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When property developments go wrong

Last year, I wrote about Bank of Ireland v Faithful & Gould which, to the best of my knowledge, was the first time the TCC had considered the role of a project monitoring surveyor (PMS). That case did rather turn on its facts though, and most of us probably learnt more about vesting certificates, than the role of the PMS.

However, fear not, because Edwards-Stuart J has produced a monster judgment in Lloyds Bank v McBains Cooper, which has some real gems when it comes to what surveyors should, and most definitely shouldn’t, do when acting as a PMS.

What does a PMS do?

Before going on, for those of you wondering what a PMS does, Edward-Stuart J described the role as follows:

“The role of a project monitor is to check the progress and quality of the works and to approve the applications for drawdown submitted on behalf of the borrower and to make recommendations to the Bank as to the amount that should be paid against the drawdown request. Some witnesses described the project monitor as the Bank’s eyes and ears in relation to the project.”

It is clear from reading the judgment that the judge clearly had an excellent grasp of the whole process surrounding lending on construction projects and the respective roles of the lender, borrower and PMS.

Lloyds Bank plc v McBains Cooper Consulting Ltd

Sadly, this case has facts that will be all too familiar to many of you, namely an inexperienced developer (I’ve never seen a claim against a PMS involving an established developer) borrowing money just prior to the credit crunch from a bank bending over backwards to lend in a competitive market. Not only that, it involved bank staff that clearly had scant understanding of the construction process, and the bank and borrower were let down by a PMS not fully appreciating the implications of his failure to adequately report cost overruns. (Unsurprisingly, prior to the credit crunch this had not been such a problem as cost overruns were absorbed in increases in property values.)

So, briefly the facts are as follows:

  • Lloyds lent the borrower, who the judge described as “the exotically named Miracles Signs & Wonders Ltd”, £2.625 million to assist with the development of a building in Willesden that was used as a church.
  • Lloyds appointed McBains Cooper as PMS.
  • Construction works started in late summer 2007, but things didn’t go accordingly to plan. By March 2009 the Lloyds’ facility was almost extinguished and the works were far from complete. The shortfall was some £700,000. While the borrower may have believed in miracles, it was unable to produce one, and so Lloyds cut its losses and realised its securities in the form of charges over the development property and two other properties.
  • Lloyds claimed losses of £1.4 million from McBains Cooper, being the total sums advanced under the facility, less the recoveries from the various charged properties.
  • Lloyds alleged that McBains Cooper was not just negligent, but that it was reckless as its PMS had only visited site on around three occasions over 18 months, rather than once each month when preparing his progress reports as required under McBains Cooper’s retainer.

Recklessness

Lloyds clearly pursued this claim because it considered that, if it succeeded, it could avoid the consequences of its own negligence. However, we’ll never know whether it could have done so because, while the judge found that the PMS had only visited site on 10 occasions (meaning that no visit had been undertaken prior to preparing seven of the 17 progress reports), no case for recklessness was made out.

Negligence

This project was probably doomed to failure from the outset, given the confusion between the PMS and the bank as to what the facility was, and what was included in it. In particular, it appears that the PMS initially proceeded on the basis that the facility was £2.25 million, and not £2.625 million. Even in the higher sum, no account had been taken of the fact that almost £100,000 interest would have to be deducted from the facility, no allowance had been made for professional fees and the contingency was inadequate (given that all parties were aware that additional asbestos was likely to be discovered).

In part, these problems arose because, bizarrely, the bank had not provided McBains Cooper with a copy of the facility letter, so the PMS was unaware of the level of the facility (£2.625 million rather than £2.25 million) and precisely what was included in it. The judge concluded that:

  • The bank had fallen below the standard of a reasonably competent lender as a result.
  • McBains Cooper was also negligent because the PMS should have repeatedly requested a copy of the facility letter in order to carry out his role.

The PMS had clearly assumed that the development was being part funded by the borrower whereas, in reality, this wasn’t the case. Despite this assumption, McBains Cooper had stated in progress reports 1 to 8 that:

“We can confirm that, in our view, sufficient funds remain in the total facility at this time to complete the development.”

This was self-evidently wrong as the PMS was aware that the value of the main contract was in excess of £2.5 million, but understood the facility to be £2.25 million. The judge was concerned that it was only at the end of the trial that McBains Cooper admitted that the confirmations in progress reports 1 to 8 were given negligently. However, even more surprising was that McBains Cooper’s own PMS expert had not considered that these actions amounted to McBains Cooper falling below the standard expected of a reasonably competent PMS. As the judge made clear, “this was never a sustainable conclusion”.

Causation

However, like any professional negligence claim, proving negligence is one thing, but in order to succeed a claimant must obviously demonstrate that the negligence caused the loss claimed.

The judge considered that McBains Cooper’s negligence caused losses from progress report 12 (August 2008) onwards, when the PMS included £10,000 in the approved draw-down for works to the third floor that were not included in the facility. The judge said that, had the PMS pointed this out to the bank, it is likely that the issues concerning the shortfall of the funding would have come to light, and that the PMS would have realised that when interest, variations and professional fees were taken into account, there would have been a shortfall of some £300,000-£400,000.

The judge concluded that had McBains Cooper properly performed its functions under the retainer, the bank would have become aware of the true financial position in November 2008. This would have resulted in it terminating the facility and selling the charged properties. However, it was not until March 2009 that McBains Cooper expressly stated for the first time that there were insufficient funds to complete the development. The judge explained that:

“Since McBains Cooper did not advise the Bank, either then or at any time prior to the end of December 2008, that: (a) that the borrower was proposing to drawdown, or was actually drawing down, money from the facility in respect of work to the third floor; and (b) there was not enough money in the facility to complete the development, it is in principle liable for the losses sustained by the Bank after the end of November 2008. That is because I find that the Bank would not have permitted any further drawdowns on the facility thereafter.”

However, the judge found that the bank was contributory negligent, and concluded that it had to bear one third of the losses.

What lessons can a PMS learn?

I think that any surveyor contemplating acting as a PMS should read this case and be watchful of the type of problems that occurred. My advice would be as follows:

  • Always read and understand the retainer upon which you are instructed. Don’t simply throw it in a drawer and monitor the project as you would normally do. For example, in this case the retainer provided for McBains Cooper to carry out its own valuation of the construction works in progress each month, and not just check the sums applied for by the borrower.
  • Always obtain a copy of the facility letter and ensure that you understand exactly what is and is not included in the facility. If in doubt, ask the lender.
  • Always visit site at the frequency required by the retainer.
  • While templates are always useful when reporting on progress, over-reliance and a lack of care can lead to incorrect statements being made, such as there being sufficient funds to complete a development when that is quite clearly not the case.
  • Ensure that you don’t include sums in draw-downs that are not included in the facility without first seeking prior approval from the lender.
  • If you need to warn the lender about issues such as cost overruns, highlight it. If it is not acknowledged by the lender, follow up with another letter or an email, just to be sure the lender has understood.

Otherwise, a PMS might find a High Court judge trawling over their reports in years to come. It’s not enough to believe in miracles

MCMS Ltd Jonathan Cope

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