Recent cases concerning negligent valuations have added to a growing list of decisions surrounding lenders and investors claiming against valuers and project monitors (independent monitoring surveyors). We have previously blogged on this subject but the litigation continues to represent a rich seam of decisions for lawyers on both sides to mine in an effort to understand the extent to which surveyors and other professional advisers may be liable to lenders and investors. Or, to put it another way (and borrowing the not-so-bon mot of some personal injury lawyers), is it true that where there's blame there's a claim?
Lenders and investors may consider a valuer or a project monitor (or, perhaps more accurately their PI cover) to be an extra safeguard in real estate finance transactions. They will rely to some extent on the valuer or the project monitor to inform their own risk analysis. But what if their trusted advisers get it wrong?
In the broader context of professional negligence claims, a blanket distinction between valuers, project monitors and other professional advisers is perhaps a false one however it is helpful to group the decisions in this way for the purposes of our analysis.
This post, the first of a two part series, looks at valuers. The second will look at project monitors (further posts could look at accountants, architects and solicitors, among others, but brevity precludes). These blog posts are unashamedly shot through with cases names and, er, law. On this occasion we think it's helpful to see the trends by reference to the specific decisions.
Without drifting back into the mists of time (and, more pertinently, the heady days before the global financial crisis), K/S Lincoln and others v Richard Ellis CB Hotels Limited (No 2)  EWHC 1156 (TCC) is a good place to start. In that case, the High Court considered the established approach that a valuation will be negligent only to the extent it is outside the margin of error (which will vary depending on the asset being valued). In that case it was held that the valuer was not negligent despite the fact it had overvalued four hotels that were subject to unusual lease terms. It was within the permissible (10%) margin for error even though the valuation methodology was below the standard of a reasonable valuer.
Cases on the margin of error have considered factors such as whether the subject of the valuation is a residential home or a buy-to-let (Scullion v Bank of Scotland plc  EWCA Civ 693) and the buoyancy of the market and the consistency of comparable evidence, such that a different approach to valuations may be justified depending on the type of lending (e.g. sub-prime vs. traditional property lending) (Paratus AMC Ltd v Countrywide Surveyors Ltd  EWHC 3307 (Ch)).
The Titan cases, a suitable epithet for a substantial and influential set of judgments, arose in the context of the apparent over-valuation of properties used as collateral in a CMBS transaction. Among other things the High Court, and subsequently the Court of Appeal, considered whether a substantially lower valuation would have carried no credibility in the market and/or if the lower valuation was within an acceptable range or margin of error for a non-negligent valuation (in this case 15%, for a property with exceptional features). It found the valuation was within range and the valuers were not liable in negligence. Separately the Court of Appeal considered (obiter) whether an issuer SPV was able to pursue a claim against the valuers, agreeing with the first instance view that, assuming a negligent valuation, an issuer in these circumstances would have a right to sue the valuer (Titan Europe 2006-3 Plc v Colliers International UK Plc (In Liquidation)  EWHC 3106 (Comm); Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation)  EWCA Civ 1083).
In Freemont (Denbigh) Ltd v Knight Frank LLP  EWHC 3347 (Ch) the High Court considered, as part of its analysis of the duties owed by a valuer, whether a duty of care in tort could be owed by a valuer instructed to produce a report for a lender for the purposes of its security, to an investor who relies on the report for other purposes (in this case, for a possible future sale by the investor). On the facts the judge rejected the assertion that the defendant valuer knew (or knew there was a high probability) that the claimant investor would rely on the report when considering whether to sell the land.
When assessing losses as a result of professional negligence, the "SAAMCO Principle" is key. In the establishing case of South Australia Asset Management Corp v York Montague Ltd  UKHL 10, the House of Lords held that, in the context of inaccurate information, only those losses that are attributable to the breach are recoverable. That is, where a valuer provided inaccurate information causing loss to the lender, the claimant was entitled to the difference between the valuation and the true value of the property at the date of valuation. The award was limited by the amount that the security had been overvalued, and the lender was not entitled to loss resulting from a fall in the market (as this was not foreseeable loss resulting from the negligence).
So, on the question of whether a valuer giving advice beyond the scope of the valuation (e.g. investment advice) could be liable for all losses of the person seeking to rely on it, including any caused by a fall in market values, SAAMCO says that it may be.
