In welcome news for valuers and their insurers, the Supreme Court has over-turned an unfavourable judgment in the Court of Appeal concerning whether or not an allegedly negligent valuation was causative of the losses claimed. In doing so, the Supreme Court endorsed the decision of the High Court in concluding that the allegedly negligent valuation was not causative of the claimed losses. Rather, those losses claimed were attributable to the existing indebtedness.
In February 2011, the lender, Tiuta, instructed a surveyor, De Villiers, to carry out a valuation of a residential development (the February Valuation). Based on the February Valuation, Tiuta advanced a sum of £2.2 million and took a charge over the development. In December 2011, as the first loan was due to expire, Tiuta asked De Villiers for a further valuation (the December Valuation). Based on the December Valuation, Tiuta advanced funds which served to extinguish the earlier loan by way of refinancing and in addition provided a further £289,000 of new lending.
Following default on the loan there was a shortfall. As a consequence, Tiuta claimed that the December Valuation was negligent and that the loss it had suffered under the second loan agreement was a result of that valuation (it was not alleged that the February Valuation was negligent).
High Court decision
De Villiers applied for summary judgment on the basis that any loss attributable to the existing indebtedness (i.e. from the first loan) could not be said to have been caused by any negligence in respect of the December Valuation. This was on the basis that, had the property been valued correctly, no new facility would have been offered and Tiuta would have “faced an unavoidable loss” irrespective of De Villiers’ advice. The High Court sided with De Villiers.
Court of Appeal decision
The Court of Appeal upheld Tiuta’s appeal on the basis it left the lender with no recoverable loss for the ‘old money’ element on the loan. This was based on the decision of the Court of Appeal in Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd (2002). Here the transaction was structured so that the second loan was used to pay off the first loan, i.e. it was effectively a 'fresh' loan. The Court of Appeal held that this meant that the valuer was liable for the losses following as a consequence of a lender’s reliance on the valuation for the purposes of making the new loan, which was to be viewed as standalone from the first loan.
Supreme Court decision
The case before the Supreme Court meant it considered only the liabilities arising out of the December valuation for the purposes of the second facility. The Court assumed that the valuation itself was indeed negligent and that, but for that negligence, the second loan would not have been made.
De Villiers argued against the Court of Appeal decision on the basis that the most they could be liable for by way of damages was the ‘new money’ element of the second loan, i.e. the £289,000. They considered that the loan had two elements 1) paying off the first loan and 2) new additional money. If it was considered that Tiuta would not have offered the new money but for the valuer’s negligence, the original loan would have remained unpaid and that part of their loss would have been suffered in any event (regardless of the alleged negligent December valuation).
Lord Sumption, delivering the leading judgment, considered that the judgment turned on the principles of the law of damages: what was required to restore Tiuta as near as possible to the position they would have been in had the December valuation not been negligent? Lord Sumption referred to the ‘basic comparison’ as established in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) (1997). The basic comparison being a measure of comparison between ‘(a) what the plaintiff’s position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff’s actual position’. Here the assumption that ‘but for’ the negligent December valuation, Tiuta would not have made the second loan, and therefore it would still subject to the initial loan, was pivotal.
The Supreme Court concluded that Tiuta’s loss was limited to the ‘new money’ advanced under the second loan. The Court of Appeal’s decision, and the application of Preferred Mortgages was distinguished on the basis it failed to take into account the fact that the second loan was structured as a refinancing so the advance was used to pay off pre-existing debt.
Finally, if Tiuta had received some benefit attributable to the events which caused its loss (i.e. the negligent December valuation), it must be taken into account in assessing damages unless the benefit can be considered collateral. Applying Swynson Ltd v Lowick Rose LLP (in liquidation) (2017), the discharge of the existing indebtedness out of the second loan was not a collateral benefit. This was because it did not confer a benefit on Tiuta, the refinancing element of the second loan increased Tiuta’s exposure and the ultimate loss under the second loan. Therefore there was no effect on the lender’s exposure and ultimate loss, the effect was neutral. Only the new money element of the second loan could be considered.
This over-turning of the Court of Appeal’s decision strengthens the courts’ emphasis on upholding established principles of causation of loss in such claims against valuers. It will be relief to valuers that the unfavourable decision at the Court of Appeal has been reconsidered and does not blur valuers’ scope of duty. The Supreme Court has provided welcome clarity on the circumstances in which a valuer can be held accountable where prior lending has been extinguished as a result of a refinance.
It should be borne in mind, however, that the Supreme Court was at pains to stress that this is a judgment arising out of a specific set of facts and assumptions. It acknowledged that, in the right circumstances, where a valuer’s liability in respect of a first facility agreement has been expunged by refinancing, the loss under the second facility might include the losses claimed in this case. Lord Sumption opened the door to the further possibility that “if the valuers had incurred a liability in respect of the first facility, the lender’s loss in relation to the second facility might at least arguably include the loss attributable to the extinction of that liability which resulted from the refinancing of the existing indebtedness.”
Whether the first and second valuations have been carried out by the same, or different, valuers will also lead to differing arguments on loss of chance, causation, reliance and quantum. The Supreme Court indicated that these differing scenarios could lead to different results.
The arguments in relation to secondary valuations and refinancing are particularly relevant to the range of claims we are seeing from valuations undertaken for re-financing purposes from the ‘back end’ of the financial downturn. What the decision does emphasise is the need for valuers to be clear on the scope of their duty and the intended use of the valuation at the outset of their appointment and to be careful to record what has been agreed.