The Court of Appeal has held that a lender can recover all its loss on a refinance loan from a negligent surveyor and not just the 'top up' advanced following repayment of the original loan.
We first reported on Tiuta International Ltd (In liquidation) v De Villiers Chartered Surveyors in April 2015, from which fuller details of the case can be seen. In brief, the lender refinanced a loan it had made to a property developer in reliance on a valuation by the defendant (the second valuation). The defendant had also undertaken the original valuation (the first valuation). For the purposes of the application before the court, it was assumed that the first loan was redeemed by the refinancing rather than the original loan agreement being varied. A new agreement and legal charge were entered into. The borrower defaulted.
The lender claimed the second valuation was negligent.
The High Court held, applying the 'but for' test, that the defendant was only liable for the difference between the negligent second valuation and a non-negligent valuation. It was not liable for the loss attributable to the existing indebtedness under the first loan at the time of the refinancing. It was liable only for any loss caused by the additional lending.
The lender appealed arguing that the original loan had been discharged, a new loan created and a new legal charge put in place so rendering the defendant liable for all losses flowing from the negligent second valuation. The defendant argued that regardless of the structure of the transaction, the second loan was in substance just an increase in the amount of the original loan.
By a majority, the Court of Appeal allowed the appeal. The purpose to which the refinancing loan was put was irrelevant to the defendant. A valuer would expect a lender, in reliance upon the valuation, to advance funds up to its full reported value. Also applying the 'but for' test, the defendant was liable for any adverse consequences attributable to any negligence in the valuation which flowed from the lender entering into the transaction.
The refinancing loan paid off the first loan and released the defendant from liability in relation to the first valuation and would be treated entirely independent from the first loan. The refinancing was entered into in reliance on the second valuation. The loss the lender suffered as a result was the amount of the refinancing, less the borrower's covenant (which had no value) and the true value of the security.
Things to consider
The defendant had accepted the instructions, knowing its valuation was to be relied on in the decision whether to make the loan and, had they wished to limit their exposure, they could have sought to do so. It was irrelevant how the lender dealt with the money.
The decision gives some clarity on the approach the court should take where there have been successive loans in reliance on valuations undertaken by the same valuers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
