Negligence — Valuer — Mortgage valuation — Undervaluation — Duties of valuer — Sale of mortgage by mortgagee at discount — Whether mortgagee’s loss crystallised upon sale of mortgage — Whether valuer’s liability for breach of duty of care limited to loss on sale of property on realisation of security — Whether valuer’s liability included loss on sale of mortgage
In April 1991 the defendant valuer valued a large
country house for the claimant mortgagee at £1.65m in connection with a
proposed loan of £1m to the intended borrower. In June 1991 the legal mortgage
was executed. In July 1997 the claimant disposed of its interest in a portfolio
of loans to the subsidiary of a building society at a discount against the book
value of the loans. The discount included £530,000 attributable to the loan on
the subject property. By reason of the discount, the claimant incurred a loss
of £456,703.83, being the difference between the amount of the advance with
funding costs and the total amount received from the borrower and on the sale
of the mortgage. The claimant contended that the defendant had been negligent
in its valuation and sought to recover its loss as damages.
property by some £550,000. On the evidence, the claimant would not have entered
into the transaction at all had it not been for the original overvaluation. In
June 1997 the property had a value of at least £1m, which was in excess of the
amount outstanding on the loan account; the claimant accepted that, at that
time, if there had been a default on the loan, the property could have been
resold without loss to the claimant. The defendant’s duty of care only extended
to loss represented by a shortfall in the value of the security, that is, to
any difference between the amount outstanding under the loan and the open
market value of the property. At the time the claimant disposed of its interest
in the loan and the security there was no such shortfall, and, accordingly, the
loss suffered by the claimant was not one for which the defendant was liable.
The following cases are
referred to in this report.
Caparo Industries plc v Dickman [1990] 2 AC 605; [1990] 2 WLR 358; [1990] 1 All ER
568, HL
Hughes v Lord
Advocate [1963] AC 837; [1963] 2 WLR 779; [1963] 1 All ER 705, HL
Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627; [1998] 1
EGLR 99; [1998] 05 EG 150, HL
Platform Home Loans Ltd v Oyston Shipways Ltd [1999] 2 WLR 518; [1999] 1 All ER 833;
[1999] 1 EGLR 77; [1999] 13 EG 119
South Australia Asset Management Corporation v York Montague Ltd; United Bank of Kuwait plc v Prudential
Property Services Ltd; Nykredit Mortgage Bank plc v Edward Erdman
Group Ltd [1997] AC 191; [1996] 3 WLR 87; [1996] 3 All ER 365; [1996] 2
EGLR 93; [1996] 27 EG 125, HL
This was the hearing of a
claim by the claimant, Europe Mortgage Co Ltd, for damages for breach of a duty
of care in relation to a mortgage valuation against the defendant, GA Property
Services Ltd.
Nicholas Stewart QC and Neil Mendoza (instructed by
Llewelyn Zietman) appeared for the plaintiff; Christopher Moger QC and Paul
Rees (instructed by Berrymans Lace Mawer) appeared for the defendant.
Giving judgment, MOORE-BICK J said:
Introduction
The plaintiff in this action, Europe Mortgage Co
Ltd, previously known as Credit Agricole Personal Finance plc, is a former
subsidiary of a well known French financial institution, Caisse Nationale de
Credit Agricole (CNCA). At the end of March 1991 it received an application
from a Mr Amerjit Brar and three other members of his family for a loan of £1m
to be secured on Chatmohr House, a large country house at Wellow in Hampshire,
set in 87 acres of land just outside the borders of the New Forest. Before
deciding whether to make an advance of any kind, the plaintiff required a
valuation of the property. Through the mortgage broker acting for the
borrowers, the defendant was instructed to carry out a valuation, and, in a
report dated 22 April 1991, it valued the property at £1.65m. On the basis of
that valuation, the plaintiff agreed to advance the sum of £1,000,200. In the
event, the loan was made in two tranches: £800,200 was advanced, and the
balance of £200,000 was advanced in March 1992. In common with all the
plaintiff’s loans of this kind, it was financed by a mixture of short- and
long-term borrowing on the money market. In June 1991 a legal mortgage was
executed over the property in favour of the plaintiff as security for the loan.
During the next few years, the loan account had a chequered history. There were
periods during which the borrowers experienced difficulty in meeting their
obligations, and on two occasions the plaintiff took initial steps towards
repossessing the property and realising its security. But the borrowers behaved
in a most responsible manner and, each time, they managed to overcome their
difficulties. By June 1997 they had almost entirely eradicated the arrears on
the account.
The plaintiff ceased to be active in the
residential mortgage market in the summer of 1992. Thereafter, apart from two
loans made in March 1994, it made no new loans, and its business was confined
to managing its existing portfolios of loans. In November 1994 CNCA disposed of
its interest in the bulk of those loans by the sale of the plaintiff to
Birmingham Midshires Building Society; but it retained a beneficial interest in
three loan portfolios on terms under which it retained responsibility for their
management and control over their disposal. In October 1996, following a review
of those portfolios, CNCA decided, for commercial reasons, that it no longer
wished to retain any involvement in the market for loans secured on residential
property in the United Kingdom, and it therefore took steps to dispose of its
interest in those three remaining portfolios. The only portfolio that is
relevant to the present action is what became known as the ‘large loan
portfolio’,
on larger properties. It included the loan to the Brars secured on Chatmohr House.
