Sounding a valuations warning

Roger Pearson looks at a Court of Appeal ruling that lender was negligent in failing to check two very different property valuations. A Court of Appeal ruling, in which damages and interest amounting to £1,049,853 awarded by a High Court judge in March last year in respect of admitted negligent property valuation were cut by 25 per cent to £817,048, serves as a warning to all in the property industry. Valuations should not be accepted without close examination, particularly when two valuations are significantly different.

If a deal based on a negligent valuation turns sour, parties could find themselves paying a high price for such failure. From the point of view of damages, although the valuers, Henry Spencer and Sons, who traded as Colley Sampson, admitted that their valuation was negligent, the appeal judges, Lord Justices Aldous, Evans and Waller, ruled that the claimant, Cavendish Funding, which lent money on the basis of the valuation, had nevertheless failed to act prudently and reduced the damages accordingly.

The action centred on a valuation of Hatfield Manor near Doncaster – a grade 1 listed building of historical significance. Cavendish Funding, which is now in administrative receivership, was approached in May 1990 through mortgage brokers for a loan of £750,000 which was to be secured on Hatfield Manor.

Its lending criteria stipulated that it had to obtain two forced sale valuations and lend on the lower of the two. Henry Spencer advised that the property had an open market value of £1,525,000 and on a forced sale would be worth £1,342,000.

However, the other valuers, Bernard Thorpe, put an open market valuation of £1m on the property, with £750,000 on a forced sale. On the basis of the higher valuation, Cavendish offered a gross advance of £846,501 for six months which was to be secured on the house.

When the borrowers defaulted on repayment, possession proceedings were taken in respect of the house and ultimately a new valuation was obtained of just £250,000. Henry Spencer accepted in the run-up to court action that an appropriate valuation at the time that its valuation was given would have been £250,000. However, it argued that it was not its valuation that caused the losses and also alleged contributory negligence on the part of Cavendish.

Both the High Court and Appeal Court have held that the losses did stem from the negligent valuation. But, the court said Cavendish had not acted in the way a prudent lender would have. Reducing the damages, the judge commented : "In my view, the failure to review the valuations in the light of their difference was negligent.

"The plaintiffs did not act in the way a prudent lender would have acted, particularly as they were selecting the higher of two valuations. It is reasonable to conclude that because the plaintiffs relied on the defendants' valuation which, upon checking would have been reduced, at least part of the damage was caused by their omission to check whether it was correct.

"What would have happened is a matter of speculation, but I believe that the damage was due, in part, to the plaintiff's fault and therefore it is necessary to decide by how much it would be just and equitable to reduce the damages.

"Bearing in mind the grossly negligent advice given by the defendants and that, if the defendants had been given the chance to review their valuation, their advice would still have been grossly negligent, I believe it would be just and equitable to reduce the damages by 25 per cent."

Sheona Wood, a partner at Fishburn Boxer, which specialises in insurance litigation and which represented Henry Spencer with counsel Roger Stewart, says the reduction in damages as a result of the view taken by the court was "a significant one" and one they were pleased to have achieved. She says the outcome of the case must serve as a reminder to lenders that when they have asked for and have been presented with two valuations which differ substantially, further enquiries should be made.