Future best practice in valuation

Stephen Scott and Rebecca Hilditch share the lessons for valuers from a major High Court ruling involving a high-profile development site. In Hyde and another v Nygate and another [2021] EWHC 684 (Ch); [2021] PLSCS 61 the High Court dismissed a claim brought by the joint liquidators of One Blackfriars Ltd against its former administrators over the sale of a development site in Blackfriars, London, previously owned by the company. The development site was sold for £77.4m to St George Group, which proceeded to develop the One Blackfriars building known as “The Vase”. The company’s joint liquidators subsequently issued a claim stating that the development site was sold at an undervalue. In particular, the joint liquidators brought a claim against the administrators in respect of failures to: act independently; assess the value of the development site and maximise planning potential; and market appropriately and sell for the development site’s real value. In considering the claim in much depth, Deputy High Court Judge John Kimbell QC dismissed the claim in its entirety on the basis that the joint liquidators had failed to persuade him in their case that the former administrators acted in breach of their duties as specified above. It was therefore not necessary for him to consider any of the issues relating to loss of chance, damages or causation. Expert valuations The High Court ruled that the former administrators had instructed competent agents to assist in valuation, marketing and the sale process to ensure the development site achieved its true market value. In particular, the court concluded that the valuation evidence of the valuer (acting on behalf of the joint administrators) in both his reports and in cross-examination was by contrast measured, detailed, precise and transparent. However, the court concluded that the joint liquidators’ valuer, along with the other appointed experts, were not similarly experienced to give adequate weight to their evidence and therefore were unable to justify their findings within the expert reports. It was clear the former administrators’ valuer (FAV) and the joint liquidators’ valuer (JLV) were miles apart in terms of their valuations of the development site back in October 2011. The JLV valued the development site at £120m whereas the FAV valued the development site on the same date at £70m. The JLV’s valuation evidence was scrutinised and subsequently found to be flawed by the High Court. In the judgment, it was explained that the JLV’s valuations of each of the schemes (being the St George Scheme and the Permitted Scheme) were based on a “pricing exercise” which was carried out by the JLV personally of which the results were set out in a series of tables. The JLV’s approach is summarised as follows: 1. The High Court pointed out in cross-examination of the JLV that his personal “pricing exercise” showed figures which were almost all exactly 92.5% of the subsequent known sale prices of the residential units; and 2. The workbook produced by the JLV detailing the “pricing exercise” showed that this column contained a formula which allowed the calculation of 92.5% of the sale prices for certain cells. The former administrators argued that the JLV’s “pricing exercise”, was confused, contradictory and unreliable. The JLV had failed to produce any supporting material to justify either exercise beyond the tables disclosed in the proceedings in respect of both schemes. The JLV’s unreliable approach negatively impacted the credibility of the joint liquidators’ case. The JLV not being able to explain his findings and analysis adequately clearly placed the joint liquidators in a difficult position by not being able to support their argument that the administrators had sold the development site at an undervalue. The relative experience of the experts engaged by the parties was considered and given notable relevance in the court’s decision, which found that the administrators’ experts were competent in their roles while concluding that experts engaged by the liquidators were not similarly experienced to give sufficient weight to their evidence. On review of historic case law, a common theme occurs in respect of expert valuation and marketing issues. In Michael v Miller [2004] 2 EGLR 151 a claimant asserted that where a property had been sold at an undervalue it must establish that there had been a failure in the sale process before the court would consider hypothetical expert evidence as to value. The decision in Hyde can also be compared with Davey v Money and another [2018] EWHC 766 (Ch), which also addressed the credibility of valuers’ expert evidence. In summary, the court held that the valuer who was acting on behalf of Julie Davey was not a satisfactory expert witness on the basis that many of his answers in cross-examination seemed to be designed to advance Davey’s case rather than give independent evidence. Further, the court held that this valuer was rather inaccurate at times and his evidence and sources provided were extremely vague; and that some of his critical opinions seemed to be entirely subjective and were not supported by adequate objective evidence or explanation, along with him making significant errors in his report which he attempted to justify. Whereas the court held that the valuer acting on behalf of the defendant was an impressive witness who was highly knowledgeable, had done her research thoroughly and had deep knowledge of her material evidence. The court held that in cross-examination she gave instinctively crisp and precise answers. Lessons to be learnt Valuers need to be aware that if the correct procedure is not followed then this could have adverse consequences for their client if a dispute arises which results in court proceedings. Development property valuations are often complex and can relate to specialised markets and therefore require a high level of expertise. It was clear from this case – and the High Court ruled – that the JLV did not have sufficient experience in the valuation, marketing and sale of a site such as One Blackfriars, and their evidence, therefore, did not have sufficient credibility attached to it. Therefore, the lessons to be learnt for valuers are: 1. It is crucial for a valuer to take proper steps to obtain a reliable valuation with supporting evidence and justifications for their findings. 2. It is important for a valuer to maintain and keep up to speed with the current market trends and guidance. 3. Valuers are required to follow the RICS guidance for valuation of property development when carrying out a valuation of a development site. The RICS guidance provides that valuations are normally undertaken in two ways: the market comparison approach and the residual method. Valuers must ensure that they avoid reliance on a single approach or method of assessing the value of development property. 4. When valuing development property, valuers must have a full understanding of the process and should take the following steps: a. obtain detailed instructions and terms of engagement; b. attend site investigations, data collection, handling, interpretation; and c. apply findings of the valuation and report on such findings. Going forward, valuers must ensure that they: 1. Keep up to date with their evidence depending on the time the review took place. A court will not hold back in scrutinising expert evidence where no justifications have been provided in respect of findings and this could have significant implications on the strength of the client’s case. 2. Are of a suitable qualification and experience level to pick a complex valuation of a development site. Further, they must also have in depth knowledge and understanding and be familiar with the geographical area where the development site is located;  and 3. Are consistent and justified in their findings and are able to explain their findings both to the client and also in a court room. For high-value/complex developments, employing joint agents is often an effective means of ensuring competitive and robust marketing and valuation, so this should be considered when valuers are instructed. We envisage that over the coming years, due to the current (and post-Covid-19) economic climate, there is likely to be an increase in cases reaching court in respect of issues regarding expert valuations. Therefore, we strongly recommend that valuers ensure that they follow the correct procedure when valuing development sites, in order to make sure that their clients are well advised and are in the strongest position possible, should a future dispute arise. Stephen Scott is a partner and Rebecca Hilditch is an associate in the real estate disputes team at CMS Photo by High Level/Shutterstock