Valuation of property for mortgage purposes – Lender obtaining two valuations – Lender selecting higher valuation as basis for loan – Borrower defaulting – Lender claiming damages for negligent valuation – Judge finding higher valuation negligent – Court of Appeal holding plaintiff contributorily negligent in failing to check whether valuation selected was correct – Plaintiffs’ damages reduced by 25%
The plaintiffs were a secondary bank set up by a group of primary banks which had agreed to provide a revolving credit facility of £20m to finance and refinance the making of short-term mortgage loans. It was part of the agreement that the plaintiffs would, in the case of property valuated in excess of £500,000 in London and £350,000 elsewhere, obtain valuations from two surveyors. The amount to be lent was to be computed as a percentage of the forced sale value as opposed to the open market value of the property. In May 1990 Mr and Mrs M required finance. They approached the plaintiffs for a loan of £750,000 secured against their house, Hatfield Manor, near Doncaster, a Grade 1 listed house. As required, two surveyors were instructed to advise the plaintiffs as to the value of the house on the open market and what the property would fetch on a forced sale in four months time. The defendants, a firm of valuers and estate agents trading at the time as Colley Sampson, advised that the property had an open market value of £1,525,000 and on a forced sale would be worth £1,342,000. The second valuation put an open market value of £1m on the property and £750,000 on a forced sale.
The plaintiffs selected the defendants’ valuation and Mr and Mrs M were offered a gross advance of £846,501.12 which provided a net advance of £750,000. They were unable to repay the loan and in January 1991 the plaintiffs’ solicitors were instructed to take proceedings. An order for possession was obtained on April 17 1991. On April 12 1991 administrative receivers were appointed over the plaintiffs. They instructed new solicitors who obtained a valuation that the house was worth only £150,000. In 1994 the plaintiffs commenced proceedings alleging damage by reason of the defendants’ negligent valuation. Before trial the defendants accepted that the valuation had been negligent and that the appropriate valuation would have been about £250,000. However they resisted the plaintiffs’ claim on the grounds that the valuation had not caused any damage or alternatively they alleged contributory negligence. The judge ordered the defendants to pay to the plaintiffs £1,049,853 by way of damages and interest and the defendants appealed.
Held The appeal was allowed in part; the sum of £817,048 was substituted for the judgment sum of £1,049,853.
1. The sequence of events and documents showed that, on the balance of probabilities, the plaintiffs had relied on the defendants’ negligent advice and that that advice had been a significant cause of the damage. No document or evidence had been produced to the contrary.
2. The failure of the plaintiffs to review the valuations in the light of their differences was negligent. The plaintiffs had not acted in the way a prudent lender would have acted who, if a higher value was to be selected, should have realised that further inquiries needed to be made. At least part of the damage had been caused by the omission to check whether the valuation was correct. It was therefore just and equitable that the plaintiffs’ damages be reduced by 25% and the judge’s order would be varied accordingly.
Roger Stewart (instructed by Fishburn Boxer) appeared for the appellants; Nicholas Patten QC and James Ramsden (instructed by Clifford Chance) appeared for the respondents.