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Claims relating to negligent property valuation now form an increasing percentage of business at the High Court and a recent case has been closely watched by those in property circles. Lawyers see the judgment in the case as a warning to lenders when they give instructions to value a property.
The case - Hambros Leasing v Weatherall Green & Smith - concerned a valuation in 1989 of the Londonderry Hotel in London's Park Lane.
Brent Walker was negotiating to purchase Trust House Forte's leasehold interest in the hotel, and was to be funded by a lease-back arrangement under which Hambros acquired the leasehold interest and granted an underlease to Brent Walker.
The company was also negotiating to buy the hotel as an operational business for £44.5m including goodwill and chattels as well as the leasehold interest. When the hotel was bought and leased back, Hambros acquired the leasehold interest for only £42m and Brent Walker purchased and paid for the other items separately.
Hambros' finance was subject to a satisfactory valuation from Weatheralls, but in its two letters instructing Weatheralls to provide the valuation, Hambros asked it to value the hotel on an open-market basis with vacant possession. On this basis, Weatheralls put a £42m price tag on the hotel.
Brent Walker acquired the hotel in 1990 but ran into financial difficulties with the result that Hambros regained possession and, after carrying out repairs and refurbishment, sold the hotel for £28m in 1994.
Hambros had tried to protect itself against its exposure by taking out a guarantee and separate policy of indemnity.
After a claim was made against Hambros' indemnity insurers, it identified the discrepancy between Hambros' insured interest, which was just the leasehold interest, and Weatheralls' valuation, which was of the hotel as an operational entity. As a result the insurers reduced their payout to Hambros by around £1.5m, representing the value of the hotel's chattels. Hambros then sued Weatheralls for this shortfall, alleging that the firm was expressly required to provide a valuation based purely on the value of the leases alone.
In his 62-page judgment, Mr Justice Neuberger cleared Weatheralls of negligence, ruling that the natural meaning of the letters instructing it to carry out the valuation had required an open-market valuation of the hotel as a going concern, in which case it had correctly included chattels and goodwill in its valuation.
A second limb of Hambros' claim was that Weatheralls ought to have sought clarification of the original valuation instructions. The judge held that because the second of Hambros' two letters of instruction had clarified the first, and as Weatheralls had provided Hambros with four drafts of its valuation, each of which made it clear that it was valuing the hotel on an open market basis, Weatheralls was not obliged to seek further clarification.
Gary Wadsworth, insurance litigation partner at Kennedys which was instructed by Weatheralls, says the case emphasises the need for instructions to valuers to be clear.
"The most important message is that those who give instructions must think carefully what they require and be specific," he said.
The judge made it clear in his judgment that there was no allegation that the valuation of £42m was negligent per se. Instead, Hambros' complaint was that Weatheralls had mistakenly included the chattels in its valuation figure.
Wadsworth says: "Weatheralls' valuation was based on the written instructions it had received and then clarified and it could not be properly faulted. What it did not realise was that Hambros had either failed to appreciate or had wrongly described what it was that it required a valuation of."