After initial exchanges with a number of
prospective purchasers, negotiations took place between CNCA and Lambeth
Building Society (LBS). These led to the sale in July 1997 of the entire large
loan portfolio, and a much smaller standard loan portfolio, to a subsidiary of
LBS at a discount of £3.35m against the book value of the two portfolios. At
the outset of the negotiations, LBS had proposed a discount of £3.1m in
relation to these two portfolios. That may well have been the result of its own
analysis of the individual accounts, although there is no direct evidence about
that one way or the other. As the negotiations reached their climax, however,
the Brars’ loan became the focus of attention, partly because it was
considerably larger than the general body of loans that made up the portfolio
and partly because the plaintiff had stipulated that it should retain any
rights of action against the defendant in respect of the original valuation.
From CNCA’s point of view, this loan also stood out because it was already the
subject of a substantial provision in its accounts. LBS itself had originally
attributed a discount of £480,000 to this loan. In the end, the price at which
the portfolios were sold was essentially a matter of commercial negotiation
rather than a simple analysis of the value of the portfolio, but one aspect of
the means by which agreement was reached was an increase of £50,000 in the
discount attributable to the Brars’ loan, raising it from £480,000 to £530,000.
Giving a discount of that size in respect of the
Brars’ loan resulted in a loss of £456,703.83 on the transaction, that being
the difference between the original advance (£1,000,200), together with the
cost of funding it (£412,114.96), and the total amount received from the
borrowers (£516,975.10), together with the payment received from LBS in respect
of the account (£438,635.97). The plaintiff now seeks to recover that loss from
the defendant on the ground that the valuation of Chatmohr House, which it
provided in April 1991, and in reliance upon which the plaintiff entered into
the transaction, negligently overstated the value of the property by an amount
well in excess of that loss.
Original valuation
of Chatmohr House
As a first step, it is necessary for the plaintiff
to establish that, at £1.65m, Chatmohr House was indeed overvalued in April
1991, and that the defendant was negligent in advising the plaintiff that that
was its true open market value at that time. In the event, however, neither of
these matters has been the subject of any serious dispute. It is common ground
that Chatmohr House is an unusual property and difficult to value, but the
expert witnesses agreed that a value of £1.65m lies outside the range of values
that could properly have been put on the property in April 1991. In the light
of its evidence, I am satisfied that the defendant was negligent in valuing the
property at that figure.
Putting a correct figure on the value of this
property in April 1991 is rather more difficult. The plaintiff’s expert, Mr
Peters, valued it at just over £700,000; the defendant’s expert, Mr Lowndes, considered
that it had originally been overvalued by about £500,000 to £600,000; he was
willing to accept a range of values from £1m to £1.25m. I do not propose to
take up time at this point analysing the differences between the approaches
adopted by the two experts. Later in this judgment I shall have something to
say about the differences between them concerning the value of the property in
mid-1997, and the comments that I make in that context apply equally to their
valuations as at this earlier date. For present purposes, it is sufficient to
say that I find the value of Chatmohr House in April 1991 to have been £1.1m.
It follows that the defendant overvalued it by £550,000.
It was not disputed that, if the defendant had
correctly valued the property, the plaintiff would not have regarded it as
sufficient security for a loan of £1m. For a loan of over £500,000, the maximum
loan to value ratio acceptable to the plaintiff was 75%, so the most the
plaintiff would have been willing to lend against the security of Chatmohr
House at that time would have been £825,000. One of the borrowers’ purposes in
obtaining a loan from the plaintiff was to refinance an existing loan of
£600,000 secured on the property; they also wanted to have spare funds
available for other purposes. Although a loan of £825,000 would have provided a
reasonable amount of spare capital, it would have fallen a long way short of
what the borrowers wanted. It is difficult to tell now, especially in the
absence of evidence from the borrowers themselves, whether they would have
wished to pursue the transaction if the loan had been limited to that amount,
but, on balance, I think that they probably would not have thought it
worthwhile doing so. As a result, I am satisfied that the plaintiff would not have
entered into this transaction at all had it not been for the original
overvaluation of Chatmohr House.
Principles governing
the nature and extent of the defendant’s liability
The nature and extent of the liability incurred by
a valuer who negligently overstates the value of a property, in circumstances
where he knows that his valuation will be relied on by a prospective lender,
has been considered in three recent cases: South Australia Asset Management
Corporation v York Montague Ltd [1997] AC 191*; Nykredit Mortgage
Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627†; and Platform
Home Loans Ltd v Oyston Shipways Ltd [1999] 2 WLR 518‡.
