In Tiuta International Limited (in Liquidation) v. De Villiers Surveyors Limited [2016] EWCA Civ 661, the Court of Appeal allowed an application to set aside summary judgment after considering the correct application of the "but for" test where a loan was used to repay an existing liability.

Facts of the case

Around February 2011, Tiuta International Limited (in Liquidation) (Tiuta) instructed De Villiers Surveyors Limited (DVS) to prepare a valuation of a partly completed property in Sunningdale. DVS valued the property at £3.25 million in its then current condition, with the value increasing to £4.9 million on completion. On the basis of this valuation, Tiuta advanced a loan of around £2.5 million to the borrower (Original Loan).

In November 2011, the borrower approached Tiuta requesting an increase in the amount of the facility to around £3.08 million (Second Loan). Tiuta instructed DVS to prepare a second valuation. DVS valued the property at £3.5 million in its then current condition, with the value increasing to £4.9 million on completion (Second Valuation). On this basis, Tiuta redeemed the Original Loan and advanced further funds to the borrower by way of a refinance. As part of this process, the original charge was released and a new charge was registered at the Land Registry. It was therefore structured as an entirely new loan.

The borrower failed to repay the Second Loan. Receivers were appointed and the property sold for around £2.1 million, leaving a shortfall. Tiuta brought a claim against DVS alleging that the Second Valuation had negligently overvalued the property.

DVS applied for summary judgment in relation to quantum, claiming that if the Second Valuation was negligent, Tiuta could not have suffered a loss greater than the "top-up" advance.

Judgment

The Court at first instance held that the "but for" test should be applied, which resulted in any negligence by DVS in relation to the Second Valuation being limited to that of the "top-up" amount (i.e. it had not caused the loss attributable to the Original Loan).

This was appealed by Tiuta and the Court of Appeal held, by a majority, that DVS was liable for all the losses flowing from the negligence of the Second Valuation and not just those relating to the "top-up". The Court of Appeal agreed that the "but for" test applied but considered that the test had not been applied correctly as the judge had failed to take into account the fact that the transaction had been structured in such a way that the Second Loan was used to repay the Original Loan. The matter would have been clear if it had involved different lenders but should not make a difference if it is the same lender. The Court of Appeal confirmed that the Second Loan was entirely independent of the Original Loan, and the Court went so far as to say "it could be said to be inherently unfair that, where both parties are commercial organisations, a negligent valuer could use an attack on the legitimate working practices and systems of the appellant as a means of escaping part of the consequences of his or her negligence". The summary judgment was set aside as, assuming the Second Valuation is found to be negligent, DVS would be liable for the entirety of the loss flowing from the loan made, based on the Second Valuation.

Commentary

This is an important decision as it has settled the rather contentious issue of the amount lenders can recover when they have refinanced loans – confirming that they can claim their full losses on refinances and are not limited to the "top-up" amounts. However, the structure of the transaction (i.e. to repay the original loan and redeem the first charge) was clear in this case, which it may not always be. In cases where it is not so clear, the result may not always be the same. Nevertheless, this decision will no doubt bring many lenders great comfort.

Going forward, lenders should pay careful attention to valuers' standard terms and conditions as they are likely to see an increase in the use of clauses attempting to limit valuers' liability in circumstances where a valuation will be used to extinguish an existing liability and make a new loan.