Royal Bank of Scotland Plc v James O’Donnell and Ian McDonald – Guarantee reduced and damages granted as a result of negligent misrepresentations on behalf of bank

The issue
Inner House case in which RBS sought payment of sums due under a personal guarantee granted by Mr O’Donnell and Mr MacDonald the directors of Whinhill Developments Ltd which had been formed to purchase a potential development site at Stone Farm in Greenock. The directors argued that the guarantee had been induced by negligent misrepresentations made on behalf of RBS.

The background
RBS and Whinhill entered a one year loan agreement in September 2007 whereby RBS would provide a loan of £1.65m to fund the purchase. Whinhill bought the site for about £1.5m and planned to obtain planning permission then sell the site to a builder or developer. Whinhill granted a standard security and floating charge in favour of RBS (the site being Whinhill’s only asset).  Whinhill were unable to repay the loan at its expiry in September 2008. The parties then agreed to refinance the loan facility with a new loan of £1.695m to be repaid by March 2011; the Whinhill directors providing a personal guarantee for the company’s liabilities to a maximum aggregate value of £300k.

Whinhill failed to repay the sums due after a default event occurred and RBS sought payment of the sums due under the guarantee in February 2011. Central to the case was the property crash in 2008 and the falling value of the property. The loan was originally advanced in mid-2007 on the strength of a market valuation of £3m. When the facility was refinanced in 2008, property values had “fallen off a cliff” and the credit division of RBS was enforcing a 70% loan to value ratio. However, Whinhill’s relationship director in RBS’s commercial banking division was keen to avoid the crystallisation of, what may have been by then, a worthless security. He received word from Ryden that the property could be valued at £2m which, with a personal guarantee from Whinhill’s directors, would allow the 70% loan to value ratio to be met.

On three separate occasions RBS told the directors that Ryden would or had re-valued the subjects at £2m. The directors had understood the revaluation could be relied on for lending and guarantee purposes and, in the Outer House, Lord Malcolm took the view that it was reasonable for them to do so. Shortly after the first occasion (but before the second), RBS’s relationship director received the updated valuation from Ryden by letter. However, the letter made it clear that the report was not suitable, nor to be relied on by the bank, for lending purposes (it was also based on an assumption of increased development density which had not been discussed with the Whinhill directors). The directors were not informed of this and there was no evidence that the report had been received by the directors who then granted the personal guarantee in favour of the bank.

The decision
In the Outer House Lord Malcolm found that the RBS statements were material factors in the directors’ decision to grant the guarantee and that the guarantee would not have been granted if they had been aware of the true position. As a result, a reduction of the guarantee was granted.

Whether the Whinhill directors were also entitled to damages for their losses depended on whether the misrepresentations amounted to a breach of a duty of care owed to them. Lord Malcolm found that, in using the assurance given by Ryden before receipt of the report to help persuade the Whinhill directors to agree to the guarantee, the relationship director had to be taken as having assumed responsibility for its accuracy. He then came under an obligation of enquiry or disclosure if he subsequently received material which cast doubt on the information given to the directors. And thereafter, he had a duty not to repeat the misrepresentation. The relationship director had breached that duty and the Whinhill directors were entitled to damages for loss sustained as a consequence.

The Inner House were in agreement with Lord Malcom’s findings and refused an appeal.

The full judgement is available here.

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‘Private Client Scotland’ a new quarterly bulletin launching in January 2015

If you are interested in subscribing to ‘Private Client Scotland’ please email me at: james@legalknowledgescotland.com

Private Client Scotland will review the latest cases, provide updates on the latest consultations, legislation and official publications and include articles, editorials and news items.

A preview bulletin will be published in November.

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LBTT rates and bands

John Swinney has announced the proposed rates and bands for the Land and Buildings Transaction Tax (LBTT) as part of the Draft Budget.

