In recent years, surveyors have faced an onslaught of negligent valuation claims from lenders seeking to recoup losses arising from lending activity during the property ‘boom years’ at the start of this century. As time passes, claims are more likely to become statute-barred as property prices improve, the amount of outstanding advances reduces (at least in repayment mortgages) and borrowers’ covenants self-evidently hold value. We have recently successfully defended a claim on limitation grounds.
Canada Square Operations Limited -v- Kinleigh Folkard & Hayward Limited
Mr Recorder Halpern QC, Central London County Court
Our surveyor client faced a claim from a lender in relation to valuations completed by it in late 2005 and early 2006. The borrowing relied on a single self-certified income of £165,000 derived solely from the husband’s building company.
An advance at a 90% loan to value ratio was made in March 2006 but, after only nine months of repayments, the borrowers began to default with a final payment made in January 2008. The borrowers surrendered possession in August 2008 and the property was sold.
The claimant sent a preliminary notice of claim to our client in December 2009 and issued proceedings on 23 October 2013. This was too late to make a contractual claim, but the lender argued that it was in time for a claim in tort on the basis that it had not suffered a measurable loss until after 22 October 2007 – so less than six years before the claim was issued.
We argued that the claim was statute barred based on evidence of loss during early 2007 owing to:
- The fact that the borrowers started to miss payments, which was evidence that the covenant was no longer good; and
- The value of the security representing less than the outstanding amount of the loan.
Following DNB Mortgages -v- Bullock & Lees, the judge held that the valuation should be an objective one, using hindsight where it shed light on the borrowers’ actual financial circumstances at the time, rather than simply how it would have appeared to the claimant.
The judge held that the burden of proof was on the claimant to show it had not suffered a loss more than six years before issuing a claim. He concluded it had not discharged that burden and that, in any event, the value of the borrowers’ covenant was low enough that the claimant had suffered a loss as soon as it made the loan.
In reaching that assessment the judge took our expert evidence from a forensic accountant, Greg Lacey, into account. Mr Lacey concluded that:
- the borrowers’ statement of their income in their mortgage application had been untrue and;
- they were in fact receiving no income from the building company at, and from, the date of the application.
He went on to value the covenant at various dates by calculating a balance sheet assessment of the borrowers’ net cash position on each, taking into account their other liabilities and a projection of future cash flows. Those calculations showed that, on the most likely assumptions about unknown factors, the borrowers’ covenant was not worth enough from the start. The result was a finding that the borrowers’ covenant had insufficient value even at a time when the mortgage repayments were being made in full and on time, and several months before they defaulted.
The judge also held that the claimant did not rely on the defendant’s valuation. At trial, the claimant did not call evidence from the employees involved in the decision-making process. Instead, it relied exclusively on evidence from its Head of Credit on lending practices and policies. In the absence of first-hand evidence, or a coherent explanation for why the claimant obtained a second valuation, or why it based its decision to lend on the lower of two valuations carried out, the judge held that the claimant had failed to discharge the burden of proof on that point also.
This is a resounding victory for valuers which addresses a number of issues arising from the application of the leading case in this area - Nykredit -v- Edward Erdman (No 2) - and which have not previously been dealt with in the case law. Although only a County Court decision, it addresses a number of novel issues and is likely to be given some weight in future cases. It goes further than any previous case in indicating how a precise value might be put on a borrower’s covenant, though it does not purport to lay down any universal principles.
The defendant and its insurers refused to be held to ransom by the claimant, despite the low claim value and the disproportionate costs involved in running this matter to trial.