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Supreme Court overturns negligent valuation judgment

The Supreme Court has overturned a judgment granting a lender the right to recover the full amount of a refinancing loan it granted after relying on a negligent property valuation, rather than just the additional 'top-up' funding.01 Dec 2017

In its unanimous judgment, the Supreme Court "reverted to a strict application of the 'but for' test of causation", according to professional negligence expert Michael Fletcher of Pinsent Masons, the law firm behind Out-Law.com. It held that, as no allegation of negligence had been made in respect of the valuation leading to the first loan, the valuers' liability should be limited to only the 'new' money advanced under the second loan.

"This decision will no doubt divide opinion, as did the majority Court of Appeal decision in the opposite direction," said Fletcher. "Although controversial in some quarters, a number of commentators considered the Court of Appeal decision to be correct."

"Whilst defendant surveyors may welcome the decision, a valuer who provides a valuation prior to a second or subsequent loan should not assume that they can never have liability for loss arising from an earlier loan. The Supreme Court decision - and the first instance judge – suggests that, where a second loan fully discharges a first loan, a claim against the second valuers might include a claim for the loss of a chance of suing the original valuers for any negligence in the first valuation," he said.

The dispute arose in relation to a partially-completed residential property development. De Villers, the surveyors' firm, was approached to value the property in February 2011 on behalf of the lender, Tiuta. De Villiers valued the property at £3.25 million in its current state of development and at £4.9m on completion. On the basis of that valuation, Tiuta provided a loan to the developer of just over £2.5m.

In November 2011, the developer approached Tiuta to increase the amount of the loan to just over £3m on the same security. De Villiers was once again approached to provide a valuation. Tiuta agreed to provide the additional funds on the basis of this valuation but it did so by refinancing the entire loan, rather than by varying the original agreement. The term of this second loan expired with about £2.85m outstanding, which was never repaid. The property achieved a value of only £2.1m when sold by the lender to recover its loss.

Tiuta claimed that it would not have made the second loan if the surveyor had taken reasonable care when it made the second valuation. It did not argue that the first valuation was negligent. In response, De Villiers argued that Tiuta would have suffered some loss in any event, as, if the first loan had not been redeemed by the second loan, the developer would not have paid back the original loan. De Villiers argued it should not be liable for loss arising from the first loan.

The original High Court judge agreed, finding that any negligence by the surveyor in providing the second valuation had not caused the loss attributable to the original loan. The Court of Appeal, by a majority of two judges to one, disagreed, finding that the two loan transactions should be treated as separate, and that the full value of the refinancing loan could be recovered as damages.

The Supreme Court has now effectively restored the decision of the High Court judge. The case, based on the facts as assumed by the court, was a "perfectly straightfoward" one, the results of which "[turn] on ordinary principles of the law of damages", said Lord Sumption, giving the unanimous judgment of the court.

"The basic measure of damages is that which is required to restore the claimant as nearly as possible to the position that he would have been in if he had not sustained the wrong," he said.

"If the valuers had not been negligent in reporting the value of the property for the purpose of the second facility, the lenders would not have entered into the second facility, but they would still have entered into the first ... There being no allegation of negligence in relation to the first facility ... the lender's loss is limited to the new money advanced under the second facility," he said.

Lord Sumption went on to disagree with the judgment of Lord Justice Moore-Bick in the Court of Appeal. He said that it did not "follow from the fact that the advance under the second facility was applied in discharge of the advances under the first, that the court is obliged to ignore the fact that the lender would have lost the advances under the first facility in any event".

"I would agree that if the valuers had incurred a liability in respect of the first facility, the lenders' loss in relation to the second facility might at least arguably include the loss attributable to the extinction of that liability which resulted from the refinancing of the existing indebtedness," he said. "But the premise on which this matter comes before the court is that there was no potential liability in respect of the first facility because that was entered into on the basis of another valuation which is not said to have been negligent."

Fletcher said that it was important to bear in mind that the Supreme Court reached its decision on the basis of assumed facts. The assumption that the first valuation was not negligent was particularly relevant here, he said.

"Indeed, the Supreme Court expressly recognises in its judgment that the decision is fact-sensitive and that different considerations might arise were it to be alleged that valuers were negligent in relation to both loans," he said.

"Lenders may therefore still be able to recover loss from a negligent surveyor arising from an earlier negligent valuation. However, 'loss of a chance' claims can be more uncertain, and are likely to involve some discount to damages. To avoid this, lenders might consider structuring additional lending by way of an additional loan, rather than as a refinance facility redeeming the first loan. This would reduce the risk of falling foul of the argument that no claim may be brought in respect of a loan which has been fully discharged," he said.

In cases where it is necessary that the second loan be used to pay off the first, lenders "may benefit from making clear in the instructions to the surveyors who will provide the second valuation that the purpose of the valuation is in connection with a refinance transaction whereby a first loan would be redeemed", Fletcher said.