On 14 October 2014 Stephen Smith QC sitting as Deputy Judge in the Chancery Division of the High Court handed down judgment on five preliminary issues in respect of a multi-million pound dispute involving an allegedly negligent overvaluation of a development site: Freemont (Denbigh) Limited v Knight Frank LLP[1].

It was decided that, although a developer was owed a duty by a valuer both in contract and in tort, the developer's claim for loss of profit on a subsequent sale, or, alternatively, loss of chance of a subsequent sale, was rejected on the basis that it did not fall within the valuer's scope of duty.

The facts

In July 2005 Freemont (Denbigh) Limited (Freemont) purchased development land in Denbigh, North Wales, which until 1995 was the site of the North Wales Hospital, (the Development). Prior to this, the local authority had granted planning permission subject to appropriate planning obligations being agreed (the Section 106 Agreement).

One of the terms of the proposed Section 106 Agreement was a requirement for Freemont to provide a bond to secure its agreement to deposit around £5 million into an account in the name of the Council (the Bond), in order to finance works to the listed buildings on the Development.

Lloyds Bank (the Bank) agreed to provide the Bond to Freemont on the basis that a satisfactory valuation of the Development was undertaken first. On 1 August 2006, Knight Frank LLP (KF) provided the valuation report required by the Bank (the Report), which was said to be provided for secured lending purposes. The Report valued the Development at £17 million with the benefit of outline planning permission, and £18.7 million with detailed planning consent.

Subsequently, two developers made conditional offers to purchase the Development from Freemont: one for £10.45 million and the other for £11.1 million, subject to the grant of satisfactory detailed planning permission. Freemont rejected both of these offers as the developers were not prepared to match KF's valuations. Further, although outline planning permission was granted, detailed planning consent was never obtained and no development has taken place.

In light of the above, Freemont issued proceedings against KF on the basis that the Development had entirely lost its value as a result of KF's allegedly negligent overvaluation which it asserted it relied on (for the purposes of assessing whether to sell the Development). Had KF valued the Development at the correct figure, Freemont argued that it would have accepted one of the offers made.

Loss claimed

Freemont claimed that it suffered loss of profit (by not accepting one of the developer's offers) and claimed damages for the same, together with damages for all subsequent marketing costs and costs of future disposal of the Development (giving credit for any future sale).

Further or alternatively, Freemont claimed that it had suffered the loss of a chance to sell the Development.

Ruling on the preliminary issues

(a) Did a contract of retainer come into existence between KF and Freemont in respect of KF's valuation of the Development and the preparation of the Report

The answer to this question was yes.

The Judge found that it may have been that ultimately KF intended to have a contractual relationship with the Bank, but for a long time the intention was for the retainer to be between KF and Freemont:

"there was nothing exceptional about this – I was told that it was not uncommon for a developer to procure a valuation for security purposes which the developer would then use to try to obtain funding."

(b) If the answer to (a) is yes, what were the terms of the contract of retainer?

It was held that the "critical term of the contract" was that KF would provide a valuation of the Development so that Freemont could obtain the financing which it required, ie KF was to provide the Report for secured lending purposes.

The Judge rejected Freemont's suggestion that it was also a term of the contract of retainer that the Report was to be provided for Freemont to rely upon in the future when forming its plans for the Development. This was because there was nothing in the contract containing an express term to that effect, or any evidence that that is what the parties intended (ie that the contract contained an implied term to that effect).

(c) Did KF owe Freemont a common law duty of care to exercise reasonable skill and care in the valuation of the Development and the preparation and provision of the Report?

The answer to this question was yes; KF did owe Freemont a duty of care in tort (in addition to a contractual duty of care). However, that duty of care extended only to the provision of a valuation report for secured lending purposes.

Accordingly, if KF had negligently valued the Development at a figure which meant that the Bank would not have provided the Bond, Freemont would have been entitled to sue KF both for breach of contract and for damages at common law. This did not happen, however, as Lloyds provided the Bond. The Judge commented that:

"It would be remarkable if the duty of care owed by Knight Frank in tort were more extensive than their contractual duty of care. There is no warrant for any extension of the duty in this case and I therefore find that the common law duty was coincident in its extent with the contractual duty of care."

It was held that KF's duty to Freemont could not have extended to protect Freemont from losses arising from any subsequent decision not to sell the Development. In that regard, the Judge's view was that those decisions would have been investment decisions of a similar type to the decisions made by the shareholders in Caparo Industries Plc v Dickman[1] and commented:

"just as the shareholders in that case had no claim against the company's auditors for the losses they suffered on their investment decisions, so Freemont Denbigh could have no viable claim in this case"

The Judge also considered Lord Neuberger's judgment in Scullion v Bank of Scotland[2] in the context of the questions that arose such as how the Development should be marketed and, if so, at what price etc. Those were questions which could be described as "tricky" in the same way Lord Neuberger described the questions which would have arisen in connection with an assessment of the likely rental return in the Scullion case. The valuer who provided the Report confirmed at trial that he was not skilled in giving such advice.

The Judge rejected Freemont's submission that KF knew (or at least they knew that there was a high probability) that the Report would be relied on by Freemont when considering whether to sell the Development. This was because KF knew that Freemont had previously retained another firm of property consultants and could reasonably have assumed that Freemont would have taken advice from them in that regard.

(d) Whether, in the light of answers to (a) to (c) above and/or the content of the Report, Freemont was precluded from relying on the Report?

In summary, Freemont was not precluded from relying on the Report for the purposes of obtaining the finance it required from the Bank.

The Judge decided that there was no need to consider whether KF, by their terms of business or similar, excluded liability to Freemont: "the liability alleged did not arise because no duty of care was owed to protect Freemont Denbigh from the losses it claims to have suffered".

(e) Are the heads of loss as pleaded in the Particulars of Claim (ie loss of profit on a subsequent sale, or, alternatively loss of chance of subsequent sale at a profit) capable of falling within the scope-of any obligation or duty held to be owed by KF to Freemont, and/or are they too remote/ unforeseeable to be recoverable from KF?

The answer to this question was no; the heads of loss claimed were held not capable of falling within the scope of duties found to be owed by KF to Freemont. As such, the Judge decided that the further questions of remoteness or foreseeability did not arise.

Conclusion

This decision is welcome news for surveyors and their professional indemnity insurers.

Firstly, this decision provides reassurance that surveyors providing valuations for secured lending purposes cannot be held responsible for investment losses. According to the Judge, it would be "remarkable" if the tortious duty of care were to be more extensive than the contractual duty of care where a surveyor is appointed to value land for loan security purposes.

Secondly, to bring a successful claim for investment losses, the developer must prove that the surveyor knew that the developer would rely on the report when marketing the land for sale. We consider that this is a significant evidential hurdle to overcome, especially if the valuation report itself clearly highlights that it is intended to be used for loan security purposes only.