As lenders run into increasing limitation difficulties in pursuing valuers in respect of valuations originating from the turmoil in the market between 2008-2009 (and even before), the decision inCanada Square Operations Limited v Kinleigh Folkard & Hayward Limited represents a welcome success for valuers. The judgment provides much needed clarification on the notoriously difficultNykredit test concerning the value of a borrower’s covenant when determining when a loss was suffered for the purposes of assessing limitation in a claim in tort.
In this instance, the court held that the claimant lender failed to establish limitation and reliance on the defendant’s valuation.
The original lender - who had assigned its cause of action to the current claimant Canada Square Operation Limited (“Canada”) - obtained valuations from Connells and Kinleigh Folkard & Hayward Limited (“KFH”). KFH valued the property on 25 January 2006 at a value of £500,000. The claim for a negligent valuation was only pursued against KFH. Canada alleged it relied on KFH’s valuation to advance £428,791.36 on 16 March 2006 to the borrowers. The borrowers failed to repay the loan and were later declared bankrupt.
On 23 October 2013 the claim form was issued (despite a preliminary notice of claim being sent in December 2009). Canada did not pursue the claim in contract as it would be statute-barred; instead, it pursued the claim solely in tort. The court had to decide on limitation and reliance.
Limitation in a claim based in tort is 6 years from the date of loss; therefore, to determine whether the claim in tort was statute-barred, the court had to consider whether Canada first suffered measurable relevant loss on or before 22 October 2007.
With regard to measurable relevant loss, the court followed the judgement in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd that “the valuer is liable for the adverse consequences flowing from entering into the transaction which are attributable to the deficiency in the valuation”, which required the court to “value both the security and the borrower's covenant and to see whether, and if so when, their combined value became worth less than the amount outstanding from time to time under the mortgage”. The court quoted Lord Nicholls’ statement in Nykredit that “ascribing a value to the borrower’s covenant should not be unduly troublesome”, but noted that “in practice it has proved to be very difficult”.
The court reiterated that the burden is on the claimant to establish a prima facie case that the cause of action accrued on a date within the limitation period; if that is established, the burden shifts to the defendant to show that it accrued outside the limitation period.
To determine the actual value of the security, the court affirmed that this is an objective test and must include all factors which actually affected the value of the security at the relevant time, whether or not they were known to the parties. It would, accordingly, allow for the court to make use of hindsight, provided the hindsight did not relate to subsequent unexpected facts or events. In the present case the court could take into account, when determining the value of the security, the right of way discovered on sale of the property and the actual costs of repossession and sale.
Similarly, the value of the borrower's covenant needs to be assessed in the light of all admissible evidence. The starting point to value the borrower’s covenant is to “compare the value of the security with the amount outstanding from time to time and ask, wherever there is a shortfall, whether the value of the borrowers’ personal covenant was sufficient to cover such shortfall from time to time”. Applying Nykredit, the court concluded that the test for doing so is twofold: “whether a) the covenant appears good and b) interest payments are being duly made.”
In order to discharge the initial burden of proof, “the lender need show only prima facie evidence to this effect”. In this case, Canada satisfied the court that prima facie the covenant was worth at least the initial shortfall of £42,973 on 16 March 2006. A direct debit had been set up and payments were made regularly for the next 10 months. Missing an instalment, however, alters the position: whilst in the words of the court it “does not automatically make the covenant worthless, it does make it necessary to look at the subsequent history of payments and promises” of the borrower. The failure of the direct debit payment in February 2007 was significant. The court indicated that this was to be read in conjunction with a second mortgage approved in January 2007. Canada, therefore, failed to produce prima facie evidence that the covenant had sufficient worth to cover the shortfall on 2 February 2007.
Furthermore, having concluded a balance sheet exercise, the prima facie case established for March 2006 itself was defeated: the court, on hearing expert evidence, found that the borrower’s covenant at the time was not adequate to cover any shortfall in the amount outstanding. The borrowers had limited assets apart from the mortgaged property and these were of an illiquid nature.
The claim was, therefore, found to be statute-barred.
The court reiterated that the burden of proof is on the lender to establish that it relied on the valuer’s valuation. The present case was not straightforward as there were two valuations, so the court had to determine which valuation Canada relied on. Canada was unable to demonstrate reliance on the KFH valuation, its own witness evidence (Canada were unable to call on those individuals actually involved the decision-making process) and the fact that the amount advanced by Canada was closer in value to the valuation by Connells. This meant the court concluded prima facie that Canada relied on Connells’ valuation and on that valuation alone. The claim failed also on the ground that Canada failed to establish reliance.
The court reiterated the rules on measurable relevant loss set out in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd. However, it has long been difficult to determine in practice how to ascribe value to the borrower’s covenant when raising limitation arguments. This judgment provides welcome clarity on how the courts will assess this in practice. It also shows that the courts are willing to scrutinise lenders’ alleged reliance on valuations.
The present case is therefore welcome news and will encourage valuers and their insurers in taking a robust stance on limitation grounds.
Canada Square Operations Limited v Kinleigh Folkard & Hayward Limited  All ER (D) 95 (Sep)
Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2)  1 WLR 1627