LSREF III Wight Ltd v Gateley LLP [2016] EWCA Civ 359

The Court of Appeal has handed down judgment in LSREF III Wight Ltd v. Gateley LLP [2016] EWCA Civ 359, a case which concerned what, if any damages had been caused by solicitors' negligence and whether the claimant had failed to mitigate its loss where liability had been admitted.

Background

In September 2007, Gateley LLP solicitors (Gateley) failed to draw to a bank's attention an insolvency forfeiture clause in a lease of a property, over which a first legal charge was granted as security for a loan facility. The forfeiture clause seriously impaired the charge as security, but the issue only came to light when the bank sought to enforce its security in 2012. During the proceedings brought by the bank for negligence against Gateley, the bank assigned its rights to LSREF III Wight Ltd, a special purpose vehicle or SPV. At the trial, Gateley asserted that the bank and latterly the SPV had failed to mitigate its loss, by failing to negotiate a variation of the lease with the freeholder. In fact, before the trial, the freeholder had indicated his willingness to remove the offending clause for £150,000, a payment which Gateley offered to make on behalf of the SPV, but which was declined.

The trial judge held that the bank had suffered loss at the commencement of the transaction in September 2007 and that the amount of loss attributable to Gateley was represented by the diminution in the value of the lease as a security attributable to the forfeiture clause. The judge further held that the SPV had not failed to mitigate its loss by not pursuing the variation of the lease. Damages of £240,000 plus interest at 2% per annum from September 2007 were awarded. After trial, the SPV used part of the damages awarded to pay the £150,000 to the freeholder in order to vary the lease. In December 2015, the property was sold at auction for £645,000 although this sale has not yet been finalised.

Gateley appealed, arguing that the alleged loss should have been calculated as at the trial date, not as at the transaction date and that the bank/the SPV had unreasonably failed to mitigate its loss by not arranging for the lease to be varied (and for which Gateley had offered to advance the £150,000 as requested by the freeholder).

Decision

The Court of Appeal ruled that the alleged transactional loss which was sustained by the bank was to be calculated as at the trial date, not the transaction date, in circumstances where the loss had not been crystallised by...