Who's sorry now?
29 August 1995
1 July 1997
8 June 1996
11 April 1997
13 January 1998
17 March 1998
There have been few times in the past when the valuing profession has been the subject of such intense scrutiny by the courts. Writ after writ seems to be issued by lenders whose loans of the late 1980s have gone into default and who have only been able to realise the security property at a lower price than the valuation on which the loan was originally based.
Cases have come to light of valuers providing what seem hopelessly optimistic valuations, after having apparently carried out only rudimentary investigations into comparable transactions and little or no experience of valuing the type or location of property.
The current state of the law says that if lenders can show they would not have made a loan if the valuer had given a correct valuation, the valuer will be liable for all loss the lender suffers. This is the case despite any occurrence of a crash in property prices after the date of the valuation and loan, which was not the fault of the valuers. This was made abundantly clear by the Court of Appeal in Banque Bruxelles Lambert SA v Eagle Star Insurance Company, although the matter is now being taken to the House of Lords.
There are those who feel this is particularly inequitable. They argue that lenders were falling over themselves to make loans at this time and that the quality of the investigation and assessment of loan proposals was, in many cases, very low. They take the view that, in these circumstances, lenders should not be able to escape the consequences of their actions at the valuers' expense. And the courts have recognised this complaint to some extent.
First, a claim against the lender for contributory negligence is now a standard feature of secured lending valuers' negligence cases. To decide whether the damages awarded against a negligent valuer should be reduced to allow for the lender's contributory negligence, Justice Philips stated at first instance in the Banque Bruxelles case that it was necessary to consider whether there were any features of the transaction which should have led a reasonably prudent bank to decline to grant the facilities, if aware of them (Banque Bruxelles at p821; approved by Justice Fawcus in Nyckeln Finance Co v Stumpbrook Continuation 1994). Justice Philips reduced the lender's damages by 30 per cent. Other reported reductions in similar cases have generally been of this order.
Second, if it is found that a loan would have been made if a correct valuation had been given, albeit at a lower level, the lender may as a result bear at least some of the loss from the fall in property prices.
It must be said, however, that often a lower loan would not have been made in the market conditions of the late 1980s, not because the lender would have been unwilling, but because the borrower would not have been prepared or able to contribute the further funds required. The lender's willingness will not assist the valuer in these circumstances.
This raises another common feature of valuers' negligence cases arising out of 1980s property lending which is that the property had often changed hands recently or was the subject of an agreement to sell at a price significantly below the figure at which it was valued.
In these circumstances, if the borrower ring-fenced its liabilities by putting the property and the loan into a single-purpose company opportunities for minimal risk speculation in the property boom are clear.
Recent case law has made it clear that both lenders and valuers must be very sceptical about claims of bargain purchases at an undervalue. Justice Philips in the Banque Bruxelles case stated that, provided the valuer is satisfied the property has been fully and openly marketed, the consideration of comparables will be no more than a cross-check on the validity of the sale price.
As far as the lender was concerned, he said it should have required a "specific and convincing explanation" for the discrepancy between the purchase price and the valuation before relying on the property as the sole source of repayment of a loan for, in that case, 90 per cent of the value. This was one of the bases of negligence findings against the valuer and contributory negligence against the bank in the BBL case.
Myfanwy Badge is a partner in the litigation section at Lovell White Durrant.