At a time when external factors may contribute to a spike in similar claims, the decision provides a timely reminder that, absent clear evidence to the contrary, a valuer’s duty will be restricted to providing evidence of the value of the security and not wider commercial factors.
Facts
In February 2018, the defendant surveyor was instructed by the claimant to provide a valuation of property as security for a bridging loan to the long leaseholder. The freehold of the property was owned by the National Trust. The defendant valued the property at £4m and a loan of just over £2.2m was advanced to the borrower
The borrower defaulted on the loan and the claimant appointed receivers to seek a sale.
It subsequently transpired that the borrower had carried out various works to the property without the necessary listed buildings consent or approval from the National Trust. As a result, the National Trust issued a notice requiring the breaches to be remedied which caused significant delays exacerbated by the Covid-19 pandemic.
The property was eventually sold in October 2020 for just £1.4m.
Causation and loss
The claimant argued that the negligent valuation caused them to enter into the transaction and sought damages of approximately £2.5m for loss of capital, loss of interest on the loan and loss of profits.
Their expert valued the property at £2.15m against the defendant’s valuation of £3.175m. The defendant ultimately admitted breach of duty in its closing submissions at trial. However, it denied causation and loss, arguing that the loan amount was still less than the true value of the security.
Legal issue
The court had to determine what damages were recoverable in a case where (i) but for the negligent professional advice the claimant alleged it would not have embarked on the transaction, but (ii) part or all of the loss suffered by doing so was said to arise from risks which arguably fell outside the adviser’s duty.
The parties’ cases
The claimant argued that the valuer’s duty extended to protecting the lender against all risks of entering into the transaction due to the nature of its business model, by which it advanced funds on low LTV ratios for short periods at high rates of interest. The claimant said the defendant knew and understood the valuation was “the only light which had to be green for the transaction to go ahead”.
The defendant argued that this was a normal valuer case, where the scope of the duty was limited to providing evidence of the current market value of the security. The correct measure of damages was therefore the loan amount less than the correct value of the security as at the date of the loan.
The decision: Scope of duty
The court held that the claimant’s analysis failed for a number of reasons.
- Though an extension of the valuer’s duty as suggested was possible, it was “improbable” this would happen “without some clear understanding between the parties, most likely expressed within the instructions to the valuer”.
- There was no evidence of the defendant’s particular knowledge of the claimant’s business model, and/or that the sole criteria upon which a decision to lend would be made would be the valuation.
- The fact of this being a short-term bridging loan did not of itself extend the defendant’s duty in the manner suggested, despite the context of that business model meaning that the valuation took on greater significance than usual.
- The claimant’s own lending criteria made it clear there were various matters beyond the scope of the defendant’s duty which should have been taken into account (ie the credit risk of the borrower, the character/probity of the borrower and an assessment of the borrower’s exit plan for the property).
The court noted the defendant was not a party to the other considerations “which the claimants’ own criteria and, indeed, common sense required [them] to consider”. Had the claimant made suitable enquiries, there would have been numerous red flags vis-à-vis the borrower.
The court concluded that:
- “the purpose of the valuation was to protect the claimants in relation to the value of the security, and not all other foreseeable risks attendant upon entering into the transaction”; and
- “the duty of the valuer did not […] extend to protecting the lender against the consequences of unlawful acts of the borrower or dramatic collapses in the market.”
The decision: Loss
The court concluded that the correct value of the property at the time of the valuation was £2.75m with a 180-day valuation (i.e. the likely price achieved if the property had to be sold within 180 days) of £2.475m.
The shortfall between the correct value and the eventual sale price had been caused by a combination of the borrower’s conduct regarding the unauthorised works at the property, and subsequent delays associated with the Covid-19 pandemic. But for those factors there was no reason why, on default by the borrower, the property could not have realised its 180-day value assessed by the court at £2.475m.
The capital loaned was just over £2.2m, which remained lower than the market value. On that basis the claimant was found to have suffered no loss.
Comment
The decision provides a helpful reminder of the correct approach to ascertaining the scope of a valuer’s duty in an area where economic factors point to a potential risk of increased claims activity in 2024.
House prices rose sharply towards the end of the pandemic as buyers sought outdoor space and took advantage of the temporary stamp duty holiday. If over-valuations occurred, they are likely to have gone largely undetected following a period of sustained growth in property prices.
More recently, however, the cost-of-living crisis, interest rate rises and falling real terms wages are prompting fears of borrowers being unable to service mortgage payments and, potentially, a property market crash.
Around 1.5 million borrowers are due to come off fixed-rate deals in 2024, and it has been predicted that the monthly cost of a new mortgage for the average semi-detached house in the UK will rise by 61% (an increase of £481 per month). In London, the effect of higher prices and mortgages mean the monthly cost of an average mortgage on a terraced house will rise by £930. Affordability may well be a significant challenge for many homeowners as a result.
In the latest published data, average UK house prices decreased by 1.2% in the 12 months to October 2023. However, November 2023 saw 22% fewer residential transactions compared to November 2022. The number of first-time buyers in 2023 was also down by a fifth year on year, the lowest amount for a decade, and this may impact on property values when the next data are released.
In a similar vein, reports have suggested that commercial property values dipped by 30% in the seven months to March 2023, evidencing further volatility in the commercial sector.
There is a sense of déjà vu about the pending volatility of the property market and the events of the property crash in the late 80's early 90's. During that time, claims against both valuers and surveyors for negligent valuation were legion. If this is a second bite at the same cherry and borrowers default, claims against valuers are likely to follow.
In the general sense Hope Capital reaffirms that by making the loan, even in somewhat unusual lending circumstances, the lender bears the risk of market volatility and commercial factors outside of the security offered by the property.
The decision does nonetheless offer valuers and their insurers some reassurance that, in the vast majority of transactions, the relevant duty will be limited to providing information of the value of the security and not extend to all other foreseeable risks.
This article forms part of our Breaking Ground series. For more information on the series, contact Andrea Lynch.