*Editor’s note: Also reported at [1996] 2 EGLR 93
†Editor’s note: Also reported at [1998] 1 EGLR 99
‡Editor’s note: Also reported at [1999] 1 EGLR 77
In South Australia Asset Management Corporation
v York Montague Ltd (the SAAMCO case) the House of Lords held
that the valuer’s duty is only to take reasonable care to avoid loss resulting
from overvaluation of the security, and does not extend to loss resulting from
factors extraneous to his own involvement, such as movements in the property
market. It is for this reason that the valuer cannot be held liable for any
loss suffered by the lender beyond the difference between the true value of the
security at the time when he valued it and the value that he then placed upon
it. Lord Hoffmann described the nature of the valuer’s task in the cases before
him in this way at p211C-D:
In each case the valuer was required to provide an
estimate of the price which the property might reasonably be expected to fetch
if sold in the open market at the date of the valuation.
There is again agreement on the purpose for which
the information was provided. It was to form part of the material on which the
lender was to decide whether, and if so how much, he would lend. The valuation
tells the lender how much, at current values, he is likely to recover if he has
to resort to his security.
All that is equally true of the relationship
between the plaintiff and the defendant in the present case.
Lord Hoffmann then pointed to the limited nature
of the valuer’s knowledge in relation to other factors that might ordinarily
affect the lender’s decision whether to make a loan at all, and, if so, in what
amount. He said at p211E:
On the other hand, the valuer will not ordinarily
be privy to the other considerations which the lender may take into account,
such as how much money he has available, how much the borrower needs to borrow,
the strength of his covenant, the attraction of the rate of interest or the
other personal or commercial considerations which may induce the lender to
lend.
Again, that is true of the defendant in the
present case.
Then, after referring to a passage in the speech
of Lord Bridge in Caparo Industries plc v Dickman [1990] 2 AC 605
at p627, Lord Bridge said:
It is never sufficient to ask simply whether A
owes B a duty of care. It is always necessary to determine the scope of the
duty by reference to the kind of damage from which A must take care to save B
harmless.
Lord Hoffmann identified the real question as
relating to the kind of loss in respect of which the valuer owes a duty of care
to the lender. He subsequently stated the principle governing the scope of the
valuer’s liability in these terms at p214C:
I think that one can to some extent generalise
the principle… It is that a person under a duty to take reasonable care to
provide information on which someone else will decide upon a course of action
is, if negligent, not generally
is responsible only for the consequences of the information being wrong. A duty
of care which imposes on the informant responsibility for losses which would
have occurred even if the information which he gave had been correct is not in
my view fair and reasonable as between the parties.
In Nykredit Mortgage Bank plc v Edward
Erdman Group Ltd the House gave further consideration to the nature of the
plaintiff’s loss in a case of this kind, and the date at which loss is
suffered. Lord Nicholls said at p1631D:
When, then, does the lender first sustain
measurable, relevant loss? The first step in answering this question is to
identify the relevant measure of loss. It is axiomatic that in assessing loss
caused by the defendant’s negligence the basic measure is the comparison
between (a) what the plaintiff’s position would have been if the defendant had
fulfilled his duty of care and (b) the plaintiff’s actual position. Frequently,
but not always, the plaintiff would not have entered into the relevant
transaction had the defendant fulfilled his duty of care and advised the
plaintiff, for instance, of the true value of the property. When this is so, a
professional negligence claim calls for a comparison between the plaintiff’s
position had he not entered into the transaction in question and his position
under the transaction. That is the basic comparison. Thus, typically in the case
of a negligent valuation of an intended loan security, the basic comparison
called for is between (a) the amount of money lent by the plaintiff, which he
would still have had in the absence of the loan transaction, plus interest at a
proper rate, and (b) the value of the rights acquired, namely the borrower’s
covenant and the true value of the overvalued property. (Emphasis
supplied.)
Then at p1632B he said:
The basic comparison gives rise to issues of fact.
The moment at which the comparison first reveals a loss will depend on the
facts of each case…
…for repayment the lender may be looking solely
to his security. In such a case, if the property is worth less than the amount
of the loan, relevant and measurable loss will be sustained at once. In other
cases the borrower’s covenant may have value, and until there is default the
lender may presently sustain no loss even though the security is worth less
than the amount of the loan.
and at p1633B:
Realisation of the security does not create the
lender’s loss, nor does it convert a potential loss into an actual loss.
Rather, it crystallises the amount of a present loss, which hitherto had been
open to be aggravated or diminished by movements in the property market.
Lord Hoffmann said at p1638H:
Proof of loss attributable to a breach of the
relevant duty of care is an essential element in a cause of action for the tort
of negligence. Given that there has been negligence, the cause of action will
therefore arise when the plaintiff has suffered loss in respect of which the
duty was owed. It follows that in the present case such loss will be suffered
when the lender can show that he is worse off than he would have been if the
security had been worth the sum advised by the valuer. The comparison is
between the lender’s actual position and what it would have been if the
valuation had been correct.
