Estimating the width of the bracket

I wrote in these pages in (“The margin of error”, 2 March 2013) that we were now seeing a growing number of valuers’ negligence cases in the courts – the apparent product of over-enthusiastic prognoses in the mid to late 2000s. My article concerned the bracket of values within which a valuer’s negligence will not be held to have caused any loss – not because the valuer was not negligent, but rather because the tort of negligence requires it to be proved (among other things) that the negligent act resulted in a value outside the bracket of values that might be produced by reasonably competent surveyors. So, Valuer X might make a series of negligent errors, but provided that the end result is within the bracket, he or she will be off the hook. The latest decision The supply of such cases has continued to reach the courts. In Dunfermline Building Society (in special administration) v CBRE Ltd [2017] EWHC 2745 (Ch); [2017] PLSCS 204 the High Court in Leeds had to consider a claim for loss said to flow from a negligent valuation carried out in 2007 – the very year before the global financial meltdown, when few were able to prophesy what was about to happen to asset values. In brief, the claimant had been asked to join in a loan to finance a housing development in Reading, which the borrower had agreed to buy for £17.5m; the defendant was instructed to provide a market valuation of the property to enable the claimant to determine whether it would provide suitable and adequate security for the loan; the defendant carried out a residual valuation in which it valued the property at £17.5m, with a gross development value of £107m; the claimant made its loan on the strength of that valuation; the market crashed; receivers were appointed; and the property was sold in 2012 for £3.75m. The claimant issued proceedings for damages in 2015. It claimed in particular that, at £17.5m, the defendant had overstated the property’s market value by £3.25m, which was outside the margin of error permitted to a reasonably competent valuer. So far, so normal. The report of the case is informative in several different ways, which valuers and other associated professionals in the field will want to consider with care. The bracket The parties’ experts agreed (a) that the relevant bracket of non-negligent values applicable in this case was +/- 15%; and (b) that any valuation falling outside the bracket would be negligent (something that need not necessarily follow in every case, but which they agreed did so here). The claimant’s expert initially put forward a valuation of £13.645m, which meant that his bracket was £11.6m to £15.7m, with the result that the defendant’s valuation fell outside by a substantial margin. The defendant’s expert’s valuation was £16.25m, producing a bracket of £13.8m to £18.7m, into which the defendant’s valuation of £17.5m fell comfortably. Adjusting for market movement There was considerable debate at trial about the circumstances in which it was proper for a valuer to look beyond the comparable evidence to determine whether there had been market movement over the period covered by the comparable evidence, so raising the possibility of an adjustment, to account for market movement, to the comparable evidence (and indeed, an extrapolation as to future market pricing). The judge was persuaded on the evidence that a reasonably competent valuer would not only have appreciated that the residential sales market in Reading had moved upwards to a noticeable extent during the 12 months before the valuation date, but would also have adjusted the comparable evidence upwards for market movement. Adjusting for offer price Although not prefigured in their reports, both parties’ experts ultimately accepted that, in carrying out a residual valuation, it could be legitimate to take into account the offer price for the property, if only to cross-check their input figures. As the judge acknowledged, there is nothing in the RICS Valuation Information Paper 12 (dealing with the valuation of development land) that expressly indicates that it is proper to intermingle the residual and comparison methods of valuation, which may be what occurs if, in carrying out a residual appraisal, a valuer takes into account such an offer price. Moreover, as the judge cautioned, if a valuer takes into account such an offer price as part of his residual appraisal, and also carries out a valuation of the property in question on the comparison method, and, in so doing, gives weight to the offer price in question, there is a danger he might give too much weight to that offer price having taken it into account in both methods of valuation. In effect, the offer price would become a magnetic factor, drawing the expert’s opinion to it. On the other hand, it is possible to understand why it might be right to take into account an offer price as part of a residual appraisal. If the object of both methods of valuation is to arrive, ultimately, at a property’s market value, it is possible to understand why a valuer may properly intermingle both methods of valuation. The comparison method As both experts accepted, there were no comparable properties (other than the property) which might have allowed a valuer to adopt the comparison method in this case, so, save to the extent that it was appropriate to take into account purchase offers for the property, the comparison method was of no assistance. The defendant contended the offer price of £17.5m should be treated as significant evidence of value to be taken into account, following the guidance given in RICS Information Paper 26 (comparable evidence in property valuation). The judge concluded that some weight should be given to the offer price, as a check on the residual appraisal of the property, but that the offer price should not be given so much weight as to cause the property’s market value to be higher than its residual land value. The judge’s decision Having considered the evidence in some detail, the judge concluded, in almost complete agreement with the defendant’s expert, that the residual land value of the property was about £16.2m on the valuation date. Using the agreed margin of +/-15% (which the judge accepted as the correct margin), this meant that the defendant’s valuation therefore lay within the acceptable bracket. Guy Fetherstonhaugh QC, barrister, Falcon Chambers