Not quite as glitzy as The Strip, but the setting for a recent High Court case which casts real doubt on the prudence of relying on unverified comparable evidence provided by fellow professionals as part of the valuation process. Arguably not appreciating the prevalence of this established means of the information gathering process, the decision illustrates that greater caution needs to be exercised in the future.
On the plus side, this case provides encouragement to those professionals seeking to diminish exposure risk of this type wherever a borrower's honesty can be called into question. Experience tells us that the utilisation of funds for purposes different than that stated is not an uncommon occurrence.
Deputy Judge Richard Spearman QC so decided in the recent decision of Barclays Bank Plc v Christie Owen & Davies Ltd (trading as Christie & Co)  EWHC 2351 (Ch). The underlying valuation by Christie & Co was of three adjacent family entertainment centres (amusement arcades to you and me) – Circus Circus, the Golden Nugget and the Flamingo in Great Yarmouth.
The borrower operated two already and applied for £1.8m funding from Barclays to purchase the Flamingo and to alter all then incorporate all three centres together. Having obtained funding, purchased the Flamingo and carried out the works, the business got into financial difficulty and was placed into administration in October 2010. It was eventually sold for £1.35m leaving Barclays substantially out of pocket.
Barclays sought to recover its losses from Christie & Co contending it had provided two negligent over-valuations in February 2007 of (1) Circus Circus and the Golden Nugget at £2.7m, and (2) the Flamingo at £1.5m, and that it had lent, sustaining loss, in reliance on those valuations. It alleged that the true values were £2.1m and £1m respectively.
Christie & Co denied it was negligent. The parties and their experts (both valuation and lending) were unable to agree on many issues in advance of trial meaning the court had many things to consider and the judgment was lengthy. As appears increasingly to be the fashion, the court did not prefer one valuation expert over the other, but instead considered "the weight to be placed on different aspects of [the experts'] evidence…and then [reached] its own conclusion". Respective experts were, therefore, preferred on some points whilst the Judge went with his own views on others, an outcome likely to give a few sleepless nights to anyone trying to advise a client as to the merits of a valuation case.
Much of the detail in the judgment is attributable to the "long and complex history of borrowing" and the many valuation points that Christie & Co took. Although the judgment was fact-specific, the following is of note:
- The correct valuation approach as to profitability was to value the arcades using an EBITDA1 multiplier rather than a turnover multiplier;
- Both experts agreed the permissible margin of error was 15% and the Court adopted their view;
- The Judge criticised Christie & Co for relying on two comparables obtained from a third party valuer, which referenced the sale of the Flamingo in 2005 at prices that were inaccurate. "…In placing the reliance that it did on [the third party valuer's] email when its contents were either not capable of being checked for accuracy or when Christie chose not to make any independent check on them, it seems to me that Christie's method of gathering information about comparables was flawed." When contended that in accordance with usual practice, information provided by a MRICS valuer would be helpful and reliable, the Judge held that "…it would be wrong to place on Barclays the risk that reliance on that email would result in a valuation that was based on information which was inaccurate…" He concluded that Christie & Co did not exercise reasonable skill and care in relying on that email;
- The Judge was "sceptical" that having accepted Barclays' instructions and produced the valuations, Christie & Co could then contend that its terms of business (TOB) had been incorporated into the contract between the parties by including them in the valuation reports themselves. Attempts to shoehorn TOB into a contract once formed have never been attractive and in this case, where the Judge made the point that there was no helpful exclusion or limitation provision, even more surprising. The Judge's comments are not going to assist any valuer looking to run a similar incorporation argument;
- The Judge applied a reduction of 40% for contributory negligence; his primary criticism of Barclays was for lending in circumstances where they were aware that the borrower had in 2003 not used a previous loan for the purposes for which it had expressly been advanced, but instead acquired a property in Spain. The Judge was very critical of the borrower's conduct describing it as "dishonest", which he considered should have resulted in Barclays refusing the borrower's application for finance altogether.
Although not eye-watering, there were some interesting concepts that were considered at length, not least the fact that valuers often rely on comparable information provided by other valuers regarding purchase prices, yields, rents, floor areas, etc. In this case, the Judge found that Christie & Co "did a poor job of researching and analysing comparables and placed too much reliance" on the information provided by the third party valuer.
Professionals providing this type of information to their peers would be well advised against exaggeration and to be confident in the source, whereas those relying on such should endeavour to obtain independent verification and, if not forthcoming, be reluctant to rely on the same to reach final conclusions without appropriate qualification in their reports. Failures to do so could heighten the risk of negligence claims if the data proves to be erroneous. The additional cost of certainty is likely to prove by far the cheaper option in the long run.