What did the financial crisis mean for valuation negligence?

A decade on from the global financial crisis, Alexandra Anderson and Jonathan Angell survey the valuation negligence landscape, and assess the impact of 10 key cases from those 10 years On 14 September 2007, queues started forming outside branches of Northern Rock as account holders tried to withdraw their money from the bank. This was in response to news that it had sought emergency funding from the Bank of England due to liquidity problems. For many, this was the start of what became known as the global financial crisis. In the 10 years since that fateful day, the courts have made some significant decisions affecting how claims against valuers are handled. Most of these claims were brought by lenders, claiming to have suffered losses as a result of making loans in reliance on valuations that were negligently high. Each case raises important points for consideration in claims against valuers. Bridging Loans Ltd v Toombs [2017] EWCA Civ 205 What was the case about? The lender advanced monies on a six-month bridging loan in November 2006. The borrower defaulted and the lender suffered loss when it sold the property. It commenced proceedings against the valuer in May 2013. What did the court decide? The claim should be struck out as statute barred, proceedings having been brought more than six years after the lender suffered loss. In striking out the claim, the court noted that it was statute barred on the face of the particulars of claim, as the amount lent exceeded what the lender claimed the property was worth in November 2006 and the value of the borrower’s covenant (which appeared to be worthless). What does it mean? This is a good decision for valuers as it means they may be able to strike out claims which appear on the face of the pleadings to be statute barred without incurring the expense of a full trial. It creates a conundrum for lenders whose retrospective valuations are less than the amount advanced. Titan Europe 2006-3 plc v Colliers International UK plc [2016] EGLR 6 What was the case about? This claim involved the valuation of a shopping centre in Germany. The valuer valued the property at €135m and the lender advanced €110m in reliance on that valuation. The borrower defaulted and the property was sold for less than the amount due on the loan. What did the court decide? The trial judge held that the property had been worth €103m and therefore the valuer had been negligent. The Court of Appeal overturned this decision, substituting a true value of just over €118m, and held that the valuer had not been negligent. It said the trial judge had given too much weight to the retrospective valuations of the experts and not enough to the contemporaneous transactional evidence. What does it mean? This decision is helpful for valuers who can adduce supportive contemporaneous transactional evidence, whether of sales of the property or valuations of it by others. Valuation experts must properly reflect the market at the relevant time and must not be influenced by hindsight or materials that were not available to the original valuer. Summit Advances Ltd v Bush (High Court, unreported, 2 February 2015) What was the case about? The lender sued the individual valuer who had prepared the valuation, rather than his employer, presumably because of concerns as to the solvency of the employer. What did the court decide? The individual valuer was not liable to the lender as he did not owe a duty of care personally. Where a valuation is prepared by an employed valuer, liability should rest with the employer unless the employee has accepted personal responsibility for the valuation. What does it mean? This is welcome news for employee valuers. It means they are generally protected from being sued where their employer is unable to meet any liability to a claimant. K/S Lincoln and others v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC); [2010] PLSCS 156 What was the case about? Eight SPVs bought a number of hotels in the belief they would make a certain rate of return, which never materialised. What did the case decide? The valuer’s report had negligently misstated certain matters but its valuations fell within the appropriate range of values for the properties, so the claim failed. As regards the appropriate margin, the court said: For a standard residential property, the margin may be as low as plus or minus 5%; For a one-off property, the margin will usually be plus or minus 10%; and If there are exceptional features of the property, the margin could be plus or minus 15% or even higher in an appropriate case. What does it mean? In setting out the margins which generally apply, this decision helps parties identify cases that should not be pursued irrespective of whether the valuer has otherwise been negligent, on the basis that the valuation falls within an acceptable margin of the true value. Canada Square Operations Ltd v Kinleigh Folkard & Hayward Ltd [2016] EGLR 3 What was the case about? The lender made a loan to allow the borrower to redevelop a site, but the development did not proceed and the site was sold at a loss. What did the court decide? The claim was statute barred. On the basis of the expert evidence, the property was worth less than the amount lent at a point more than six years before proceedings were commenced. The court found that the value of the borrower’s covenant was not sufficient to make up this shortfall. In assessing the value of the borrower’s covenant, the court took into account evidence about the borrower’s financial affairs generally and subsequent events where these threw light on what he was worth at the time. What does it mean? This decision shows that a valuer may be able to establish that a borrower’s covenant was of little or no value, and that limitation has started running, even while the borrower is still paying instalments under the loan. Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2016] EGLR 51 What was the case about? The valuer sought summary judgment on the basis that the lender had not suffered the loss it was claiming because the loan was a refinancing of earlier lending, which had already exposed the lender to loss on the underlying transaction. What did the court decide? The valuer would be liable for all the losses the lender suffered in making the loan if it was found to have been negligent. What does it mean? Lenders can sue a valuer who has provided a valuation on the refinancing of a loan for the full amount of their losses on that loan. On the other hand, where a loan in connection with which a valuer has provided a valuation has been repaid, irrespective of how that has happened, no liability should attach to the valuer even if his valuation is negligent. Platform Funding Ltd v Anderson & Associates Ltd [2012] EWHC 1853 (QB); [2012] PLSCS 163 What was the case about? The subject property was a flat in a new development where all the properties had been bought by one person who had then sold them on. What did the court decide? The valuer had been negligent in a number of respects, including in failing to enquire about sales incentives provided by the vendor and to obtain suitable comparables. Despite this, the claim failed as the court concluded that a valuer exercising reasonable skill and care would have arrived at the same misguided valuation, due to the concealment of incentives by the vendor and the provision of false comparables by the sales team at the development. What does it mean? Lenders need to establish not only that the valuer was negligent, but also that his negligence caused him to arrive at a different figure than he would have arrived at had he exercised reasonable skill and care. Freemont (Denbigh) Ltd v Knight Frank LLP [2014] EWHC 3347 (Ch); [2014] PLSCS 276 What was the case about? The valuation was provided to enable a bank to consider whether to provide a bond securing the developer’s obligations. The developer claimed that it had relied on the valuation when deciding whether to sell the property. What did the case decide? The developer was not entitled to rely on the valuation for any purpose other than that for which it had been provided, namely secured lending. The valuer did not owe the developer a duty of care to protect it against losses which the developer might suffer as a result of relying on the report for any other purpose. What does it mean? This decision reinforces the importance that the purpose of a valuation has in determining liability. Where a valuation is relied on for a different purpose, no liability should attach. Hubbard v Bank of Scotland plc (t/a Birmingham Midshires) [2014] EWCA Civ 648 What was the case about? This claim was brought by the borrower, rather than the lender, concerning cracking to the rear of the property, which the surveyor advised was minor and not ongoing. The property subsequently suffered further cracking and the borrower alleged that the valuer had been negligent in not recommending more extensive investigation into whether movement at the property was ongoing. What did the case decide? The valuer had not been negligent. It noted that the duties owed by a valuer preparing a valuation report are limited, given the limited inspection of the property involved which is reflected in the fee. A valuer is not under a duty to recommend more extensive investigations just because he observes matters which could, but in his non-negligent professional opinion do not, indicate potential problems. What does it mean? This case reinforces the limitations on the duties owed by valuers when preparing valuation reports. Scullion v Bank of Scotland plc (t/a Colleys) [2011] 3 EGLR 69 What was the case about? The borrower alleged that he had suffered loss when relying on a negligent valuation which the valuer had provided to his lender, when he purchased the property as a buy-to-let investment. What did the court decide? A valuer who is instructed by a lender does not owe a duty of care to a borrower purchasing a property as a buy-to-let investment. What does it mean? This case restricts a valuer’s potential liability when preparing valuations of buy-to-let properties. The position with buy-to-let properties contrasts with that which applies to valuations of owner-occupied residential property. Reassurance for valuers Valuers have faced significant numbers of claims by lenders since the global financial crisis. Many of the cases that have gone to trial since then have resulted in judgments that will help valuers to defeat the claims made against them or to limit their exposure where they are liable. While the traffic has not been all one way, it is satisfying that the courts have, on a number of occasions, appreciated the reality of what surveyors do and the difficulties they can face in carrying put their professional duties. Alexandra Anderson is a partner, and Jonathan Angell a consultant, at City law firm RPC Pic credit: Newscast/REX/Shutterstock