Some of the passages in the speech of Lord
Hoffmann in South Australia Asset Management Corporation v York
Montague Ltd and in the speeches of both Lord Nicholls and Lord Hoffmann in
Nykredit Mortgage Bank plc v Edward Erdman Group Ltd might be
taken to suggest that the valuer is liable only for that part of the lender’s
loss that is caused by the overvaluation, but it is clear from the speeches of
Lords Hobhouse and Millett in Platform Home Loans Ltd v Oyston
Shipways Ltd that that is not the case. Having cited the passage in Lord
Nicholls’ speech in the Nykredit case at pp1631-1632, Lord Hobhouse said
at p526H:
Thus, the first step is to establish what was the
basic loss of the lender. The second step is to see whether that basic
loss exceeds the amount of the overvaluation and, if it does, the lender’s
right of recovery from the valuer is limited to the extent of the overvaluation.
(Emphasis supplied)
At p532B he continued:
[Lord Hoffmann] affirmed that the premise from
which the debate proceeds is that the causation test has been satisfied and
that there is a basic loss caused by the plaintiff having entered into the relevant
transaction which satisfies the prima facie criteria for recoverability…
…The Banque Bruxelles principle is
essentially a legal rule which is applied in a robust way without the need for
fine tuning or a detailed investigation of causation.
Lord Millett explained the principles in this way
at p537H:
It is necessary to recapitulate what this House
has laid down in relation to the assessment of damages in cases of the present
kind. Two calculations are required. The first is a calculation of the loss incurred
by the lender as a result of having entered into the transaction. This is an
exercise in causation. The main component in the calculation is the difference
between the amount of the loan and the amount realised by enforcing the
security.
The second calculation has nothing to do with
questions of causation: see the Nykredit case, at p1638, per Lord Hoffmann. It
is designed to ascertain the maximum amount of loss capable of falling within
the valuer’s duty of care. The resulting figure is the difference between the
negligent valuation and the true value of the property at the date of
valuation. The recoverable damages are limited to the lesser of the amounts
produced by the two calculations.
Central issue
In the present case, the plaintiff would not have
entered into the loan transaction if the defendant had not given an incorrect
valuation of Chatmohr House. Mr Nicholas Stewart QC, for the plaintiff,
submitted, therefore, that its loss was to be calculated in the manner set out
in the speech of Lord Nicholls in the Nykredit case, namely by comparing
the plaintiff’s position as it would have been if it had not entered into the
transaction with its position as it stood under the transaction. In this case,
the sale by the plaintiff of its large loan portfolio to LBS, rather than the
repossession and sale of the security, crystallised the loss that it suffered
as a result of entering into the transaction. However, there was nothing
unreasonable, he submitted, in the plaintiff disposing of the loan and the rights
associated with it by a standard form of commercial transaction to which there
could be no objection in principle. The realisation of its rights in that way
was essentially no different from its realisation through the more common
mechanism of a repossession and sale of the property following the borrower’s
default. When assessing the lender’s loss, the court is not concerned, he
submitted, with the ‘true’ value of the security, whatever that may be; it is
concerned only with the amount that the plaintiff has lost as a result of
entering into the transaction. That is what the ‘basic calculation’ calls for.
Accordingly, in the present case, the plaintiff was entitled to recover the
amount of the loss sustained at the time of the sale of this loan, which did
not exceed the extent of the original overvaluation, unless the defendant could
show that the plaintiff had acted negligently in relation to the sale of the
account, so as to break the chain of causation between the defendant’s breach
of duty and the loss that the plaintiff ultimately suffered.
Mr Christopher Moger QC, for the defendant, made
it clear at the outset of his submissions that he did not seek to rely on
negligence on the part of the plaintiff, or anyone associated with it, in
connection with the portfolio sale, as breaking the chain of causation. His
submission was of a more radical nature, namely that the loss suffered by the
plaintiff in this case did not fall within the scope of the defendant’s duty of
care as a valuer at all. He submitted that the task that the defendant was
instructed to carry out was to advise the plaintiff of the open market value of
Chatmohr House at the time he made his valuation, the purpose of the exercise
being to provide the plaintiff with information about the potential value of
the property should it become necessary for it to resort to it as security at
some time in the future. The value of a house on the property market is an
essentially different thing from the value of the loan secured on it, which is
likely to reflect factors other than merely the value of the security, such as
the strength of the borrower’s covenant, the terms of the loan itself and other
factors of a purely commercial nature. Mr Moger submitted that the scope of the
valuer’s duty extends to loss caused by the inadequacy of the security as such,
which normally becomes relevant only when the lender is forced to resort to it,
and does not extend to loss that is merely a reflection of the value that the
lender or a third party places on the loan in the context of its disposal,
either alone or as part of a portfolio. It follows, of course,
open market value of the property, is always a fundamental element in
calculating the loss for which the valuer can be held liable.
This is the issue of principle that divides the
parties, but, before I consider it, I must deal in greater detail with the
circumstances surrounding the sale by the plaintiff of the large loan portfolio
to LBS, and the value of Chatmohr House at that time.
Value of Chatmohr
House in June 1997
There was a significant difference between the
experts as to the value of Chatmohr House in June 1997, but, by the end of the
trial, it had become apparent that it had little, if any, bearing on the
outcome of the action. Mr
on the property than Mr Lowndes, accepted that it had an open market value at
that time of £1m. That is in excess of the amount currently outstanding on the
loan account, and so, leaving aside any value that might be attributed to the
borrowers’ covenant, there was, on any view, no shortfall in the value of the
plaintiff’s security. That being so, it would be sufficient for me simply to
find that, in June 1997, Chatmohr House had an open market value of at least
£1m, but, since the question was fully canvassed before me, I think it right to
express my views on it briefly.
