The Supreme Court unanimously held that a lender was only entitled to recover new money, which had been advanced as part of a loan refinancing, in its claim against a negligent valuer (whose report it relied upon in entering into the refinancing). The portion of the refinancing used to repay the lender's original facility could not be recovered. This Supreme Court decision is relevant for all lenders involved in refinancings who seek to preserve their claims against third-parties: Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2017] UKSC 77

The claimant, Tiuta International (the Lender), brought proceedings against defendant surveyors, De Villiers (the Valuer) for negligently valuing a partially completed residential development (the Development). The Lender had sought and relied on valuations from the Valuer to comfort itself that the Development was sufficiently advanced and valuable enough that the charge the Lender proposed to take over the Development would adequately secure the funds to be advanced to a borrower/developer.

Initially, in early 2011, the Valuer valued the property at GBP 2.3 million in its current state, and GBP 4.5 million on completion of the whole development (the First Valuation). In reliance on the First Valuation, the Lender advanced GBP 2.5 million (the Original Facility) for nine months, receiving in exchange the security of a first legal charge over the Development.

In December 2011, rather than repaying the facility as it fell due, the borrower developer sought to restructure the Original Facility with the Lender on the basis of the same security, namely the Development. The Valuer provided the Lender with a fresh valuation of the Development, valuing it at GBP 3.5 million in its current state and GBP 4.9 million on completion (the Second Valuation). In reliance on the Second Valuation, the Lender advanced just over GBP 3 million to the borrower-developer (the Second Facility), of which GBP 2.8 million was used to repay the First Facility, and GBP 281,000 was ‘new money’.

The borrower developer then went into administration, and the GBP 3 million advanced under the Second Facility was not repaid. The Lender sought to recover its loss from the Valuer, on the basis that the Second Valuation had been negligently prepared, without which the Lender would never have advanced the Second Facility.

The Supreme Court was called upon to determine how much of the Lender’s loss was recoverable.

Loss suffered under Original Facility irrecoverable due to refinancing

The Lender did not argue that the Valuer was liable for advances under the Original Facility, as it had not alleged any negligence in relation to the First Valuation. Even if it had, Lord Sumption pointed out, the Lender had not suffered any recoverable loss from that valuation, as the Original Facility had been repaid and discharged in full with the proceeds of the Second Facility (relying on the reasoning in Lowick Rose v Swynson).

Recoverable loss limited to new money and loss of chance

The Lender had argued successfully before the Court of Appeal that its loss extended to the entire GBP 3 million advanced under the Second Facility, including the amount applied to refinance the Original Facility.

The Supreme Court disagreed. The basic measure of tortious damages is that required to restore a claimant to the position it would have been in before the wrong was suffered. In the case of a negligent valuation relied on by a lender in entering into a loan transaction, this requires a factual “basic comparison” between the Lender's position had it not entered into the transaction, and its actual position under the transaction.

Had the Second Valuation not been negligent, the Court noted, the Lender would not have entered the Second Facility but it would have still entered (and suffered loss under) the Original Facility. If it had not entered the Second Facility at all, the Lender would have been in a better position in that: (1) it would not have lent any new money (ie GBP 281,000); and (2) the Original Facility would not have been repaid from the proceeds of the Second Facility, which would have kept alive the Lender's ability to pursue a claim against the Valuer for any negligence in the First Valuation.

However, the Supreme Court emphasised that, even if the Lender had not entered the Second Facility, it would still have been owed the amounts outstanding under the Original Facility. Regardless of what happened with the Second Facility, the Lender had already lent (and though it did not know it at the time, lost) those moneys under the Original Facility. As such, the amount applied towards the refinancing did not form part of the Lender’s recoverable loss. The Valuer’s expectation of the extent of its own liability, and the fact that it effectively avoided greater liability when part of the advance was used to repay a pre-existing debt to the Lender, was irrelevant.

No collateral benefit through refinancing

The Supreme Court rejected the argument that the borrower-developer’s use of the funds advanced under the Second Facility to repay the Original Facility was a “collateral benefit”. Collateral benefits are those whose receipt arose independently of the circumstances giving rise to the loss, and therefore they are not taken into account in assessing damages. Common examples include insurance receipts, or disability benefits. The Court held that discharge of an existing debt out of a later advance could not confer such a “collateral” benefit on the Lender, as there was no net beneficial effect at all on the Lender's position from the refinancing (simply an exchange of liabilities). The only way the refinancing would not have been neutral for the Lender would be if the refinancing had extinguished the Valuer's liability for negligence in the First Valuation. However, the Court went on to note that even this benefit would not be collateral in the circumstances of this case, because the repayment of the Original Facility had been required by the term of the Second Facility: they were effectively linked transactions.

As such, allowing the appeal, the Supreme Court held that the recoverable loss suffered by the Lender in circumstances where a prior facility has been refinanced from a later facility would be limited to: (1) the new money lent under the Second Facility (ie GBP 281,000); and (2) loss of a chance to pursue a claim against the Valuer for a negligent First Valuation.

Implications for lenders

As with the recent Supreme Court judgment in Swynson, a negligent professional services firm has avoided greater liability by virtue of its client participating in a refinancing. A third-party Valuer’s liability was reduced only because of the dealings between Lender and Borrower. Had the Valuer proffered exactly the same valuation to a new lender offering take-out financing (rather than a refinancing of an existing loan) there seems little doubt that the Valuer would have been liable for the full amount.

Anyone relying on valuations or other professional services advice in the context of lending decisions will need to think carefully about implications for available causes of action against its professional advisors before structuring a refinancing or similar transaction. Lenders may also need to revisit and update their terms of engagement with professional services firms to clearly define the extent of their contractual rights of recovery.

While it does not make it impossible for lenders to ever recover loss suffered from a refinanced loan, it is substantially more difficult and requires the lender to demonstrate negligence both in respect of any original valuation and any valuation relied on in the refinancing. The burden of proof is convoluted: a lender would need to be able to prove it had lost a cause of action which, but for the refinancing caused by the subsequent negligent valuation, it could have pursued in respect of the refinanced loan. In practice, however, this will be difficult and costly for lenders, who effectively need to prove negligence twice over to recover their loss.