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.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.