The art of valuation

Polly McBride and Megan Hill offer detailed analysis of an important recent ruling on valuation methodology and the correct approach to the hypothetical purchaser. In Bratt v Jones [2024] EWHC 631 (Ch); [2024] PLSCS 60, the High Court has provided useful guidance on the test for negligence in the valuation of development land. The claimant, Rowland Bratt, owned a greenfield site of about 10 acres at Cotefield Farm near Banbury in Oxfordshire, which had detailed planning consent for 82 houses.  A developer had an option to purchase the site, under the terms of which the purchase price was defined by reference to the site’s market value. In June 2013, the developer exercised its option and the defendant was instructed to value the site.  The defendant, Nigel Jones, carried out a residual and comparable valuation exercise and assessed the market value at £4.075m. Accordingly, the purchase price was £3,529,500, being 90% of the market value less certain deductibles.  Valuation methodology The defendant carried out assessments on both the residual and comparable bases.  Having considered the comparable evidence, the defendant identified one comparable that he considered to be so similar that he placed exclusive reliance on it, leading to the valuation of £4.075m. The defendant’s residual calculation resulted in a valuation of £3.365m (the residual calculation contained a mathematical error which, when corrected, would have resulted in a valuation of around £4.7m, but this wasn’t discovered until much later).  In light of the strength of the comparable evidence, the defendant opted to rely on the comparable method as the primary basis of valuation and accordingly advised a market value of £4.075m. The defendant considered that his residual valuation supported this figure as it was in the same “tone”, being around 17% lower (or around 15% higher when corrected).  The claimant alleged that the defendant had negligently undervalued the site by almost £4m, relying on expert evidence that valued the site “in the order of £8m”. The defendant’s valuation expert concluded that a reasonably competent assessment would have resulted in a market value within a +/- 15% range of £4.2m (ie between £3.57m and £4.83m).  The judgment  Judge Cawson KC dismissed the claim. In doing so, he made clear that a valuer’s liability for negligence cannot be determined simply by reference to whether the valuation fell within a reasonable margin of error as determined by the court.  If the valuation falls within such a margin, then that is the end of the matter and the valuer is not negligent. The court clarified, however, that even if the valuation is held to fall outside the bracket, the valuer’s competence will then be considered by reference to whether, in arriving at the valuation, the valuer has acted “in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession”. What this means for valuers The question of how the court arrives at the “correct” valuation was the subject of real debate at trial and within the judgment. Sometimes – in more straightforward cases – the court can assess the correct valuation relatively easily, and can then separately consider (if necessary) the question of whether or not any aspect of the valuer’s approach fails the test in Bolam v Friern Hospital Management Committee [1957) 1 WLR 582, ie was not something that a reasonably competent member of the profession would have done. In other cases – involving more complex and multi-layered valuations (which is usually the case with valuation of land) – the consideration of what constitutes a correct valuation will necessarily involve considering what the reasonably competent approach would have been to each and every step of the valuation process. The judge emphasised that the court has to be astute to assess what kind of case it is, and what kind of approach is therefore necessary.  What is, however, clear in every case is that only if the overall valuation falls outside a reasonable margin can a valuer be found to be liable in negligence.  Accordingly, in defending a claim for negligent over or undervaluation of development land, it will significantly help the valuer if they can show, from the outset, that the steps they have taken are such that would be regarded as acceptable by other members of their profession. The court recognises, in this respect, that valuation is an art, not a science, and that there may be more than one approach that could reasonably be adopted. The question, therefore, is not whether another valuer would have done it differently, but whether the approach adopted by the original valuer is considered to be reasonably competent. In other words, is it one that would be accepted as reasonably competent by a valuer’s peers?  The court undertook a detailed analysis of the process and approach adopted by the defendant in this claim, and the analysis put forward by the parties’ experts. The defendant was found to have acted competently in relying primarily on just one comparable, which in his judgment was the best evidence of the site’s value. The court also agreed that, although reliance on the comparable method was acceptable, it was important to undertake a residual appraisal by way of cross-check, and that, in doing so, a valuer should consider – as the defendant had done – how a hypothetical purchaser would put together its bid to purchase the site. The hypothetical purchaser This means, when valuing development land, valuers should be placing themselves in the shoes of the type of developer that would likely be bidding for that specific site. In this case, the defendant assumed the HP was a relatively cautious (the market having just recovered from the global recession), mid-sized housebuilder. The court accepted that the HP would put together a detailed residual appraisal, using any site-specific contemporaneous information and professional advice available, and would likely adopt a reasonably cautious approach.  