Partner Article

Doomed church building project - lending blunder

Kamal Majevadia, Partner, Sydney MItchell LLP is a specialist legal adviser and reports that some loan agreements are doomed from the start. It was certainly so in one case in which over £2.6 million was advanced by a bank to pay for construction of a minority church. The High Court found that both the bank and property consultants that it employed to monitor the project had made a catalogue of errors.

The bank agreed to lend the money to a company that had been established by the church’s pastor to pursue the development. By the time the loan facility was almost exhausted, the project was far from completion and it became clear that something had gone badly wrong. Neither the pastor nor his flock had the means to finish the development and the bank decided to cut its losses.

After taking possession of and selling the property, and two others owned by the pastor and his wife, the bank was left with a deficit of about £1.4 million. It sued the consultants whose task it was to monitor the development, to report on progress and to effectively act as the bank’s eyes and ears.

Ruling on the case, the Court noted that it was quite clear that the loan was based upon a grave overvaluation of the property and should never have been made. The bank could not blame the consultants for that, although the latter had unquestionably been negligent and were found two-thirds responsible for the bank’s loss.

In ruling the consultants liable to pay a total of £415,439 in compensation to the bank, the Court found that, but for their negligence, the bank would have withdrawn funding for the project substantially earlier and taken a smaller loss.

This was posted in Bdaily's Members' News section by Linda Heyworth .