LBTT will replace Stamp Duty Land Tax (SDLT) in Scotland on 1 April 2015.  The new tax will have a progressive structure to bands and rates (i.e. tax is charged on the proportion of the price exceeding the threshold (like income tax) rather than charging the higher rate of tax on the whole price (per SDLT). This approach is intended to remove the distortions in house prices which may result from the bunching of sales around the thresholds that can occur with SDLT. 

Residential Purchases
The rates and bands which apply to the purchase of residential properties are as follows: 

Purchase price LBTT rate
Up to £135,000     0%
Above £135,000 to £250,000    2%
Above £250,000 to £1,000,000    10%
Above £1,000,000    12%

 

Non-Residential Purchases
The rates and bands which apply to the purchase of non-residential properties are as follows:

Purchase price   LBTT rate
Up to £150,000    0%
Above £150,000 to £350,000    3%
Above £350,000    4.5%

.

Non-Residential Leases
The rates and bands which apply to non-residential leases are as follows (as with SDLT, the rates are applied to the Net Present Value (or NPV) of the rent payable under the lease):

NPV of rent payable   Rate of tax to apply
Up to £150,000   0%
Over £150,000   1%

.

The following tax rates and bands will also be applied to any premium payable under the lease:

Premium   Rate of tax to apply
Up to £150,000    0%
Above £150,000 to £350,000    3%
Above £350,000    4.5%

.

Further information and tax calculators are available from the Scottish Government here.
A summary of the Land and Buildings Transaction Tax (Scotland) Act 2013 is available here.

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Land Registration etc. (Scotland) Act 2012 – Style documents

 2012 Act compliant offers are now available to subscribers and from our styles page here

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Update on HMRC’s changes to its ‘bereavement service’

This includes:

“On 13 October, HMRC will remove form R27 (‘Reclaiming tax or paying tax when someone dies’):

  • for PAYE customers – with an automated process that is simple for customers and more efficient for HMRC
  • for Self Assessment customers – with a tailored service, which includes letters that match the individual’s circumstances”

More on this can be found here.

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‘Private Client Scotland’ a new quarterly bulletin launching in January 2015

If you are interested in subscribing to ‘Private Client Scotland’ please email me at: james@legalknowledgescotland.com

Private Client Scotland will review the latest cases, provide updates on the latest consultations, legislation and official publications and include articles, editorials and news items.

A preview bulletin will be published in late October.

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‘Smith Commission’ submission

Submission by James Aitken of Legal Knowledge Scotland

I refer to your requests for submissions.

By way of background I was involved in previous ‘fiscal powers’ submissions to the Calman Commission on behalf of the Law Society of Scotland and Reform Scotland and I am also one of the authors of Reform Scotland’s ‘devo plus’ proposal.

I am a partner in and a co-founder of Legal Knowledge Scotland.  Legal Knowledge Scotland is a provider of legal knowledge in various forms.  I am a solicitor who has practised in Scotland, England & Wales and Illinois.  I am also the immediate past Convener of the Scottish Borders Chamber of Commerce.

I would like to start with a comment.  It is not clear if your remit is to recommend the devolving of powers that when taken together would be considered to be what has been termed ‘devo max’.  It is generally accepted that ‘Devo max’ effectively means the devolving of all tax and welfare powers to the Scottish Parliament.  Alternatively you may consider your remit to be to simply recommend a few additional powers along the lines of those already proposed by the ‘NO’ parties.

The reason for the lack of clarity is of course the failure to use clear language by those advocating this position in the event of a ‘NO’ vote.  That lack of clarity I suspect was intentional.

In any event, I would argue that your remit is to recommend the devolving of substantial and extensive powers to the Scottish Parliament by May 2016.

The timetable for the devolving of these recommended powers will I suspect also be the cause of some debate.  The date of May 2016 is though quite clear when you consider the ‘timetable’ outlined by former UK Prime Minister Gordon Brown and the claim that these powers would be in place before the powers that would have accrued under independence.

To begin.  There are over 25 UK taxes, charges and duties and presently the Scottish Parliament only has control of 2 minor taxes and partial control of income tax.  This increases to 4 minor taxes and slightly more control of income tax when the Scotland Act 2012 is fully implemented.  This means there is huge scope for devolving substantial new tax powers to the Scottish Parliament.