It was common ground that Chatmohr House is a
difficult property to value. It is unusual both in its style and construction
and, for that reason, is likely to generate less interest in the market than a
house of more conventional character. None the less, it has several attractive
features: large, spacious reception rooms; a large number of bedrooms (10 in
all), five with en-suite bathrooms; several outbuildings; a newly-built
four-bedroom detached house; a substantial amount of land (87 acres); proximity
to the New Forest; and good communications by road. The main house stands in
the centre of its land, much of which is woodland, and is protected from the
road by a belt of trees. It has pasture suitable for horses. On the other hand,
it also has some less attractive features: although it is in a rural area, its
access is off a busy trunk road; it is not particularly well placed for the
rail network and for rapid access to London; and, although it is imposing in
its own way, many people are likely to find its crenellated facade and flat
roof less visually attractive than houses of a more conventional style.
Mr Peters and Mr Lowndes both followed established
practice for valuing houses of this kind by adopting, as the basis for their
valuations, information derived from the sale of other houses of a broadly
similar size and type in the surrounding area, both before and after the
relevant date. These are known as ‘comparables’. By making adjustments for
factors such as market movements, size, location, amount of land and other
features of importance, the valuer is able to obtain, from the price obtained
for any comparable, a notional open market sale price for the property he seeks
to value. These notional prices provide the raw material for his valuation of
the property, for which he inevitably draws heavily on his own experience and
perception of the market. The experts were able to reach a considerable measure
of agreement as to the method that should be adopted when making the
adjustments to which I have referred, but there remained some more fundamental
areas of disagreement between them. One of the most significant concerned the
manner of choosing comparables. Mr Peters’ governing consideration was
location. He therefore restricted his choice of comparables to properties
within a radius of about 30 miles of Chatmohr House, even though some of them
were significantly smaller than Chatmohr House itself and called for a
substantial adjustment for size. Mr
more important factor. He therefore selected comparables from a much wider
area, which called for a greater degree of adjustment for location. I do not
think that either of these approaches can be categorised as right or wrong,
especially when one is dealing with an exercise of judgment of this kind, but
it was Mr Lowndes’ experience that, within the range with which I am concerned,
larger properties, that is, properties with a larger number of rooms and more
land, appeal to a slightly different sector of the market, and tend to command
a higher price, foot for foot, than smaller ones. Mr Peters was not inclined to
disagree with that, and a comparison of the prices paid for the different
comparables selected by the experts tends to bear it out. While location is
undoubtedly of great importance, therefore, there is a risk that, by making it
the principal factor in the choice of comparables, a valuer may be led into
underestimating the value of a larger property. On balance, therefore, I prefer
Mr Lowndes’ approach to the choice of comparables to that of Mr Peters.
It is unnecessary, in this case, for me to deal in
detail with the various comparables that formed the basis for the experts’
differing valuations. Inevitably, in many cases, there was room for argument
about the degree of adjustment that ought to be made for one factor or another,
but there was little of fundamental significance. In the end, putting a value
on a property such as Chatmohr House is essentially a matter of judgment, in
which experience of the country house market counts for a great deal. Moreover,
it was accepted on all sides that even highly experienced valuers may differ to
quite a significant degree in their valuations. Both Mr Peters and Mr Lowndes
have considerable experience in this field and both of them assisted me
greatly. In so far as there was a difference between them, I prefer the evidence
of Mr
view, reflected in his choice of comparables, his approach to valuing land
associated with large houses of this kind, his method of adjusting for market
movements and the appropriate index by which to make such adjustments, all of
which were, to a greater or lesser degree, accepted as correct by Mr Peters. Mr
Lowndes put the value of Chatmohr House in mid‑1997 at £1.375m. I think
that may be slightly generous, but not much. I find that the true open market
value of the property at that time was £1.3m.
Sale of the
portfolios
Much of the impetus for the disposal of the
plaintiff’s remaining portfolios of loans came from Mr Peter Mash, who joined
CNCA in March 1996 as head of the UK mortgage division. In that capacity, he
had overall responsibility for managing the remaining loan portfolios in which
CNCA had retained an interest. As part of the sale of the plaintiff to
Birmingham Midshires in 1994, CNCA had given various representations and
warranties to the purchaser, some of which had since given rise to substantial
claims. CNCA was keen to avoid any recurrence of that experience, and its
reluctance to give similar warranties in the future was to play a part in the
negotiations for the sale of the large loan portfolio to LBS. One of the first
things that Mr Mash did on joining CNCA was to review the remaining loan
portfolios. The fact that no new loans had been made since 1994 caused him to
fear that the overall profile of the portfolios would deteriorate over time as
performing loans were paid off. Moreover, even taken together, the portfolios
were not particularly large and, for that reason as well, were likely to prove
unattractive to first-class purchasers. Mr Mash’s recommendation, which was
accepted by his superiors, was that the remaining portfolios should be sold off
in such a way as to maximise the return within as short a time as possible. Mr
Mash had already noted that substantial provisions had been made for losses on
many of the accounts, and he considered that it ought to be possible to sell
the large loan portfolio at a discount against its par value, which would not
exceed the provisions already made. Certainly, that was one of his prime
objectives. There were a number of claims outstanding against third parties in
relation to loans within the portfolio that Mr Mash wanted to retain, in order
to decide when and how they might best be disposed of. This strategy reflected
a purely commercial approach to extricating CNCA from the UK lending market. It
had nothing to do with the current state of the property market or the status
of any particular loans.
