Snapshot

A lender has had its level of contributory negligence increased on appeal, from 25% to 50%.

Facts

As previously reported on pages 188 and 189 of the September 2011 edition of this journal, this case arose from a loan transaction whereby the lender lent $2.8 million to borrowers secured by a mortgage. This loan was in reliance upon a valuation by a valuer, who valued the property at $3.6 million. The borrowers defaulted and were unable to repay the loan, so the lenders sued the valuer.

At first instance (Angas Securities Ltd & Ors v Valcorp Australia Pty Ltd [2011] FCA 190), the court found that the valuation was negligent and the valuer had misled and deceived the lender. This was because the valuer had placed greater reliance on sales that were not 'comparable'. However, the lender was also found guilty of contributory negligence, assessed at 25%. The finding of contributory negligence was based upon the lender's failure to undertake certain serviceability enquiries of the borrowers, prior to granting the loan.

On appeal, the valuer submitted that it could not be said that its negligence reflected a substantially greater degree of departure from the conduct of a reasonably competent valuer than did the negligence of the lender reflect a departure from the conduct of a reasonably prudent lender.

Although the valuer initially submitted that the court should find that the lender was liable for 100% of its loss (on the basis that the primary judge found that "had the [serviceability] enquiries been made the loan would not have been made"), this was not accepted.

In the end, the court found that, having regard to the relative culpability of each party and because the reasons of the primary judge did not disclose a basis to "distinguish between the causal potency of the impugned conduct of each party", it was just and equitable that each of the parties should be found equally responsible for the loss suffered. On that basis, the lender was found guilty of contributory negligence to the extent of 50%.

Impact

This case is a stark reminder that a valuer will not be 'automatically' liable for the entirety of any loss that is suffered by a lender who lends in reliance upon a valuation.

Especially in respect of any failure by a lender to carry out proper due diligence or adequate assessment/consideration of the means and ability of the borrower to repay the principal loan, interest and other charges (as was the issue in this case), it is likely that a significant reduction for contributory negligence will be made against the lender.

Although, in this case, the lender submitted that it viewed the security as the principal consideration of whether the loan would be made (meaning that serviceability became a secondary consideration), there was still an obligation on the lender to make a proper assessment of serviceability.

This appeal further demonstrates the need for lenders (even those who profess to be security lenders) to properly conduct their enquiries about a borrower's ability to service the loan. It is not sufficient for a lender who does not solely rely on security to claim that it was focusing on security as opposed to serviceability.

In a case, unlike this, where a lender alleges a total security loan (that is, a loan where little or no regard was had for the borrower to demonstrate an ability to repay the principal and interest repayments on the loan), that lender's loan to value ratio would need to be at a lower than usual level. Valuers should be very wary of accepting instructions for a valuation for mortgage purposes where the lending is security lending. Know your client's basis of doing business.

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