In the current economic climate, it is not surprising to see a number of lenders raising court actions against surveyors in order to try to recover losses which they claim to have suffered as a result of the negligent over-valuation of properties used as security for loans. In December 2012, Coulson J handed down his decisions in Webb Resolutions Limited v E.Surv Limited and Blemain Finance Limited v E.Surv Limited. This provided useful reminders in relation to the permissible margin of error and issues of contributory negligence.
Background
Webb concerned the valuation of two properties for two separate borrowers, Mr Ali and Mr Bradley, which would act as security for loans advanced. Mr Ali purchased a 2 bedroom flat in Birmingham, which E.Surv valued at £227,995. Mr Bradley sought a remortgage of his property in Whitstable, Kent, which E.Surv valued at £295,000. The correct valuations of the properties should have been £204,658 and £260,000 respectively.
In Blemain, Mr and Mrs Sherman obtained a second mortgage on their house in Putney, London which E.Surv valued at £3.4 million, but the correct valuation should have been £2.8 million.
Margin of error
The court reaffirmed the position set out in K/S Lincoln and others v CB Richard Ellis Hotels Limited. A valuation may fall within these margins without it being negligent:
- For a standard residential property, the margin may be as low as +/-5%;
- For a "one off" property, the margin will usually be +/-10%;
- For a property with exceptional features, the margin could be +/-15%, maybe more.
A 5% margin of error was applied to both valuations in Webb and a 10% margin in Blemain. The original valuations were deemed to be negligent and damages awarded to the lenders.
Contributory negligence
In the event that a surveyor's valuation is deemed to be negligent, it is common for the surveyor to advance arguments of contributory negligence on the part of the lender in order to reduce the damages payable to the lender. No reduction was allowed in Blemain as the defendant's lending expert could not say that no reasonably competent lender would have made the loan to the Shermans in July 2007. In the Webb case, guided by the suggestion that "the approach is to see what was happening elsewhere in the lending market because, if the claimant was doing what its competitors were doing, negligence was unlikely, unless it could be shown that it was irrational or illogical", Coulson J found that no reduction should be awarded in respect of the loan to Mr Ali, however, he did reduce the damages by 50% in respect of the loan to Mr Bradley.
In relation to Mr Ali's loan:
- A loan to value (LTV) ratio of 85% was high and acceptance of investment mortgages as self-funding was flawed but both were in line with what was happening in the market;
- Despite defaults, errors in the application form and no investigations having been carried out in relation to other mortgages, there was nothing to show extensive credit difficulties. The court was satisfied that the information would have made no difference to the decision to lend.
As this lending was not uncommon, it was impossible to say that the decision to lend was irrational, illogical or negligent.
In relation to Mr Bradley's loan:
- A LTV of 95% was unacceptably high - evidence of 95% loans being made in the marketplace was thin and may not have been made in this case;
- Mr Bradley was clearly in financial difficulty, seeking a remortgage loan to consolidate significant debts and defaults. The loan should not have been made on a self-certifying basis and proof of earnings should have been required.
In the circumstances, the court held that the lender failed to look after its own interests and made a loan which a reasonably competent centralised lender would not have made. Damages were reduced by 50%.
Comments
The decisions in the above cases should be welcomed by surveyors and lenders alike. Not only should the permissible margins of error be borne in mind by surveyors, they should also be considered by lenders in assessing the adequacy of the security before lending.
The court's comments in relation to contributory negligence
are interesting, highlighting that just because hindsight allows us
to view certain lending practices as risky, they will not be
negligent if they were common in the marketplace at the relevant
time. Cases will require to be considered individually, and the
borrower's financial position is likely to be key in any
assessment. It is also of interest that in Blemain, the lending
expert could not go so far as to say that no reasonably competent
lender would have made the loan to the Shermans in July 2007. All
he could say was that a reasonably competent lender "may have
taken the decision not to lend". While Coulson J did not make
any specific criticism of the lending expert in this respect, the
lending expert's evidence was crucial to reducing the damages
payable and it is surprising that his evidence was relied upon in
trying to establish allegations of contributory
negligence.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