In October 1996, as a result of an overture from
Mr
portfolio and the small standard loan portfolio. In order to enable it to
evaluate the portfolios, CNCA provided LBS with information about each of the
loans, which included the date and amount of the original valuation of the
security, the amount outstanding on the account, the date and amount of the
most recent valuation of the security and the amount, if
against loss that had been made in the plaintiff’s own accounts. For management
purposes, Mr Mash carried out an analysis of each portfolio, ascribing a
premium or a discount to different categories of loan by reference to the
amount of arrears and the adequacy of the security. That led him to the
conclusion that the loan on Chatmohr House could attract a discount of £550,000
to £620,000 based on the existing provision.
In early February 1997 Mr Mash carried out another
analysis of the portfolio. The most recent information then available to him
appears to have been that contained in the accounts as at 31 January 1997,
which included provisions based on the latest audit valuations available at
that date. Those accounts showed Chatmohr House valued at £575,000, indicating
a negative equity of £435,800, to which was added 12 months’ interest pending
sale and an amount in respect of additional expenses liable to be incurred
between repossession and sale. On that basis, a provision of £599,920 had been
made in respect of the loan. In respect of the portfolio as a whole, the
accounts made provisions in the total sum of £2,441,883. In view of CNCA’s
anxiety to dispose of the complete portfolio, Mr Mash recommended that it
should be willing to allow a substantial overall discount to encourage a
purchaser. It could afford to do that without exceeding the provisions that had
already been made. Although Mr Mash had already identified the Brars’ account
as one that would generate a large proportion of the discount, he did not, at
that stage, single it out as likely to call for individual discussion.
LBS formally notified CNCA of its interest in
acquiring the portfolios being offered for sale on 18 February 1997, when it
indicated that it would be likely to require an overall discount of £3.1m.
There is no evidence of how LBS itself went about valuing the portfolios, but,
having regard to the information available to it, it is likely that it adopted
an approach broadly similar to that taken by Mr Mash. Within a few days, Mr Mash
was giving further consideration to the impact of the Brars’ account on the
transaction as a whole. It is not surprising that he should have done so
because the account stood out, both because it was by far the largest loan and
because it was showing a very large negative equity. Excluding it from the sale
could have a significant effect on the overall discount, reducing it from £3.1m
to about £2.5m. All that would have been apparent to LBS, however, and it
remains unclear whether attention was first directed to the Brars’ account by
Mr
On 27 March LBS made a formal offer to acquire the
whole of the portfolios at a discount of £3.1m or at a discount of only £2.62m
(a reduction of £480,000) if the Brars’ account were excluded. At this point,
therefore, the discount directly attributable to that account was identified
for the first time. It is clear that CNCA already had the possibility of suing
the present defendant very much in mind, and, indeed, the writ in this action
was issued within three weeks in order to protect the position. The draft sale
documentation produced by its solicitors provided for the plaintiff to retain
any rights against advisers relating to the Brars’ account. That was picked up
by the solicitors acting for LBS and quickly led to the reopening of
negotiations. LBS began by insisting that the Brars’ account should be excluded
from the sale on the grounds that any action against the original valuer might
encourage the borrowers to default on the loan. Why that should be so is
unclear, but it posed a real problem for CNCA, which was very anxious to ensure
that the whole portfolio was disposed of. Whether LBS realised it or not, it
had found a strong negotiating lever, so strong, indeed, that Mr Mash toyed
with the idea of giving up the claim against the defendant, if it were
necessary to do so, in order to persuade LBS to take the Brars’ loan. However,
there was still a good deal of room for giving LBS further encouragement by an
increase in the discount, and Mr
size of the discount eventually attributed to the Brars’ loan was irrelevant,
provided it did not exceed reasonable bounds and the total discount remained
within the overall provisions already made. His response, therefore, was to
offer to increase the discount on the Brars’ account by £30,000 in order to
reduce the risk to LBS, which he justified by its effect on the loan to value
ratio, rather as if this were a new loan. However, LBS then found another point
of weakness in CNCA’s position when it suggested that CNCA should give a
warranty against its incurring any loss in excess of £480,000 within 12 months
of the end of any action against the defendant. As I have already said, CNCA
had already had its fingers burnt once in connection with the warranties it had
given as part of the sale of the plaintiff to Birmingham Midshires, and was
adamantly opposed to giving any warranty of this kind in connection with the
sale of the large loan portfolio. There was also an outstanding issue relating
to the absence of mortgage indemnity guarantee insurance on some accounts. In
the end, as Mr Mash frankly conceded, it came down to commercial haggling, and
CNCA was ultimately obliged to increase the total discount to £3.35m to ensure
that the sale of the two portfolios went through. Of that, £530,000 was
attributed by the parties to the Brar account, thereby valuing the loan and
security over Chatmohr House at £438,635.97. That was at a time when the
account was in arrears by only £3,748.36 and the house itself was worth £1.3m.
