The mixed bag of recent judgments for valuers (see Surveyors’ PI: application of the ‘but for’ test and Lender Claims - Bank not entitled to compound interest as damages ) continues with the latest decision in Barclays Bank Plc v Christie Owen & Davies Limited.

Barclays Bank Plc has successfully brought a claim in the High Court against Christie Owen & Davies Limited relating to the negligent valuation of three arcades in Great Yarmouth. The judgment demonstrates the court taking a firm line on valuation methodology but applying a generous 40% reduction for contributory negligence. The key issues were (1) the correct basis for carrying out a trading valuation and (2) issues of contributory negligence.

Background

In 2007, the bank loaned its customer (the "Borrower") £1.8m to facilitate the purchase of an arcade (“First Arcade”) and the carrying out of alterations to that building and the two adjacent arcades (“Second Arcades”), already owned by the Borrower. The Borrower later went into administration and in March 2011, all three arcades were sold for a sum of £1.35m, leaving Barclays with substantial losses.

At the time of the lending, Christies had valued the three arcades with a combined value of £4.2m (First Arcade £1.5m, Second Arcades £2.7m). The bank alleged that the true values were circa £1m and £2.1m respectively. Accordingly, the bank alleged that Christies had negligently over-valued the properties

Decision

Overvaluation determination

Christies had valued each of the arcades by applying a multiplier to the turnover, based on the company accounts, with the addition of £150,000 in each case for the office, storage or residential accommodation on the upper floors. The experts for both parties agreed that they would typically expect the arcades to be valued by reference to EBITDA (earnings before interest, tax, depreciation and amortisation). The judge held that, whilst it was possible for Christies to perform an EBITDA valuation, it was not automatically negligent for them to have adopted the alternative methodology. However, when good robust evidence, as required for EBITDA evaluations, is available the only acceptable reasons for not using the conventional method are “a) if there is evidence that other methodologies are used in the market or b) if there is better available evidence which might support a more robust valuation on some other basis.” In this instance, the judge found that, (1) sufficient evidence was available to make an EBITDA-based valuation and (2) there was no evidence that other methodologies were at any material time used in the market. It was, therefore, held that the EBITDA method should have been used by Christies, and the judge proceeded to use EBITDA in determining the correct values of the arcades.

Applying the EBITDA method to the First Arcade, the judge found the correct value to be £1.1m, and to the Second Arcades, the judge calculated the correct value to be £2.3m. Both of these fell outside the permissible margin of error of +/- 15%. Accordingly, Christies had overvalued the arcades by £700,000.

As a side point, it should be noted that Christies’ expert’s report suggested that the 2007 sale price of the First Arcade, being £1.6m in an arm’s length transaction, supported the £1.5m valuation. The court held that the sale price of the First Arcade to the Borrower could not be used as cogent evidence of the open market value of the property.

Contributory negligence

The court found that the overwhelming probability was that had the valuations been correct the purchase would have been abandoned and no loan would have been made. The court then considered the issue of contributory negligence.

A 40% reduction in damages was applied for the bank’s contributory negligence. The judge found that the bank had not responded to the Borrower’s mortgage history as a competent bank should have responded. In 2003, under a commercial mortgage, Barclays had advanced monies to the same Borrower, which had been dishonestly used to purchase a property in Spain. The bank had been prepared to overlook the Borrower’s previous misuse of money because it considered that it could still make money out of its banking relationship with its customer. This was deemed to be a regrettable approach. The court held that a competent bank would have declined to give a further loan in 2007 and, at the very least, the bank should have more closely scrutinised the Borrower’s finances, projections and proposals.

Comment

As stated at the outset, this judgment is a mixed bag for valuers and their insurers. It highlights that for a valuer to depart from an industry standard approach, there must be substantial reason and evidence for doing so. Valuers will, therefore, want to ensure that valuation methods are carefully selected on an evidential basis and that such choices can be sufficiently justified and documented.

On the plus side, the case demonstrates that the courts are still willing to apply a significant reduction if a lender is found to have failed to act with reasonable competence (see Webb Resolutions Ltd v Countrywide Surveyors Ltd (2016) and Paratus AMC Ltd v Countrywide Surveyors Ltd (2011)). Such a reduction for contributory negligence may bring the quantum below the SAAMCo capped loss. It therefore remains the case that, when faced with such claims, a rigorous examination of the lending should be undertaken in order to maximise the reduction of any award to a claimant lender.