Property development company sues Scots legal firm for £2.7m over ‘negligence’

A judge in the Court of Session ruled that the legal firm was “negligent” in its failure to ensure that the company complied with the terms of two revolving credit facility (RCF) agreements it had made with a bank.

Lord Tyre (pictured) heard that the pursuer Dunvale Investments – the holding company of a group of companies whose business consists principally of investment in commercial property and whose sole owner and managing director is Douglas Wheatley – sought reparation for losses which it claimed to have sustained as a consequence of the negligence of the defenders Burness Paull & Williamsons LLP, which 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.

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 (RBS), after the pursuer was found to be in breach of the loan‑to‑value covenants contained in two revolving credit facility agreements.

Under one of the agreements – referred to by parties as “RCF 2” – the bank agreed to make available to the pursuer a revolving loan of a maximum of £3.5 million as being “to assist with the acquisition of the property”, a development site at Osborne Street, Glasgow. The parties also agreed another £1.5 million revolving credit facility, referred to as “RCF 3”.

In the first place, the pursuer contended 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, it was submitted.

Alternatively, it was argued that 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.

In the second place, the pursuer contended 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.

As regards the first ground of alleged fault, the defenders asserted 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, and in these circumstances the defenders contended 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.

In response to the second alleged ground of fault, the defenders argued that there was no duty to advise that the breach was technical and temporary.

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, it was submitted.

Lord Tyre said it was “self-evident” that something had gone wrong.

He explained that the pursuer was found to be in breach of the bank’s LTV covenant at a time when the company’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,” he said.

It was said that on behalf of the pursuer 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 a written opinion, Lord Tyre said: “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.”

The judge granted decree for payment by the defenders to the pursuer of the sum of £2,716,842, with interest at the rate of 4% per annum from the date of citation until the date of decree.