Negligence — Mortgage loan — Restaurant premises — Profits method valuation — Whether valuers negligent — Plan of land valued — Whether solicitors negligent in conveyance of security — Whether lenders contributorily negligent
On the
instructions of the plaintiff bank, in October 1990 the defendants provided a
valuation of restaurant premises in the sum of £1.25m. This was based on a net
profit multiplicand of £295,000, being 37% of projected turnover, a multiplier
of seven and a discount of twice the net profit. In February 1991 the bank
loaned 75% of the valuation on the security of the premises. The borrower
defaulted and in January 1996 the premises were sold for £225,000. However, the
parties agreed that the premises should have been sold by December 1993 for
£260,000. The bank claimed their losses of some £1.416m from the defendant
valuers. The defendants brought third party proceedings against Lovell White
Durrant, who acted for the bank in the conveyance of the security. In the
course of the conveyancing, the solicitors asked the defendants, by reference
to a plan of the principal registered title, whether the area ‘corresponds
exactly’ with the area valued. The defendants answered that the area appeared
to correspond. The defendants alleged that the security taken was defective because
the solicitors failed to include two titles essential to the running of the
restaurant business.
The third party claim was dismissed. The third party solicitors were not negligent.
The problems which arose in regard to the titles were solely attributable to
the defendants’ incorrect and misleading answer to the simple question. The
solicitors could not have deduced from the plan that a small but significant
part of the property was outside the principal title, and it was not their duty
to obtain any other plan. Evidence was accepted that in valuing leisure
property in the West Country it would be reasonable to allow 20% margin of
error. In the profits method of valuation, the appropriate net profit
multiplicand should have been £240,000 on a projected turnover of £800,000. A
multiplier of no higher than 5.25 should have been used. A discount of twice
the multiplicand (or 1.5 times plus fixtures and fittings) should then be made giving
an open market value of £800,000. The loss occasioned by the valuers’
negligence was £516,250 (the value of the security as reported, £1.25m, less
the actual value of £800,000, plus £62,250, being the cost of remedying the
defects in the title). The plaintiffs were contributorily negligent in not
asking for up to date accounts and bank statements and in failing to see that
the borrower had sufficient working capital; damages were reduced to £300,000
plus the costs of remedying the title defect of £62,250.
The following
cases are referred to in this report.
Alliance
& Leicester Building Society v Wheelers
unreported January 23 1996
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co
Ltd [1994] 2 EGLR 108; [1994] 31 EG 68; [1994] 32 EG 89
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co
Ltd [1995] QB 375; [1995] 2 WLR 607; [1995] 2 All ER 769; [1995] 1 EGLR
129; [1995] 12 EG 144, CA
Bolam v Friern Hospital Management Committee [1957] 1 WLR 582;
[1957] 2 All ER 118
Bristol
& West Building Society v Fancy &
Jackson unreported July 22 1997
Cavendish
Funding Ltd v Henry Spencer & Sons Ltd
[1998] 1 EGLR 104; [1998] 06 EG 146
Colchester
Estates (Cardiff) v Carlton Industries plc
[1986] Ch 80; [1984] 3 WLR 693; [1984] 2 All ER 601; [1984] 2 EGLR 64; [1984] EGD
461; (1984) 271 EG 778
Coventry
Building Society v William Martin & Partners
[1997] 2 EGLR 146; [1997] 48 EG 159
Froom v Butcher [1976] QB 286; [1975] 3 WLR 379; [1975] 3 All ER
520; [1975] 2 Lloyd’s Rep 478, CA
HIT
Finance Ltd v Cohen Arnold & Co [1998] 1
EGLR 140
HIT
Finance Ltd v Lewis &Tucker Ltd [1993] 2
EGLR 231; [1993] 9 PNR 33
Interallianz
Finanz AG v Independent Insurance Co Ltd
[1997] EGCS 91
Mahoney v Beatman (1929) 110 Conn 184
Nyckeln
Finance Co Ltd v Edward Symmons & Partners
unreported 1996, CA
Nykredit
Mortgage Bank plc v Edward Erdman Group Ltd
[1996] 1 EGLR 119; [1996] 02 EG 110, CA
Platform
Home Loans Ltd v Oyston Shipways Ltd [1996]
2 EGLR 110; [1996] 49 EG 112
Scotia,
The (1890) 6 Asp MLC 541
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
Western
Trust & Savings Ltd v Clive Travers & Co
unreported 1996, CA
This was a
claim for damages by the plaintiffs, UCB Bank plc, against the defendants,
David J Pinder plc, to which Lovell White Durrant had been made third party.
