price of pounds 220,000.

The property had been valued at pounds 199,000 by Ratcliffe & Walley. However, it was alleged that Anthony David Gilroy, the partner in the defendant firm dealing with the transaction, learnt that the property had been the subject of two recent sales, the second of which, at a price of pounds 150,000, was under contracts exchanged the same day as for Mr Hadi's purchase, and the first, completed some time earlier, was for a yet lower figure.

Those matters, the plaintiff said, cast doubt on the valuation of the property and the defendants ought to have reported them to the plaintiff, as well as to Mr Hadi. The plaintiff could then have obtained a second valuation, which would have demonstrated that the property was overvalued. The true open market value, it transpired, was then only pounds 120,000.

Mr Gilroy, having learnt of the other transactions, drew Mr Hadi's attention to the fact that his vendor, Ahmed Arrach, was paying only pounds 150,000; but he did not communicate the same information to the plaintiff. After the purchase was complete, Mr Hadi only made one interest payment under the mortgage. The plaintiff subsequently obtained a possession order and sold the flat, but due to a general fall in the market received only pounds 96,000.

Nicholas Patten QC and Timothy Harry (Rosling King) for the plaintiff; Genevra Caws QC and Ben Patten (Pinsent & Co) for the defendants.

MRS JUSTICE ARDEN said a conveyancing solicitor experienced in property transactions knew the risks attached to them, particularly in advancing money on inadequate security. Mr Gilroy knew the plaintiff relied on the valuation and should have realised the price paid by Mr Arrach cast doubt on its accuracy. In the circumstances, he was put on inquiry.

The fact that Mr Hadi was allowing his vendor an immediate profit of pounds 70,000 should have raised doubts in Mr Gilroy's mind as to matters on which the plaintiff relied. He therefore had a duty to place those matters before the plaintiff.

The present case was distinguishable from Clarke Boyce v Mouat (1993) 4 All ER 268, in that the plaintiff, unlike Mrs Mouat, had not determined to enter the loan transaction come what may. It had reserved the right to withdraw and the defendants, if not expressly instructed to advise them whether to exercise that right, were by implication entitled and bound to bring to its attention relevant matters.

The existence of the right to withdraw gave rise to a potential conflict of interest between Mr Hadi and the plaintiff and in those circumstances the defendants had to obtain both clients' consent to their continuing to act.