As lenders continue to pursue claims against valuers, they are hailing the decisions in two recent cases as a victory. However, the decisions of Coulson J in Webb Resolutions v E.Surv and Blemain Finance v E.Surv, handed down on 20 December 2012, do not constitute any change in the law; but they do provide guidance on the margin of error of valuations and contributory negligence of the lender.
Webb and Blemain were two separate claims brought by lenders against E.Surv alleging over-valuations.
Blemain: E.Surv valued a 5 bedroom modern detached house located on a small private road in Putney Heath at £3.4 million in July 2007. The borrowers obtained a second mortgage on the property from Blemain. Following repossession, Blemain recovered nothing from the forced sale. In the claim against E.Surv the Court concluded that the correct value was £2.8 million making the valuation negligent by 21%.
Webb: This concerned two valuations provided by E.Surv in relation to mortgage advances to two individual borrowers, Mr Ali and Mr Bradley. Mr Ali was purchasing a 2 bedroom flat in a new development in Birmingham. E.Surv valued it at £227,995 in November 2006. The correct value was held to be £204,658, making the valuation negligent by 11.4%.
Mr Bradley was seeking a remortgage. E.Surv’s valuation of his 4 bedroom detached property in Whitstable, Kent was £295,000 in July 2007. The correct value was found to be £260,000 making the valuation out by 13.5%.
Margin of Error
It is a well established principle that valuations are not an exact science and there is a permissible margin of error within which a valuation may fall without it being negligent. The position was clearly set out in K/S Lincoln and Others v CB Richard Ellis Limited (2010):
- For a standard residential property, the margin of error may be as low as +/- 5%
- For a valuation of a one-off property, the margin of error will usually be +/- 10%
- If there are exceptional features of the property, the margin of error could be +/- 15%, or more.
In Webb, the margin of error for both properties was 5%, mainly because there was a wealth of comparables for both properties. Indeed, the Court viewed the Ali property as being “as far from a one off property as it was possible to get”.
In Blemain the appropriate margin of error was 10%, despite both experts agreeing that the margin was 15%. The Court held that whilst the property was “distinctive” there were a number of comparables available.
Coulson J confirmed that K/S Lincoln still holds good, but the cases add a little guidance to the factors that would take a residential property out of the standard 5% range.
Contributory negligence and the associated level of reduction to any damages is a key feature in lender claims. In both Blemain and the Ali loan in Webb, the Court held that there should be no reduction. Conversely, the Court applied a reduction of 50% for the Bradley loan in Webb.
Although in Ali it was a high loan to value ratio (LTV of 85%), with a failure by the lenders to investigate the performance of other mortgages or verify income and defaults of £2,477 in Mr Ali’s current account, Mr Ali did not appear to be in substantial financial difficulty at the time of the loan. The Court considered these ordinary features of sub-prime lending. Whilst the Court said such lending was a recipe for disaster, it concluded that the appropriate standard to apply was that of a reasonably competent centralised lender and practices common at the time should not be considered with hindsight. As the sub-prime self certified model was common between 2004-2007, the Court could not conclude that such lending was irrational or illogical. The Court stated that this was simply a re-affirmation of the position set out in Paratus AMC Limited v Countrywide Surveyors Limited (2011) and Banque Bruxelles v Eagle Star Insurance (1994).
The Court applied a 50% reduction in the case of Bradley because of Bradley’s financial position. Mr Bradley was clearly in financial difficulty prior to his application. He had £18,000 worth of defaults and £1,000 CCJ against him. The 50% contributory negligence was the result of the particular combination of factors: the remortgage loan was required to consolidate significant debts; an LTV of 95% was considered beyond the edge of acceptability for the market at the time. The Court concluded that this loan should not have been on a self certified basis and that proper proof of income should have been required. The 50% contribution was awarded, noting Paratus v Countrywide where 60% had been applied.
The Blemain and Webb decisions are in line with case law and re-affirm that the margin of error depends on the nature of the individual property in question. Where there are a number of comparables it is likely a margin of error of 5% will apply. The comfort for valuers is that, provided the right comparables have been used, their valuations should be supported.
The ruling on contributory negligence indicates that a Court will be reluctant to find against a lender solely on the argument that their lending model was imprudent albeit consistent with the market at the time. However, the specific circumstances concerning the underwriting of a loan are relevant, in particular the suitability of the product for the borrower’s financial position. Where such negligence is found, significant reductions of 50-60% can reduce the quantum. Surveyors and Insurers should take heart.