How did the loss
arise?
Mr Stewart accepted that, if the borrowers had
defaulted on their loan in the spring of 1997, thereby forcing it to repossess
the property and realise its security, the plaintiff would have suffered no
loss. That being so, how has it come about that the rights that the plaintiff
held, both as against the borrowers and over the security, realised far less
under the portfolio sale than it would have realised on a repossession and sale
of the property, thereby causing the plaintiff to suffer a substantial loss?
There are a number of reasons for it. One of the most powerful factors was the
value of £575,000 attributed to Chatmohr House in the accounts as at 31 January
1997. The basis for that value remains unclear. CNCA obtained what were known
as ‘audit valuations’ of all the properties in the large loan portfolio at
regular intervals for its own accounting purposes. These were commissioned on
what is known as a ‘drive-by’ basis, under which the valuer is instructed
simply to make a brief visual appraisal of the property from the outside in
order to check on its general condition and to produce a valuation that
reflects movements in the market since the last full inspection and valuation.
In the ordinary way, a full inspection would have been carried out at the time
of the original loan. A ‘drive-by’ valuation is cheap, but, if competently
performed, it provides the lender with a current working value that is adequate
for the purposes of monitoring the state of its loan accounts. It is normal
practice for a mortgage lender selling a portfolio of loans to rely for the
purposes of the sale on ‘drive-by’ valuations, no doubt because it would not
ordinarily be worth incurring the expense of carrying out full valuations, even
if borrowers could be persuaded to allow the necessary inspection; but a
cursory valuation of this kind would not be regarded as a reliable basis for
making a decision of any real importance in relation to the security. It is
interesting to note that when CNCA began making arrangements to repossess and
sell Chatmohr House in August 1996, it instructed no less than five independent
valuers to carry out full valuations of the property. In fact, none of the
valuations was carried out because, within a very short time, the Brars had
made satisfactory arrangements to continue the loan and the instructions were
rescinded.
The plaintiff and CNCA used values derived from
‘drive-by’ valuations of this kind for the purposes of monitoring loan
accounts; they were periodically adjusted by the computer systems by reference
to an index of market movements. The most recent audit valuation of Chatmohr
House had been carried out in December 1996. That valued the property at
£600,000, so it seems likely that the figure of £575,000 that appeared in the
accounts as at 31 January 1997 was based on an earlier valuation. Whatever its
source, however, it fell a long way short of the true value of the property.
Since Mr Moger did not seek to argue that there was negligence on the part of
the plaintiff or anyone connected with it, it is unnecessary for me to make any
finding as to whether CNCA itself or the valuer who provided the information on
which it relied was at fault in this respect, but the fact remains that the false
valuation caused both CNCA and LBS, to whom the information was given in the
context of the sale of the portfolio, grossly to underestimate the value of the
security. Given the size of the loan and
of CNCA not to obtain a more reliable valuation of this property. CNCA’s own
provisions for loss were based primarily on negative equity, and it is likely
that that also played an important part when LBS came to formulate its offer.
Another factor is likely to have been the extent to which the account was in
arrears. Here, the position was less favourable. In January 1997 the account
was significantly in arrears and negotiations between CNCA and LBS had to be
conducted on the basis of the most recent information. No one could predict
with confidence that the arrears would be all but extinguished during the next
few months. Paradoxically, however, during the first half of 1997 CNCA was
agreeing to increase the discount attributable to this loan at a time when the
arrears on the account were being steadily reduced. No value appears to have
been attributed to the borrowers’ covenants, but, since the value of Chatmohr
House alone exceeded the amount outstanding on the loan, nothing turns on that.
What I think emerges clearly from the history of
the negotiations between CNCA and LBS is that the discrepancy between the
consideration that the plaintiff obtained for the Brars’ loan and the value of
the security, in the shape of Chatmohr House, was the result of a significant
undervaluation of the security in the plaintiff’s accounts and the impact of
wider commercial considerations, which had little, if anything, to do with the
intrinsic value of the loan or the security itself. The influence of those
wider commercial considerations in the present case, however, only serves to
emphasise that a transaction of this kind is likely to be significantly
affected by commercial factors that differ in many important respects from
those that are involved in the realisation of security by repossession and
sale. In my judgment, therefore, Mr
sale of the loan and the rights associated with it, such as occurred in this
case, is an essentially different kind of transaction from that which is
involved when the lender sells the property to realise his security.