The major taxes are more problematic both in political terms and complexity and I suspect will be only considered by you if are seriously looking at devolving powers that are akin to ‘devo max’.  The major taxes being income tax, National Insurance and North Sea revenue.  Control of VAT cannot be devolved to the Scottish Parliament.

I will therefore concentrate on what I term the ‘minor taxes’.

Devolving control of the so called minor taxes is a relatively straightforward matter as has been shown by the devolving of control of stamp duty land tax and landfill tax under the Scotland Act 2012.  The creation of Revenue Scotland also means that the Scottish Parliament will soon have its own tax authority to administer newly devolved taxes.

There are numerous advantages associated with devolving the undernoted minor taxes and associated areas of law.

This would this quickly give the Scottish Parliament control of a much broader range of taxes.  Approximately 20 taxes.  This is important as taxes cannot be looked at in isolation if you are trying to develop policy.  For example SDLT and capital gains tax or inheritance tax and income tax and capital gains tax.

That is one of the main reasons for devolving these taxes.  The fact that they are so closely associated with matters already devolved to the Scottish Parliament.  The devolving of these taxes would give the Scottish Parliament the opportunity to develop policy much more effectively.

In addition this would also increase substantially the number of economic levers available to the Scottish Government and the Scottish Parliament and greatly increase the amount of revenue it is responsible for raising.  The increase wold be approximately £6bn.

Some examples:

  • Property law is devolved but SDLT (not until 2015), capital gains tax and inheritance tax are not.  Devolve control of capital gains tax, inheritance tax and the Crown Estate.
  • Succession law is devolved but inheritance tax and capital gains tax are not.  Devolve control of inheritance tax and capital gains tax.
  • Environmental law is devolved but not all the environmental taxes are.  Devolve control of climate change levy, air passenger duty and aggregates levy. 
  • Health is devolved but alcohol and tobacco duties are not.  Devolve control of all alcohol and tobacco duties once any European Union issues are resolved.
  • Transport is devolved but transport related taxes are not. Devolve control of fuel duty and vehicle excise duty.  

If you are indeed serious about devolving new major economic levers to the Scottish Parliament you will also have noted that companies are registered separately in Scotland but company law, employment and discrimination law, corporation tax, stamp duty on shares and SDRT are all reserved to Westminster.  Control of each of these areas of law and taxes should be devolved to the Scottish Parliament plus control of insurance premium tax and betting and gaming duties.

If you recommend that major welfare powers are devolved to the Scottish Parliament then control of National Insurance should also be devolved to the Scottish Parliament.  Devolve control of National Insurance to the Scottish Parliament.

If you recommend devolving control of broadcasting to the Scottish Parliament then control of the licence fee should also be devolved to the Scottish Parliament.   Devolve control of the licence fee to the Scottish Parliament.

Finally on tax simplification.  If you are going to recommend a tax for devolving, you should recommend that it is devolved in its entirety.   The main reason is that devolving partial control simply adds further complication to an already overly complicated tax system.  A tax with “two masters” poses obvious potential problems. A good example is the never ending tinkering with how much control the Scottish Parliament should have over income tax.  Also the underlying law, for example which reliefs apply may be just as important an economic lever as the headline rates.  Please also note that income tax is not just a personal tax but is a business and succession tax.  If you recommend that income tax should be devolved to the Scottish Parliament devolve all aspects of it including all underlying law.

Also on tax simplification.  OSCR should decide whether a Scottish registered charity is entitled to the associated tax advantages that comes from being registered as a charity and not HMRC.  The present system simply adds a layer of bureaucracy.  Devolve the responsibility for deciding the favourable tax status of Scottish registered charities to OSCR.

Lastly on tax simplification.  As with SDLT, the devolving of inheritance tax would simplify matters for the whole of the UK due to the complications that arise from having different laws of succession in the UK but a single inheritance tax.  This particularly applies to the required tax forms and guidance.

Please feel free to contact me further if you require further information on this submission.

