The Court of Appeal has recently overturned a summary judgment, deciding in favour of the lender and against professional valuers. Whilst the lender has won this round, the matter will now be set down for a full trial in the High Court. De Villiers may yet escape liability. However, for now, the case provides a useful steer on the Court of Appeal’s current thinking in an area which may well be revisited in the event of a post-Brexit downturn.
In February 2011, Tiuta International (T) instructed De Villiers (V) to value a partly-completed residential development in Sunningdale. V valued the property at £3.25 million in its partially completed state. T then advanced approximately £2.5 million by way of a secured loan.
Several months later, the developers approached the lenders for more money. T asked V to prepare a fresh valuation. This needed to be acceptable to T before it would agree to fund a further advance. In December 2011, V valued the partially-completed property at £3.5 million.
The parties entered into a second facility agreement; the principal advanced was approximately £2.8 million, a little more than what was required to repay the original loan. The original facility was paid down in its entirety i.e. refinanced in January 2012. The original charge was released on repayment of the original loan. A fresh charge was taken over the Sunningdale property.
The borrower failed to repay the loan.
T brought a claim against V, claiming that it had negligently overvalued the Sunningdale property. But for the valuation, T claimed, it would never have advanced the second loan.
V argued that even if the second valuation had been negligent (which was denied) this did not cause the loss. Approximately £2.6 million was already outstanding under the original loan. The second valuation had only led to T making what was, in effect, a small top-up loan of approximately £0.2 million. Although the deal was structured as a refinancing, the substance of the commercial bargain meant that the second transaction involved nothing more than an agreement to increase the amount of the original loan.
V applied for summary judgment and succeeded in the High Court; T appealed to the Court of Appeal.
Court of Appeal decision
For the purposes of this application, the Court had to assume that:
- V had been negligent in overstating the value of the property
- the second transaction had discharged the existing indebtedness.
The Court of Appeal decided in favour of T:
- the court was not entitled to “disregard the structure of a routine refinancing transaction in favour of what it regards as the substance of the case”
- in order to determine the quantum of T’s loss, one would need to compare the amount lent by T and the true value of the property
- the purpose of the second loan, to refinance the existing loan, was not relevant – the second loan stood apart from the first
- put simply, T entered into the second loan relying on V’s valuation. If V had not negligently overstated the valuation, T would not have made the second loan
- there was nothing unfair in holding V to account in respect of its own valuation.
When the matter returns to the High Court, these issues will be revisited, and the outcome for T and V may well be reversed.
Nevertheless, this Court of Appeal decision is interesting. Valuations are more likely to be ‘stress-tested’ in a recession, when lenders may be enforcing security; offloading property onto the market at a loss; and seeking to recover that loss from third parties.
Also useful is the analysis of causation of loss and valuations in the context of refinancings.