Where a lender fails to obtain a home buyer's report (when the customer has asked for one), they may be liable for significant damages if there are defects at the property which the customer purchases.
The correct measure of damages will normally be the diminution in value (rather than the cost of repair). But this rule can be interpreted flexibly to include other practical indictors, such as the cost of repair of defects or the cost of removing the damage.
In Moore and another v National Westminster Bank  EWHC 1805 (TCC), the High Court upheld a finding that the lender was liable for damages of £115,000, effectively reflecting the cost of repair.
The key facts are
- Mr and Mrs Moore (the Borrowers) applied for a mortgage with the bank to assist with their purchase of a buy to let investment flat.
- In the application, the Borrowers indicated that they required a home buyer's report.
- The bank offered to advance £81,000 to the Borrowers based on a valuation of £135,000. The borrowers therefore believed that the bank had received a favourable report and the transaction proceeded.
- Due to an error, the bank did not in fact arrange for the necessary survey to be undertaken and so no home buyer's report was provided.
- The Borrowers subsequently discovered that the flat required extensive repairs. They brought a claim for breach of contract against the bank.
County Court judgment
- The bank was found liable for breach of contract in failing to obtain the home buyer's report.
- The Borrowers argued that the correct measure of damages was the cost of repair as, if they had received a home buyers report, they would not have bought the property due to the defects it would have revealed.
- The bank argued that the correct measure of damages was the diminution in value (as supported by existing Court of Appeal authority on negligent surveyor cases). Based on their expert evidence, they said the diminution in value was only £15,000.
- The Borrowers' expert was unable to provide a diminution in value figure because he felt the property could not be properly valued in its existing state.
- The court concluded that the cost of the repair – as the only practical indicator of a diminution in value of the property - was the fair measure of loss in this case.
The bank appealed on the sole issue of the Recorder's award of the cost of repair.
The 'diminution in value' rule comes from a negligent valuation case (Philips v Ward  1 All ER 874) which involved an inaccurate surveyor's report. This was subtly different to the Borrowers' claim where no survey was obtained by the bank. The Recorder therefore held it was like a no "transaction" case, ie the Borrowers would not have bought the property had the report been obtained. The Recorder concluded that this was different to a case where a negligent report had been provided.
On appeal, Mr Justice Birss disagreed with this analysis but ultimately upheld the amount of damages awarded. Specifically:
- The Recorder was wrong to distinguish the principle in Philips v Ward. Even though the Borrowers might not have bought the property had a report been provided, it still had a value.
- There is no legal principle which says that an expert cannot use cost of repair to determine diminution in value in a proper case.
- The Recorder's decision could be supported on two different bases:
- Working out the diminution in value in this case would be too speculative and so cost of repair is recoverable; and
- Doing the best one can, the diminution in value is represented by the cost of repair. This is the approach the Recorder took.
- The Judge ultimately agreed that the diminution in value rule can be interpreted flexibly, if the facts warrant it, and can therefore sometimes be assessed by considering the cost of repairs.
The court dismissed the bank's appeal.
The appeal judgment does not give us the full factual background to this case. For example: did the Borrowers in fact pay for the home buyer's report? Why did they not insist on seeing the report before completing the transaction, especially as they were purchasing the property as an investment? How did their case on reliance withstand scrutiny in the light of these considerations?
Nonetheless, we can take the following points away from this judgment:
- While not in issue in the appeal, if a lender (in breach of contract) fails to obtain a home buyer's report, when the customer asks for one, they might be liable where there are property defects, depending on the facts.
- The High Court rightly held that the correct measure of damages is the diminution in value and not the cost of repairs. However, there is some flexibility in the application of this rule, as shown by the results in this case.
- Nonetheless, it will still be for claimants to prove loss and adduce appropriate expert evidence in support of any alleged diminution in value.
- Mr Justice Birss suggested that a different approach might have been considered by the Recorder had he been provided with an alternative (intermediate) figure for the diminution in value. As there was "no other practical indicator as to what would amount to a reasonable estimate of the diminution in value" for the Recorder to consider, he was only left with the £115,000 to rely upon (as he clearly felt £15,000 was too low). It is always worth having an appropriate "fall back" position in this type of dispute when there is disagreement over the level of quantum (and approach to assessment).
- The case does not impose any new duty on banks. The Borrowers ultimately succeeded at first instance because they demonstrated that the bank was in breach of contract.