UK: Lender Claims Revisited: Paratus AMC Ltd & Another V Countrywide Surveyors Ltd

In the midst of the current storm of lender claims, in Paratus AMC Ltd & RMAC 2005 NS1 PLC v Countrywide Surveyors Ltd (2011) the High Court has grappled with issues such as the scope of a valuer's duty on a mortgage valuation, securitisation and contributory negligence.

In this case, the claimants (a lender and a related specific purchase vehicle) alleged that the defendant valuer negligently overvalued a property.

The Court dismissed the claim but made interesting comments in relation to the scope of the valuer's duty, the effects of securitisation on recovery and contributory negligence where there are high loan to value ratios.

Background

In July 2004, Mr Stockton (Mr S) sought to re-mortgage a property at Fulford Place, York. He made a mortgage application though his broker to the first claimant (formerly GMAC RFC Limited).

In the mortgage application, Mr S stated that the property was worth £185,000 and he requested a ten year, interest only, mortgage of £166,500 (the loan to value ratio being 90 per cent).

The first claimant instructed the defendant (who was on its panel of valuers) to value the property. In late July the defendant inspected the property and confirmed that it was suitable security and the market value was £185,000. In reliance on the valuation the re-mortgage completed.

The beneficial interest in the re-mortgage was sold to the second claimant in March 2005 as part of a package of loans (the Securitisation). The legal interest remained vested in the first claimant who remained the mortgagee.

In late summer 2007 Mr S defaulted on his repayments. The first claimant subsequently obtained possession of the property which was sold in September 2008 for £123,500. The net proceeds of sale were £118,103.20.

The claimants brought a claim against the defendant to recover its loss. In the claim the claimants' expert valued the property at July 2004 in the region of £154,000.

The defendant's expert valued the property at £175,000 and argued that the valuation was within the acceptable range of values.

Was the valuation negligent?

It was common ground that the key question in determining negligence was if the defendant's original valuation fell within the range of values that a reasonably competent valuer exercising reasonable skill and care could have arrived at.

To determine if the valuation was negligent the Court would need to establish a) the market value of the property, b) the range of acceptable values and, c) if the valuation fell within the acceptable range.

What was the value of the property in July 2004?

The Court heard evidence from both parties' experts to determine the actual market value of the property in July 2004.

Each expert's approach differed. In summary, the Court rejected the claimants' expert's valuation method which was based primarily on the application of a price per square metre to the floor area of the property.

Instead, the Court preferred the defendant's expert's approach. This approach used comparable sales evidence obtained from the Land Registry for the period immediately prior to the valuation.

Accepting the evidence of the defendant's expert, the Court concluded that the market value at July 2004 was £175,000.

What was the acceptable range of values?

The Court then turned to consider the acceptable range of values. The claimants' expert sought to argue that the correct range would be plus or minus 4 per cent. The defendant's expert argued in favour of a permissible range which worked out at 11.4 per cent.

The Court commented that the margin could not be regarded as a matter of law and also approved the defendant's expert's approach of not starting with a percentage. However, the Court considered that his suggested range was too high. Instead the Court used its own discretion and applied an acceptable range of £160,000 to £190,000 which equated to an 8 per cent margin.

Was the valuation negligent?

As the original valuation of £185,000 fell within the range of £160,000 to £190,000 the Court did not find that the valuation was negligent. The Court ordered that the claim be dismissed.

The scope of duty

In reaching its conclusions the Court had to consider the correct approach to the valuation.

There was some discussion of the scope of the enquiries which the valuer should have made. It was suggested that the valuer could have sought details of the floor area of the comparable properties, and confirmation if any incentive (such as a reduction in the purchase price) was given by the developers.

In considering this issue, the Court had regard to the valuer's level of remuneration. It commented that where the valuer is paid a low level of remuneration, "the fee sets some parameters to what is reasonably to be expected".

In the context of this decision, it was found that the valuer was not required "to make enquiries of developers who have completed their developments and moved on" and as to the investigation of floor areas this "would in my view only be credible if values correlated with areas".

The implication from this finding is that the scope of a valuer's duty is likely to depend on the nature of the retainer and remuneration. It is not clear what impact this will have on future decisions and it will be interesting to see if this finding is extended beyond these specific facts given the modest fees paid for mortgage valuations.

Claimants' right to recover loss and contributory negligence

Despite dismissing the claim, having heard evidence from both parties' experts the Court went on to comment in relation to two other key points.

Did the securitisation prevent the claimant from pursuing the claim

The defendant argued that the duty was owed to the first claimant and that the Securitisation had assigned the first claimant's cause of action against the defendant to the second claimant. Further, it was argued that the first claimant had suffered no loss as the losses had been borne by new holders of the security following the Securitisation.

On the facts the Court held that the assignment had not taken place. It also found that the income from the securitised mortgages was distributed between various parties and the first claimant was the residual beneficiary. As such, the Court found that it had suffered loss.

In any event, the judge went on to conclude that the defendant was seeking to exploit the consequences "of a strict application of the technical rules concerning assignment to a widely used financing technique' and that it 'would be a sorry state of affairs if.......losses for which a negligent valuer would otherwise have been liable become irrecoverable".

Contributory negligence

As much of the evidence had been heard, the Court felt competent to comment in relation to the contributory negligence arguments.

The Court declared that it would not be imprudent for the claimant to agree to a mortgage with a loan to value ratio of 90 per cent per se, rather that it would depend on all the circumstances. In particular, where a high loan to value is agreed the claimants were under a duty to investigate and verify matters of central importance to the mortgage, such as Mr S's financial position.

At trial it was found that Mr S provided information as to his income and liabilities which was misleading.

The claimants sought to argue that the honesty of the borrower was not critical if he had the ability to keep up payments. However, the Court considered that when these discrepancies were taken into account with other factors, it would lead the claimants to the conclusion that Mr S was dishonest and that it would not have lent to him.

On the facts, the Court found that the claimant had contributed to its own loss. Had the valuation been negligent, a reduction of 60 per cent to the claimants' entire loss would have been made.

Practical implications

This case should provide some comfort to valuers. Although it does not excuse a negligent valuation, it does suggest that a court will more readily interpret the valuation exercise by having regard to the level of fees paid.

Further, where valuations are found to be outside the acceptable range, valuers will be pleased to hear that courts are still willing to hold lenders to account for their imprudent or careless lending.

In light of the changing conditions in the property market we look forward to seeing if this case is applied more widely and if the law is developed further as more claims reach the courts.

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