Nicholas
Davidson QC and John Wardle (instructed by Dibb Lupton Alsop) appeared for the
plaintiffs; Augustus Ullstein QC and Jonathan Ferris (instructed by Haxstall
Erskine) represented the defendants; Edward Bannister QC and Peter Cranfield
(instructed by Barlow Lyde Gilbert) represented the third party.
Giving
judgment, MR JONATHAN PLAYFORD QC said: The plaintiff bank lends money,
taking as security a legal mortgage on real
are not surveyors. In late 1990 the bank was contemplating a substantial loan
and proposed to take as security a legal mortgage over an Italian restaurant
and ancillary undertakings known as the Hosteria Romana in the Barbican area of
Plymouth, owned and operated principally by a Mr Enrico Moreschi. His partners
in the business, if there were strictly a partnership, were Mr Colombo and Mr
Cinque, but they remain shadowy figures and, save where I need specifically to
distinguish them, I shall refer to the partnership generally as Moreschi.
To this end,
the bank instructed Pinders to value the business, which they did on October 13
1990. The value which they put on it was £1.25m. On February 14 1991 the bank
loaned 75% of this sum, £937,500, to Moreschi, who, apart from six payments of
£1,000 each in October and November of 1991, made not one of his covenanted
repayments. Lest too censorious a view be formed of him at the outset, however,
I should say that all of UCB’s loan was applied to reduce a pre-existing debt to
Barclays Bank plc and did not find its way directly into Moreschi’s pocket.
The third
party, who have not been joined as defendants by their clients, are a firm of
solicitors practising in the City of London, who acted for UCB in the
conveyance of the security. In circumstances which I will need to examine in
detail, UCB’s title to the security was found to be defective, in that the
place where the business was carried on extended to three separately registered
areas of land, but only one of these titles, albeit the most significant, was
taken into charge. The other two titles were essential to the running of the
business and without them the security, if it could be realised at all, would
have been seriously diminished in value, but, fortunately, it proved possible
to purchase the missing titles. That the title was defective is blamed by the
bank on Pinders, who in their turn seek indemnity or contribution from the
solicitors.
In the result,
it was possible to realise the security and in January 1996 it was sold for
£225,000. Almost five years had elapsed between Moreschi’s default and the
realisation of the security, and my initial reading of the papers indicated
that there was to be much debate about responsibility for this delay over a
period that showed few favours to sellers of repossessed properties. But, again
fortunately, agreement was reached during the course of the trial; it was
agreed that the property should have been sold by December 1 1993 for £260,000
when it would have cost UCB £62,500 and £10,000 to purchase the missing titles.
It will be
evident, therefore, that the bank suffered a substantial loss on this
transaction, which they now seek to recover from Pinders on two grounds, namely
that they negligently overvalued the property and negligently misrepresented
what they had valued with the result that the title was defective. Mr Nicholas
Davidson QC, in his closing submissions on behalf of the bank, put before me a
schedule which, even assuming a notional sale in December 1993, shows an overall
loss, including contractual interest, of £1,416,050. This schedule is not
agreed and has not been put in evidence, but Mr Augustus Ullstein QC, for
Pinders, accepts an overall loss of about £1.4m, which is sufficient for
present purposes.
Background
As appears
from the photographs, and by all accounts, the setting for the business,
grouped along three sides of an enclosed courtyard and approached by a short
passage leading off Southside Street, Plymouth, and then passing under an
archway, is picturesque and attractive. In bygone years, perhaps when the
Mayflower put to sea from the Steps nearby, the building was a monastery. It
was latterly used as a warehouse and suffered bomb damage during the war, but,
although it was largely rebuilt in the early 1980s, it still retains some of
its character. In April 1983 Mr Moreschi and his partners opened there the
Hosteria Romana, which by October 1990 consisted of a restaurant, hotel and
pizzeria — the latter by then not quite ready for business, having taken the place
of a coffee shop. The deployment of tables in the enclosed courtyard would have
given the establishment an agreeable appearance and, especially in the summer
when the historic Barbican area of Plymouth would attract the tourist trade, I
have no doubt that it was a good spot for what was evidently an up-market
restaurant. But it is not always summer and the visitors to Devon in the main
head for the moorlands and beaches rather than the towns; the hotel rooms were
small and, so far as I can tell, not especially inviting; perennial problems
such as parking, vandalism and so on are factors to be borne in mind when there
is little or no off-street parking; and, of course, while the establishment’s
postal address, 58 Southside Street, might be thought to imply a frontage on to
the street, the fact is that it was set well back from the passing traffic, as
described above. There was an issue as to how well signed it was and, while I
accept that it was reasonably signposted at the time, it is clearly the case that
signage was necessary for what was described by Mr Christopher Grimshaw [frics fsva], the expert valuer called
for the plaintiffs, as ‘backland development’.
