Negligent valuations in the context of a re-financing

Tiuta International Ltd (In Liquidation) v De Villiers Chartered Surveyors Ltd [2016] EWCA Civ 661


The Court of Appeal has provided guidance on the extent of a surveyor’s liability for negligence when a property valuation is prepared for a re-financing exercise. In this case, a valuation was sought by a lender when it re-financed an existing facility. The court had to decide whether the surveyor should be liable for the difference between the loan amount and the true value of the property or, whether the discharge of the first loan using the funds from the second loan meant that all that could be claimed was the amount by which the facility had been increased by. The court opted for the former, and held that the surveyor could be liable for the full extent of the lender’s losses, even though the existing loan had been advanced on the basis of an incorrect valuation.

The facts

A surveyor provided two separate valuations to a lender in respect of a development property being financed by the lender. On both occasions the surveyor valued the development at £4.9 million, based on its value on completion of the development. The lender lent a sum of over £2.5 million on the basis of the first valuation. In December 2011, the developer approached the lender seeking to increase the loan amount. The lender therefore obtained a second valuation and consequently agreed to increase the facility. The second loan was used to repay the initial facility and further finance the development. The original charge was released and a new charge was executed.

The lender subsequently sought repayment of the second loan when its term expired. The monies were not repaid and the lender discovered that the sale of the property would only realise around £2.1 million, in contrast with the £2.8 million loan sum left outstanding.

The lender argued that the surveyor had negligently over-stated the value of the property in the second valuation and that it had suffered a loss amounting to the difference of £700,000. However the surveyor applied for summary judgment, claiming that if the valuation was negligent, the lender could only claim £300,000, being the amount by which the loan had been increased.

Summary judgment

The High Court found in favour of the surveyor and granted the application for summary judgement. The Judge held that any negligence by the respondent in relation to the second valuation had not caused the loss attributable to the first loan. It was not assumed in that decision that the first loan was repaid by the second, instead that the second loan was effectively an extension of the first. The lender appealed.

The key issues on appeal

The key issue was whether the first loan and the second loan were independent of each other. The court considered that when assessing the loss, the correct quantum is the difference between the amount of money lent and the property’s actual value. The court did not consider it was relevant that the surveyor knew that the valuation was sought for the purposes of re-financing the loan.

Appeal decision

The majority of the Court of Appeal held that the surveyor was liable for the whole loss flowing from the second valuation. If the valuation had not been negligent, the lender would not have advanced the second loan. Therefore the court concluded that the correct calculation of loss was the difference between the full amount of the second loan, and the market value of the property.

Our advice for surveyors

We are yet to see the substantive issue of negligence come to trial, and this decision was based heavily on the assumption that the valuation was negligent. Each member of the Court of Appeal noted that this matter would be better dealt with at trial based on findings of fact over assumptions. Nevertheless, following this ruling surveyors should be aware that they may be liable for total sums lent, even where a second loan is offered that appears to be independent of any previous financing.

The court noted that it was open to surveyors to limit their exposure by way of their terms and conditions when accepting instructions. However, whether a lender would accept such a caveat in the context of a re-financing is doubtful.

Our advice for lenders

This decision gives comfort to a lender who makes a further loan to re-finance an earlier transaction on the basis of a second valuation. However, the terms of the re-structuring will be key and lenders should be wary of any terms or conditions limiting their valuer’s liability.