By way of illustration, in approaching the residual appraisal, the court agreed with the defendant that the HP would not have assumed (as argued by the claimant) that planning permission would have been obtained for an additional four houses, given that the detailed permission for 82 houses had been won on appeal. Similarly, the court agreed that reliance on an affordable housing bid made by a provider was preferable to the claimant’s reliance on a calculation using market data. The court took the same approach in respect of reliance on professional build costs advice specific to the site, rather than on Building Cost Information Service rates as adopted by the claimant, as well as accepting the defendant’s approach of conducting a house-by-house appraisal of market sale values to arrive at a £ per sq ft, as opposed to the claimant’s use of an average blended £ per sq ft value. The court, therefore, recognised that the defendant’s approach more closely mirrored the approach taken by the HP when formulating its bid and was therefore far more likely to lead to an accurate assessment of its market value. It found that the claimant’s approach resulted in an artificially high valuation. Comparables In respect of the comparable exercise, the court agreed that the defendant’s use of a £ per plot approach was a reasonably competent one, and that there had been no obligation to adopt a £ per developable area approach as had been contended for by the claimant, as the latter was not likely to adequately reflect differences in density, section 106 obligations and abnormal costs, location, build costs and specific development potential. The court also agreed with the defendant that it is not appropriate to use a blended rate (ie not differentiating between affordable and market housing) when adopting a £ per plot approach, as put forward by the claimant, given that the split between market and affordable housing will be of material interest to the HP in light of the effect on profitability. While it was recognised that an HP was unlikely to carry out a comparable analysis, the court made it clear that the results of such an exercise should align in tone with the result of the residual appraisal and, if not, that would be a strong indicator that an error had been made. The judge was keen to emphasise that the court’s exercise is not to reach an immaculate or absolute valuation of the site, but to reach the most likely figure on the basis of the evidence before it.  In conclusion, the judge found that the market value of the site was £4,746,860 “or thereabouts”. Application of the bracket  The court held that an appropriate bracket was between 10% and 15%, in circumstances where there was clearly a wide range of opinion as to the correct approach, residual inputs, comparable assessments and overall market value of the site and where case law has established that development land usually attracts a wider bracket. In circumstances where the defendant’s valuation was within 14.2% of the court’s valuation, the claimant had failed to establish his claim and the court did not need to consider whether the defendant had acted “in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession”.  Lessons for the future It appears, therefore, that, when valuing development land, a speculative exercise should be avoided where possible and the primary consideration should be what an HP would assume when carrying out a residual appraisal on which to base its bid.  The court dismissed the claimant’s academic approach, which failed to drill down into the detail, almost in its entirety in favour of the defendant’s granular assessment and use of contemporaneous information and advice. In this respect, the judge commented: “It is, of course, a fundamental principle of any open market valuation that it is concerned with what a purchaser would be likely to pay for the relevant asset on the open market at the relevant time, and that it is not a purely theoretical exercise.” Ultimately, the value of a development site, like any other property, is driven by what the market is prepared to pay for it. In the context of development land, however, this assessment is made more complex by the number of variables at play. As such, it is imperative that the valuer seeks to align themselves with the approach of an HP as much as possible.  The court was also mindful that there are a large number of variables when valuing development land, each of which should be approached with careful consideration. As such, the margin of error is likely always to be wider for such valuations, the complex nature of which was demonstrated further by the challenges faced by the parties’ experts and the court in approaching the valuation exercise in the claim.  Polly McBride is a legal director and Megan Hill is a solicitor at DAC Beachcroft; they successfully acted for the defendant valuer in this case Photo © Clayton Robbins/Unsplash