UK: Report, Reliance, Refinance… Recovery

A Court of Appeal judgment has considered the application of the "but for" test of causation in a lender claim against valuers involving an alleged refinance loan. It overturns an earlier summary judgment decision where the lender's loss in respect of a second valuation was restricted to any loss caused by the extra lending. The appeal court's interpretation of the "but for" test now means that the surveyor could be liable to the lender for the entire loss flowing from the second valuation, including in respect of monies used to redeem the prior loan. The judgment has caused a stir in the valuing community but it needs to be kept in mind that the decision was one on specific assumed facts.

Bridging lender Tiuta International ("Tiuta") provided a loan in February 2011 on the basis of De Villiers Chartered Surveyors Ltd's ("De Villiers") valuation of a former nursing home. Later that year, in November/December 2011, De Villiers revalued the property. In reliance on this second valuation, Tiuta made a new loan. It was assumed for the purposes of the appeal that the second loan did not vary the original loan agreement but was instead a refinance facility fully redeeming the first loan and providing funds on top. When the borrower defaulted, Tiuta claimed De Villiers' second valuation was a negligent overvaluation and sought to recover its shortfall following sale of the property. No allegation of negligence was raised in respect of the first valuation.

In the earlier hearing, applying the "but for" test, the Court found that had the second valuation been non-negligent and the second loan not proceeded, Tiuta would still have been exposed to the debt arising from the February loan. The Court held that the losses had to be limited to the amount by which the second loan exceeded the first loan. Summary judgment was granted to De Villiers to this extent. The Court suggested that Tiuta could seek to amend its particulars of claim, as the value of any lost claim in relation to the first valuation could be relevant to ascertaining the extent of the loss caused by a negligent second valuation. That a claim in relation to the first valuation was lost by virtue of the redemption of the first loan upon the refinancing followed from the Court of Appeal's decision in Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd (2002), a case concerning a claim against the first valuer.

Overturning the decision, the Court of Appeal held by a majority (with a substantial dissenting judgment given by McCombe LJ) that a lender can recover all of its loss on a refinance loan and not be limited to the amount by which the second loan exceeds the first. Applying the "but for" test, it held that had there not been a negligent second valuation, Tiuta would not have entertained the refinance facility in the first place and would still have had a potential claim against the valuer in respect of the first loan. The Court observed that De Villiers had taken on a duty to value the property as a whole in accordance with their instructions and had not sought to limit their potential exposure.

The judgment avoids claims being lost in a "black hole" arising from the consequences of the Preferred Mortgages decision. Whilst there was always the potential for pleading a loss of a chance of succeeding on a claim in relation to the first loan, that may have depended on whether the first valuation was itself negligent.

The judgment turns on specific facts. It will not, for example, operate against defendant valuers in cases involving multiple lenders. It was also based on assumptions, including as to the fact that the second loan operated to completely redeem the first loan, and it therefore remains to be seen how the case plays out on the true facts as established by the evidence at trial. As ever, there is no substitute for a close examination of the full factual matrix when it comes to questions of causation and recoverable loss.

From the viewpoint of an insurer underwriting exposures in this area, causation issues are not really any different to other legal aspects of a claim such as contributory negligence or a SAAMCo "cap". These are all things that do not concern the valuer at the point of providing a market valuation. At that stage the valuer is not concerned with (or even necessarily aware of) the lender's knowledge of security or any other aspects of the lender's underwriting such as the purpose of the loan, the identity of the original lender or the amount of the original loan. The valuer is not asked to comment on whether or not the proposed loan is a good risk. All the valuer will usually be concerned with is providing a market valuation, and, ultimately, that is what its insurance cover relates to.

What valuers will now be encouraged to do though is ensure any terms of business limit their liability in a refinance situation, whoever the outgoing lender is.

Co-author: Adrian Kwintner (Associate)

Report, Reliance, Refinance... Recovery

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