Scope of the
valuer’s duty
Mr Stewart submitted that if, as I have found was
the case, the plaintiff can show that the defendant’s original overvaluation
induced it to enter into the loan transaction, it has done all that is
necessary to establish the causal link between the defendant’s negligence and
its loss. Once that point has been reached, it makes no difference that a loss
of a foreseeable kind has come about in an unforeseen manner: see Hughes
v Lord Advocate [1963] AC 837. It therefore only remains to assess the
quantum of that loss, which, in this case, is directly related to the amount
that was obtained on the sale of this loan to LBS. The first part of this submission
derives support from the speeches of Lords Hobhouse and Millett in Platform
Home Loans Ltd v Oyston Shipways Ltd, both of whom make it clear, in
the passages to which I have already referred, that the whole of the loss
suffered by the lender as a result of entering into the transaction is to be
regarded as having been caused by the valuer’s breach of duty: see, for
example, per Lord Hobhouse at p533A-B and p535D. However, that is not of
itself sufficient to enable the plaintiff to succeed, because, as Lords
Hobhouse and Millett both point out, the essential question in cases of this
kind is whether the loss that the lender has suffered falls within the scope of
the valuer’s duty of care, which, in turn, depends on whether it was loss of a
kind that he was under a duty to prevent.
I therefore return to the issue that lies at the
heart of this case, namely whether, as Mr Stewart submitted, the valuer’s duty
of care extends to all loss, up to the amount of the original overvaluation,
that flows from the lender having entered into the transaction, regardless of
the precise manner in which it is ultimately suffered; or whether, as Mr Moger
submitted, it extends only to such loss as the lender may have suffered by
reason of the open market value of the property (together with any value
attaching to the borrower’s covenant) falling short of the amount expended by
the lender. It will be apparent that, if Mr Stewart is right, the market value
of the property, at the time when the loss is crystallised, is, strictly
speaking, irrelevant in a case such as this, except in so far as it may provide
evidence of a failure on the part of the lender to take proper steps to realise
the full value of its security.
To answer this question, it is necessary to return
to the decisions in the SAAMCO and Nykredit cases. Lord Hoffmann
in the SAAMCO case stated the principle by which the scope of the
valuer’s duty is determined as follows (p212E-F):
The scope of the duty, in the sense of the
consequences for which the valuer is responsible, is that which the law regards
as best giving effect to the express obligations assumed by the valuer: neither
cutting them down so that the lender obtains less than he was reasonably
entitled to expect, nor extending them so as to impose on the valuer a
liability greater than he could reasonably have thought he was undertaking.
The starting point in the present case is that the
defendant was instructed to provide an estimate of the open market value of
Chatmohr House as a guide to how much, at current values, the plaintiff was
likely to recover if it had to resort to its security. This is the fundamental
aspect of the relationship between the lender and the valuer, which led Lord
Hoffmann to define the scope of the valuer’s duty in terms that limit his
liability to loss that reflects the original overvaluation, and exclude loss
arising from extraneous circumstances, such as a fall in the property market.
However, I think it is also inherent in his reasoning that the valuer is
concerned only with the property as a security, and that both parties proceed
on the assumption that the lender will, if necessary, resort to that security
by repossessing the property and selling it in the open market. The valuer is
therefore only concerned with the amount that the property will realise on a
sale on the open market. This is reflected in passages in the speeches of
various members of the House in the Nykredit case. Thus, Lord Nicholls,
when describing the basic comparison called for in the typical case, refers to
‘the true value of the overvalued property’ (p1631F), and both Lord Nicholls
and Lord Hoffmann, when dealing with the time at which a cause of action
arises, appear to regard the value of the property in the market as providing
one of the essential elements in the calculation: see Lord Nicholls at p1632B
and p1633B and Lord Hoffmann at p1638H. I realise that these statements must be
read in the context of the cases that were then before the House, and that
there are dangers in placing too much emphasis on particular expressions that
may reflect the facts of the individual cases, but, in my view, those passages
contain statements of principle of general application. It is, perhaps, worth
emphasising that there is nothing to distinguish the relationship between the
plaintiff and the defendant in the present case from the typical relationship
between valuer and lender with which their lordships were concerned in those
cases. To regard the scope of the valuer’s duty as restricted to loss directly
related to the open market value of the property is, in my view, consistent
both with these statements of principle and with the underlying principle of
giving effect to the express obligations assumed by the valuer.
In the present case, the plaintiff did not have
resort to its security, in the form of Chatmohr House, nor was the loss that it
suffered the result of any shortfall between the open market value of the
property and the amount outstanding on the loan account. The loss arose in the
context of the sale by the plaintiff to a third party of its rights in relation
to the loan, including its rights over the property, and was the result of a
combination of factors in which the erroneous valuation of the property in its
accounts and purely commercial considerations each played a significant part.
For the reasons given earlier, I am satisfied that the defendant’s duty of care
only extends to loss represented by a shortfall in the value of the security,
that is, to any difference between the amount outstanding under the loan and
the open market value of the property. At the time when the plaintiff disposed
of its interest in the loan and the security there was no such shortfall, and,
accordingly, the loss suffered by the plaintiff is not one for which, in my
judgment, the defendant is liable.
Claim dismissed.