Valuations, refinancings and uncertainty...
Whilst we do not usually blog case reports, a recent case is interesting in the context of refinancings and negligent valuations. In addition, and compounding a difficult few weeks for valuers in the context of the Brexit referendum, we are experiencing market volatility and refer further below to the RICS guidance in such conditions.
The Court of Appeal ruled in Titua International Ltd (In Liquidation) v De Villiers Chartered Surveyors Ltd (2016) that lenders can recover the full amount of a loss caused by a negligent valuation of a secured property on which a refinancing loan was based. The Court also ruled that when quantifying the loss to the lender, the real value of the secured property must be compared to the money lent under the refinancing loan. This decision means lenders can potentially recover higher amounts from negligent valuers and that valuers may face higher professional indemnity cover costs.
The initial transaction was straightforward. The lender advanced money to a property developer and took security over a property. The developer later requested more funds. The valuer carried out a second valuation of the property and on the basis of that valuation, the lender refinanced the facility. The refinancing provided funds to repay outstanding amounts on the original loan and further drawdowns. However, things did not go as planned and the developer failed to repay the loan. When the lender tried to sell the secured property, it realised a significant shortfall. The lender took the valuer to court, for an amount totalling £890,500, claiming that the second valuation was negligent.
The initial High Court decision was in favour of the valuer claiming that the loss is merely the value of "topping up" the original loan (£272,000), and did not include the original loan amount, lent on the original valuation prior to the refinancing. The Court of Appeal reversed the decision.
Court of Appeal - Valuer liable for whole loss
The lender argued that the second transaction created a new loan with fresh security and that the valuer was liable for the negligent second valuation. On the other hand, the valuer argued that the second loan was, in substance, merely an increase in value of the original loan. The Court sided with the lender and ruled that the Court will look at the structure of the new transaction and not its perceived substance. On that basis, the refinancing is a new loan which should be considered by itself. Therefore, the loss to the lender should be quantified by comparing the money lent under the second loan with the property's true value. The Court held that the lender would not have entered into the second loan had the valuation not been negligent. On that basis, the valuer was liable for the whole loss caused by the negligent second valuation.
For more information
Please reach out to your usual contact at Fieldfisher LLP. We also copy a link to the RICS blog on the same. http://www.rics.org/uk/news/news-insight/comment/will-a-new-court-of-appeal-ruling-have-wider-implications-for-valuation/.
Whilst we fully intended to post a Brexit lite blog, we thought it worth mentioning the recent market events are causing difficulties for valuers in finalizing valuations. We attach a helpful link to another RICS blog dealing with this and which sets out the guidance for valuers in an uncertain market. http://www.rics.org/uk/news/news-insight/news/eu-referendum-valuation-uncertainty-in-the-run-up-to-brexit/.
We trust this information is useful, please feel free to comment.