UK: Lender Claims – A Reminder On Causation

The recent matter of Platform Funding Limited V Anderson & Associates Ltd (2012) was a claim brought by a lender, which concerned the dishonest marketing of a number of flats in the now notorious Thamesmead development. The case is a reminder that causation is a fundamental aspect of claims in negligence against valuers and one that should not be ignored. A valuer may escape liability on this basis even where there is a clear breach of duty.

Background

In 2006, Anderson & Associates Ltd (AA) was instructed by Platform to value Flat 25, Hill House, a block in the Thamesmead development. AA valued it at £275,000.

Platform proceeded to advance the sum of £250,960 to the borrower. The borrower quickly defaulted and Platform repossessed the flat and sold it at a loss in 2008.

Platform pursued a claim in negligence against AA, alleging that its valuation was negligent and that Platform would not have made the loan had it known the flat's true value, alleged to be £199,995. Platform claimed losses of £75,000 plus interest and costs.

The flat was sold to the borrower by a Mr Barrie, who had agreed to purchase all 84 flats in Hill House from the developer, Persimmon, at a significant discount. Flat 25 was purchased for only £207,575. The completion dates of the purchases were staggered to enable Mr Barrie to fund the purchase price of each flat following receipt of sales income from other flats. Mr Barrie then utilised Persimmon to market the flats on his behalf.

Mr Barrie found the purchasers for the flats himself, having placed high values on them but then offering significant discounts to buyers.

In selling the flats on, Mr Barrie provided the Persimmon sales staff with "appropriate" comparable information within Hill House to be shown to any valuer. These comparables did not take into account the incentive offered by Mr Barrie and therefore did not represent the "true" purchase price. He also directed the Persimmon sales staff not to reveal any incentives or his identity as the initial purchaser of the flats. In using Persimmon's sales staff, Mr Barrie sought to provide the impression to the valuer that Persimmon was the vendor.

The borrowers obtained funding from sub-prime lenders such as Platform. Taking into account the incentives, the borrowers paid none of their own monies in the purchase as Mr Barrie contributed the balance of the purchase price (i.e the difference between the mortgage and the marketed price) in order to keep the actual sales figures high. Mr Barrie then retained the profit achieved upon the sale of each flat, as well as receiving back his contribution to the purchase price.

The valuation

The AA valuation confirmed the value of Flat 25 as the asking price.

In reaching its valuation, AA had relied on three comparables being the actual sale prices of three flats within Hill House provided by the Persimmon Homes on-site sales staff as described above. Despite recent changes to the Red Book Guidelines, AA failed to have regard to the prices achieved for similar properties on other, nearby developments or the second hand market. AA also failed to uncover the nature of the incentive offered.

The Court's approach

The Judge reached the view that the true value of Flat 25 could not have been more than £235,000.

In reaching his conclusion, the Judge looked in depth at the duty of a valuer when valuing new-build properties. The Judge considered the guidance in the Red Book, which had undergone amendment in June 2006 (just six weeks before AA's valuation) due to concerns that incentives offered by developers on new-build properties were not being picked up by valuers and thereby distorted the value of properties.

The Red Book

The revised Red Book guidelines make it clear that there should be extensive use of comparables and that these comparables should be considered in the context of any incentives available which could affect the price to be paid, the market in the area, prices realised for similar new properties on other developments, the second-hand market and other information considered relevant by the valuer. AA sent an internal memo around regarding the amendment.

The court was provided with evidence as to the valuation of Flat 25 by experts for AA and Platform, as well as evidence of the sale prices of new-build and second-hand sales figures of flats within the Thamesmead development.

The experts agreed that the valuation of Flat 25 ought to be considered in the context of a localised and special market given the large number of flats available, the fact that none of the flats were marketed through estate agents, the inevitable new-build premium and the fact that there were no outward signs of incentives being offered.

Platform's expert advised that there were sufficient warning signs to put AA on notice that the Hill House flats had been part of a bulk purchase and were sub-sales and that AA should have considered whether incentives were offered, given their prevalence in adjacent blocks. AA's expert countered that the effect of Mr Barrie using Persimmon sales staff and controlling the comparable information did not convey the fact that a significant sub-sale had occurred and further, there was no concrete evidence of any incentives or inducements being given in any of the Thamesmead flats.

As to the issue of whether second-hand comparables ought to have been considered, both experts agreed that they should, in line with the Red Book guidance. However, AA's expert said that there were no available comparables to rely on.

Breach of duty

The Judge found that AA had acted in breach of its duty of care for failing to:

  1. 1 Consider incentives
  2. Obtain comparables of other new-builds in adjacent blocks and from the second-hand market
  3. Make any other enquiries about the selling conditions in the Thamesmead development

Causation

However, the Judge found that even had the above steps been taken, they would not have provided AA with any evidence that its valuation was too high as:

  1. There was no way AA could have discovered whether there were any inducements or incentives
  2. There was no reason why AA should have made enquiries about any sub-sale, or AA would not have been told about the sub-sales or the level of discount provided to Mr Barrie, even had it asked
  3. The available comparable sale prices of flats in adjacent blocks supported the value of Flat 25
  4. Had AA searched for comparable second-hand sales via the internet or through estate agents it would not have been able to find any
  5. There was insufficient evidence as to the downward trend of values of new-build properties at the time of AA's valuation

Accordingly, even if AA had not acted in breach of its duty of care, any enquiries it had made would not have altered the valuation and the breaches were not causative of Platform's loss. The Judge found that Platform's loss was caused by a combination of the dishonesty of Mr Barrie and Platform/the borrower's solicitors, Bluestone, who had failed to advise Platform of the incentive and (wrongly) registered the marketing price of the sold flats as the true sale price.

Contributory negligence

The Judge dismissed any allegations of contributory negligence, declining to comment on the same save to say that, despite the fact that Platform's loan represented an LTV ratio of 90% and that in line with sub-prime lending practices, Platform had not obtained significant information as to the borrower's ability to service the loan, there was no evidence that "demonstrated that the sub-prime underwriting was undertaken without reasonable skill and care."

Practical implications

This claim is a helpful reminder to those defending valuers in lender claims to look beyond the issue of breach and to focus on the information available to valuers at the time of the valuation. If a valuer can demonstrate that it complied with the Red Book and that it could not reasonably have unearthed information as to incentives and second hand sales, it may be possible to avoid a finding of liability on a causation basis. Valuers should also remember to take note of their local knowledge and what information is and is not available when reaching a conclusion as to a valuation.

A drawback of the Judgment is the Judge's finding that there was no contributory negligence on the part of Platform, which may open the door for Platform or other sub-prime lenders to argue that their lending was reasonable in the circumstances, although the lack of specific details as to the allegedly negligent lending may make this more difficult.

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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