UK: Negligent Valuation

Last Updated: 25 April 2012
Article by Peter Levaggi

Property Litigation - March 2012

The volatile property development sector has led to increased pressure on surveyors. The problem arises in relation to the valuation of distressed property where there are:

  • forced sales
  • revaluation as part of renewed or restructured lending for exiting property portfolios
  • mezzanine lending with a mortgage lender agreeing to take a higher risk

Valuers face substantial difficulty in attempting to arrive at a market value in circumstances where very little market exists. The conventional valuation process involves the consideration of transactions which compare with the current property transaction (i.e. is truly "comparable" in terms of being recent, of a similar/same location and of similar/same property characteristics).

However the market is currently so suppressed that there are little or no comparables available for some locations. Often a valuation is needed immediately and the parties can not/will not wait for the market to improve to provide comparable evidence. The financial crisis has tested the mettle of the valuation industry. There have been numerous cases where valuers have been criticised for looking at circumstances which would not have been known at the valuation date or where valuers have relied on hindsight and not actual comparable transactions (MrJustice Lewison in Marklands v Virgin Retail [2008]).

The case of Paratus AMC Ltd v Countrywide Surveyors Ltd [2012] demonstrated how valuers can be caught out by the downturn in property prices. The loans in that case were made when the property market was booming in 2005. The valuation was then brought into question after the financial crisis in 2008 and proceedings issued alleging negligence. Mr Justice Keyser QC accepted that a valuation did not have to be accurate providing it fell within a "reasonable margin of error" but did have to be based on more than mere guess work. There was no real substitute for comparable evidence.

The point was also emphasised by Mr Justice Coulson in 2010 (K/S Lincoln v CBRE) who allowed only 10% as a margin of error. He emphasised the dangers of making valuation assumptions where there "were limited comparables, an immature investment market and a changing market at the material time".

The extent of a valuer's liability to a mortgage lender (for negligent advice) was summarised in South Australia Asset Management Corporation v York Montague Ltd [1996] 27 EG 125 as follows:

  • If an accurate (i.e. non-negligent) valuation would have resulted in no loan being made, the valuer is potentially liable for all of the lender's losses resulting from the loan.
  • If an accurate valuation would have resulted in a smaller loan being made, the valuer is potentially liable for the difference between what has been lent and lost and what would otherwise have been lent and lost.
  • In either case the valuer's liability is subject to a "cap", equivalent to the amount by which the property has been over-valued. Accordingly valuers can never be held responsible for more than the amount of their error.

These principles involve estimating how much loss the lender suffered and how much loss (if any) would it have suffered if there had been no negligence. The valuer's liability is the difference between the two.

South Australia Asset Management Corporation was recently followed in the case of Capital Home Loans Ltd v Countrywide Surveyors Ltd [2011] PLSCS 237, which concerned a mortgage loan and further advance made by the claimant on the security of a residential property.

The original loan, of £93,400 net of fees, was made in May 2004, after the defendant had valued the property at £110,000. A year later, the borrower applied for a further advance of £21,250. A valuation was again obtained from the defendant (this time at £135,000) and a further loan of £19,492 net of fees was made on the basis of that valuation.

In December 2009, the borrower defaulted on the mortgage payments and the claimant loan company sold the property for some £86,500. By this time, the claimant had already started a negligence action against the defendant valuer, in which it alleged that the property had been worth only £95,000 at the time of the first valuation and only £105,000 at the time of the subsequent advance.

The defendant argued that, even if its valuation was wrong, the claimant had not suffered any actionable loss as a result of relying on it because the further advance had been paid off out of the proceeds of the resale regardless.

In respect of this defence, the court heard evidence as to the claimant's internal financial practices and, in particular, the computer systems of the company to which it outsourced its mortgage administration. It transpired that, in this particular company's systems, a final payment under a mortgage (whether or not sufficient to pay off the outstanding loan) would automatically be allocated first to any further advance before the main account.

According to the rules that govern the appropriation of payments between debtor and creditor in cases where there are multiple debts, a debtor is entitled to apply a payment to whichever debt it pleases. If the debtor does not specify then this decision passes to the creditor. However, once the creditor elects to use the money in satisfaction of debt A rather than debt B, it is bound by this irreversible election.

Applying these principles, the court ruled that the claimant had chosen to use the proceeds of sale in paying off the further advance and it could not therefore show any loss resulting from the defendant's valuation on which the further advance was based. The defendant was not liable for negligent valuation.

Summary

The economic difficulties of the last five years have produced challenging times for both lenders and borrowers. The banks are now moving to appoint fixed charge receivers and force properties to be sold. As this process continues there will be a focus on the quality of the original valuation (at the time the loan was originally made) and a focus on the current distressed sale price. Borrowers are naturally concerned that the best value is achieved on a forced sale (to reduce the impact of any shortfall liability). Lenders are concerned to limit any complaint that the borrower may have and evaluate the circumstances which led to the failed loan being made in the first place.

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.

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