Bank of Ireland v Faithful & Gould Ltd  EWHC 2217 (TCC), is a messy case where the bank sued its project monitor (more on that next time) who, after settling with the bank, then sued the valuers for contribution. The court held that the bank's loss had not been caused by the valuer's overvaluation of the property's gross development value. The bank had not relied on its valuation of the site's residual market value. The case reiterates the importance of causation. Even in circumstances where a valuation is shown (or admitted) to have been negligent, the SAAMCO defence will be successful if it can be shown that a transaction would have been entered into in any event (that is, the lender or investor did not rely on a negligent overvaluation), or there is otherwise no causal link (that is, the losses would have been incurred in any event) (or both).
In Capita Alternative Fund Services (Guernsey) Ltd and another v Driver Jonas (a firm)  EWHC 2336, the valuer's liability was limited to the difference between a competent valuation and the purchase cost, despite the valuer negligently overstating value and having provided wider investment advice in relation to a property development.
Other issues for lenders include limitation arguments. As the turbulent wake of the global financial crisis subsides, limitation periods are running out for claims based on valuations provided around that time. Both for claims in tort and contract the limitation period is six years. However, while in contract the clock runs from the time of breach, in tort the cause of action only arises when all the necessary elements are present (i.e. duty, breach and damages). Nevertheless, even where extended limitation periods for claims in tort might be seen as an advantage, cases such as Canada Square Operations Limited v Kinleigh Folkard & Hayward Limited  All ER (D) 95 (Sep) and, more recently, Bridging Loans Limited v Toombs  EWCA Civ 205 demonstrate the difficulties for lenders in pursuing worthwhile actions, faced with rules requiring a demonstration of measurable relevant loss for claims based in tort (see Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd  UKHL 53). More hurdles to jump.
Even in cases of fraud or deceit, the lender may not be able to catch a break. In Mortgage Express v Countrywide Surveyors Ltd  EWHC 1830 (Ch), the court held that a fraudulent or negligent surveyor was not a quasi-guarantor of a borrower's performance of its obligations. That is, it rejected the lender's claim for interest as damages (being the opportunity cost of the interest it could have earned lending to other borrowers). Instead the lender received simple interest on a statutory basis.
Barclays Bank plc v TBS & V Ltd  EWHC 2948 (QB) represents another win for the valuers. Applying K/S Lincoln it was for the valuer to analyse the circumstances of the property (and the business operating from it) objectively but the court will form its own view in relation to the real value of the property based on all the expert and factual evidence, and not simply prefer the evidence of one or another expert. The issue comes back to the fact that it's not about preferring methodologies but rather whether the valuation is within the permissible margin of error.
The valuer also argued that, if it had in fact been negligent, its liability was superseded by the fact the loan had been replaced (on the basis of Preferred Mortgages v Bradford & Bingley  EWCA Civ 336). The borrowers had defaulted on their interest payments and the debt had been restructured but the same legal charge remained in place. The fact the mortgage had not been redeemed was sufficient for the judge to dismiss the valuer's argument (obiter, since the claim for negligence failed), distinguishing it from Preferred Mortgages.
The theme up to this point appears to suggest that lenders are up against it when seeking to recover potentially significant losses from valuers. But here we arrive at Tiuta International Ltd v De Villiers Surveyors Ltd  EWCA Civ 661 (and its precursor Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd  EWHC 773 (Ch)). As reported in our post last summer, the Court of Appeal ruled that a lender could recover the full amount of a loss caused by a negligent valuation of a secured property on which a refinancing loan was based. It 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. It was assumed that the first loan had been fully redeemed as a result of the refinancing and it was held (by a majority but with a significant dissenting voice), that the "but for" test should be applied in the context of the refinancing loan being entirely independent from the first loan. On that basis, the valuers could be liable for losses arising from the entire amount of the second (refinancing) loan. Finally some positive news for lenders, if not for professional indemnity insurance premiums.
Tiuta was appealed to the Supreme Court and heard on 6 November this year. The issue for the Supreme Court was how the "but for" test for factual causation is to be applied as between the allegedly negligent valuer and the lender in a refinancing. In its majority decision the Court of Appeal demonstrated there had been disagreement about the correct application of the test. The judgment is not yet ready to download (literally and figuratively) but we'll update you when it is.
There is no doubt that lenders and investors face some difficulties in pursuing valuers. A restructuring or refinancing may complicate things further. However a well-informed (and advised!) party may still find scope for a claim where it has relied upon a valuation that was not up to scratch. That being said, a professional negligence claim will never be an effective substitute for robust borrower and asset due diligence, and a comprehensive security package. Lenders and investors should be cautious about placing too much reliance on their valuers and the inherent assumption that, if the valuers get it wrong, they can always sue them for their losses.
The second part of this post, focussing on claims against project monitors, will follow shortly.