James Aitken
Legal Knowledge Scotland
http://www.legalknowledgescotland.com/
8 October 2014

 

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Peat and Kerr v Assembly Theatre Limited [2014] CSOH 144 – executor’s ‘time-barred’ personal injury action to proceed

An executor, the daughter of a woman whose late mother was injured in a fall, can proceed with a claim for damages despite the fact the action was raised more than three years after the incident.

The full judgement can be found here.

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HSBC Bank Plc v James Edward Collinge and Leanne Mavis Kennedy, 20 August 2014 – whether reasonable to allow repossession of property where offers of payment made

Sheriff Court case in which HSBC sought to recover possession of a cottage in Lockerbie when the debtor defaulted in terms of a standard security over the property. The sole issue for the court was the reasonableness of the orders sought by HSBC. (In terms of the Conveyancing and Feudal Reform (Scotland) Act 1970 the Court can only grant an order allowing the creditor to exercise its remedies  where the court considers that it is reasonable in the circumstances to do so.)

At first instance the sheriff granted the orders sought by HSBC allowing them to take possession of the property. In coming to his decision the Sheriff took account of two proposals made by the debtor to make repayments to HSBC. Both of the proposals required HSBC to compromise the sums due by over £100k (the debtor’s total indebtedness amounted to over £400k). Although HSBC did not make any counter proposals, the sheriff noted the lack of financial information provided by the debtor and the late stage in the proceedings that the proposals for payment were made (the week of the hearing) before finding that it was reasonable to grant the application in favour of HSBC.

The Sheriff Principal refused an appeal of that decision.

“As at present advised, although two separate offers have been made, there is no information before the court as to how these offers would be funded. There is no statement of assets. There is no statement of income and expenditure. There is [no] document from a source which would provide funding to allow the indebtedness to be obtempered. There is no assurance available to the respondent that funds would be available on the dates set out by the appellants. It cannot be said that it would be reasonable in these circumstances for the respondent to accept either of the offers which have been made. They are wholly unsubstantiated

The sheriff’s decision was one which he was entitled to make in the exercise of his discretion in light of all the information before him.  The appeal fails.”

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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Lormor Limited v. Glasgow City Council, 26 August 2014 –period of notice required when tenant ends lease continuing by tacit relocation

Background
Inner House case concerning a lease of property on Kelvinhaugh Street in Glasgow. (The subjects were greater than two acres in extent and were the subject of a probative lease). The natural term of the lease had come to an end (on 27 February 2012) and the lease continued by tacit relocation. By letters dated 3rd and 16th of January the tenants gave notice to the landlords that the lease was to terminate at 27th February 2013. The tenants argued that in doing so they had complied with the requirement, at common law, to provide 40 days clear notice of the termination.

Arguments
However the landlords argued that the situation was governed by s34 of the Sheriff Courts (Scotland) Act 1907 which deals with removings and provides that notice requires to be given 6 months before termination.

In the sheriff court the sheriff agreed with the tenants’ interpretation and the landlords appealed.

Decision
In the Inner House the appeal was refused. The court found that s34 applies to the situation where the landlord initiates the termination process but not where the tenant initiates the process. This was in contrast to s35 which provides for the situation where the tenant initiates the termination and preserves the common law position on the giving of notice. As such the common law applied and a period of 40 days’ notice was sufficient to terminate the lease.

“… [W]e have reached the view that the submissions for [the tenants] are sound, and that the sheriff’s analysis and conclusions were correct.  The structure of sections 34-37 of the 1907 Act makes a clear distinction between a landlord’s notice in writing to remove and a tenant’s letter of removal.  The first proviso to section 34, which requires not less than 6 months’ notice before the termination of the lease, relates to a notice in writing to remove.  It relates to termination initiated by the landlord, and not termination initiated by the tenant.”

As to the contrasting approaches of s34 and s35, the court noted the element of additional protection provided for the tenant when the landlord exercises the remedy of ejection without independent judicial termination (which is not required when the tenant initiates the procedure).

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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