Valuations and whether there is a duty of care

Louise Clark analyses a decision before the Chancery Division on common law negligence where the court found that there is no duty of care where there is no advisory duty. Key points There must be an advisory duty for a lender to have a duty of care to a borrower  Merely providing valuations to a borrower does not give rise to such a duty The court has considered the circumstances in which a lender owes a duty of care to a borrower in Shokrollah-Babaee v EFG Private Bank Ltd [2023] EWHC 3270 (Ch), which concerned an application by the defendant lender to strike out the claimant borrower’s claims. The background The parties were introduced in 2007 when the claimant, Kim Shokrollah-Babaee, whose net worth in 2012 was around £20m, was interested in refinancing existing borrowing of £4.9m secured on various assets, including a substantial, late Victorian, four-storey villa in Chiswick. The claimant informed the defendant that, at that time, the property was worth £6.5m and a valuation obtained on behalf of the bank valued it at £6.65m.  In 2012 there were negotiations between the parties about two loans, one of £4.7m to refinance existing borrowing on the property and a further £1.25m to be invested, with the proceeds servicing the loans. The claimant told the bank that, based on discussions with valuers, including Savills, once improvements were completed, he expected the property to be worth £8.5m.  In August 2012, the defendant lent the claimant £5.95m on a two-year term which was subsequently secured inter alia against the property. It was not disputed:  (i) that the defendant informed the claimant before issuing the mortgage offer that it was not providing advice in relation to the transaction;  (ii) that the mortgage offer stated that the defendant had not recommended the mortgage and that it was a matter for the claimant as to whether he accepted it; or  (iii) that the estimated value of the property was £8.5m.  Following a referral from the claimant, the defendant instructed Savills to provide a valuation of the property for the bank’s sole use, for the purposes of loan security. A copy of Savills’ July 2012 report, which valued the property at £8.5m, was provided to the claimant.  In 2014, extensions to the loans were discussed on the same basis as the 2012 transaction. In March 2015, the property was again valued by Savills, for the bank, at £8.5m and the claimant received a copy of the valuation.  The facility was extended to June 2018 when the claimant failed to repay the loans. The bank served the claimant with a statutory demand for around £5.4m plus interest and subsequently presented a petition for his bankruptcy.  The claim The claimant claimed that, from 2012 onwards, he invested almost £3.5m of the loan in speculative residential property development, which he would not have done but for the bank’s breach of statutory duty in breaching Financial Conduct Authority rules – the Mortgage Conduct of Business rules – and breach of duty in tort at common law in respect of the two Savills reports which overstated the value of the property by £2.5m-£3m. The claim, which was issued on 12 June 2023, was for £5.18m.  Limitation issues Claims for common law negligence and breach of statutory duty are claims in tort under section 2 of the Limitation Act 1980. The latter could also be an action to recover any sum recoverable by virtue of an enactment under section 9.  In either case, the limitation period was six years from the date when the claimant first suffered damage, unless he could successfully argue that section 14A provided an alternative period – three years from when the claimant had the required knowledge and a right to bring an action – for any action for damages for negligence. The claimant argued that he only suffered losses based on the 2015 valuation, when transactions were refinanced in 2017. However, the court concluded that the actionable loss was suffered at the time of the 2012 and 2015 mortgage transactions when the claimant became bound to repay the amounts owing irrespective of the success of his property ventures.  The claim for breach of statutory duty did not require an allegation of negligence and so was not a claim for damages for negligence within section 14A (Shore v Sedgwick Financial Services Ltd [2008] EWCA Civ 863). So, the claim was statute-barred. The court had insufficient information to be able to determine whether section 14A applied to the common law negligence claims.  Duty of care Throughout, the defendant made clear that it was not advising the claimant about the merits of the mortgage arrangements and was treating the claimant as an execution-only client. There was no room for an advisory duty.  It was clear to the claimant that the Savills reports were being provided to the defendant for its own lending purposes. They were addressed only to the defendant. The provision of valuations in such circumstances does not – without more – give rise to a duty of care on the part of the lending bank (Rehman v Santander UK plc [2018] EWHC 748 (QB)). Where there is a statutory duty, there is no need or justification for an independent imposition of a duty of care at common law, although the position may be different where there is an advisory duty (Green and another v Royal Bank of Scotland plc [2013] EWCA Civ 1197; [2013] PLSCS 234). Consequently, the claimant could not pursue a common law claim in negligence where its arguments on breach of statutory duty were statute-barred. In any event, the court decided that the defendant was not in breach of the relevant Mortgage Conduct of Business rules or any common law duty of care in relation to the estimated value of the property in 2012 or 2015. The claims were struck out and dismissed.  Louise Clark is a property law consultant and mediator Photo © Andrea Piacquadio/Pexels