Valuation gets sent back to court

A judge's calculation in a negligent property valuation case has been sent back for a closer look. Roger Pearson reports.

A major property valuation dispute has been sent back to the High Court.

The Court of Appeal has overturned a 1998 High Court decision by Mr Justice Wright in the case of Arab Bank v John D Wood & ors.

Mr Justice Wright had ruled that the Arab Bank was entitled to damages from valuers John D Wood (Commercial) Ltd, but dismissed a claim against Weatherall Green & Smith.

Lords Justices Nourse, Mantell and Mance unanimously held that Weatherall Green & Smith was also negligent and sent the case back to the High Court for questions of compensation and contributory negligence to be reconsidered.

The case centres on valuations made on an industrial estate in Darlington. Wood valued the estate at £22m. Weatherall Green, on information provided by Wood, came up with an initial valuation of £19m, which later increased to £20.6m.

On their advice, the Arab Bank advanced a loan of £18.5m. But the borrowers defaulted, the bank repossessed and proceedings were issued against Wood and Weatherall Green for negligence.

By the time the case reached the High Court, Wood was in liquidation and was not represented.

After a 37-day hearing, Mr Justice Wright held that the true value of the site should have been £16m and found Wood negligent. But he dismissed the claim against Weatherall Green on the basis that although its valuation was too high, it was not far enough outside the acceptable margins of error to be considered negligent.

On appeal, the Arab Bank, represented by Forsters, successfully argued that Mr Justice Wright, instead of adopting mean figures for the estimated rental values for two of the largest tenants on the estate, wrongly adopted the highest non-negligent figures and effectively gave Weatherall Green the benefit of two margins of error.

It also argued successfully that the judge had used impermissible hindsight to select his estimated rental value for the third-largest tenant on the estate and that as a result he had come up with a valuation figure which was far too high.

It said that if he had used the correct figures he would have found Weatherall Green's valuation to be well outside the permissible margin of error.

Andrew Head of Forsters says that the latest decision gives new guidance on the way the House of Lords' ruling in the Saamco case should be treated in the future.

Head says that Saamco laid down that the figure most likely to be put forward should be the mean figure in the range of non-negligent valuation. The judge should then apply the appropriate margin of error.

"If the valuer's valuation is outside this margin it is well established that this will call into question the competence of the valuer.

"Obviously the more outside the margin, then the higher the valuation is and the higher the degree of negligence is likely to be," says Head.

He continues: "The appeal was a complex one and involved detailed consideration of the evidence given at the trial.

"Much of the Court of Appeal's reasoning is therefore not of general application. Nonetheless the decision does contain important practical lessons for judges and expert valuers when seeking to follow Saamco and come up with a figure for true value in negligent valuation cases.

"It is important, particularly when dealing with multi tenanted properties, that judges consider what mean figures to adopt for both the estimated rental values and yields of each of the individual tenancies.

"If they do not, they risk double counting when subsequently applying a margin of error to the figure for true value.

"Although it is often necessary for both the judge and the retrospective valuer to consider events which post date the valuation in question, this use of hindsight will only be permissible if these events throw light on market conditions which could have been known to a reasonably competent valuer at the valuation date."