It seems that
the business did well under Mr Moreschi, despite competition. He was evidently
a good restaurateur, having been from 1972 to 1978 at the Bella Napoli, another
Italian restaurant further along the street. In exactly what capacity he had
been at this restaurant, which apparently to this day continues to flourish, is
not altogether clear, bearing in mind that he was made bankrupt in 1976 and did
not obtain his discharge until 1984. But he was born in 1932 and his working
life had been spent in the leisure industry, either as a tour operator or in
restaurants, hotels or clubs, and so he was certainly experienced. Reports
speak of him kissing the ladies’ hands, singing Italian songs and having on his
wine list bottles of Chianti at £950 each, and the picture presented is one of
a flamboyant man with flair. At all events, his talent — and it was his rather
than his partners’ — was such as to lead Mr Richard Webber [frics], the expert valuer called on
behalf of Pinders, to describe the business, of which he had personal
experience, as ‘the best such establishment in Plymouth’. Other valuers, Brodies,
concluded that Mr Moreschi, ‘a most personable gentlemen, is clearly a highly
experienced restaurateur’.
Of the
financial history of this business singularly little is known. It seems,
however, that starting in July 1987, for purposes and with results that are not
all clear to me, a number of valuations of the business were made. These are
conveniently tabulated in Mr Grimshaw’s first supplemental report at para 7.11.
The report of Brodies was addressed to Barclays Mercantile Business Finance Ltd
and I assume that on the strength of it Barclays made the loan to which I have
referred above. Probably the various valuations, save for that of Mr Richard
Anthony Hornby [frics], which
seems to have had a different purpose, and save, of course, for the forensic
valuations, were made in order to obtain loans. As part of this process Mr
Moreschi made an application in early 1990 to UCB’s Manchester branch for a
25-year loan of £1,282,500, apparently in order to restructure his existing
borrowings. His borrowings were said to be £962,000 secured on 58 Southside
Street, and £117,000 secured on 96 Embankment Road, Plymouth, another property
owned by him. For this loan he offered as security both these properties,
attributing a value of £1.2m to the former. In answer to the question, ‘Have
you or your partners ever been adjudicated bankrupt?’ he answered ‘No’. The
application was supported by a Pinders’ valuation, dated March 1 1990 and made
by their Mr Colin Grogan, in the sum of £1.2m, which, at Mr Moreschi’s request,
was addressed to ‘the Lending Principals of North Eastern Financial Services’.
In the event, the Manchester branch declined the total proposal but agreed to a
much smaller loan, £202,500, secured on 96 Embankment Road alone.
On July 20
1990 Mr Moreschi renewed his application to UCB. This time the request was for
£1,372,500 in order ‘to restructure existing borrowings and provide some
working capital’. Existing borrowings were said then to total £1,318,000, the
main creditor being Barclays Bank in the sum of £962,000, with NatWest Bank a
distant second at £150,000. Now the security offered included 94 The Ridgeway
and 36–38 Mayflower Street, where Mr Moreschi had yet
Southside Street being again put in at £1.2m. As before, UCB’s standard
question in regard to bankruptcy was answered untruthfully. This application
was made at a time when the previous application was still at the offer stage
and so should be seen as being for an additional £1.17m, namely £1,372,500 less
the existing offer of £202,500. Having taken into account the existing loans by
Barclays and NatWest together with a Barclays overdraft of £60,000, the
application, if granted in full, would have provided some £60,000 by way of
working capital, with the remainder of Mr Moreschi’s indebtedness being offset
against the Embankment Road loan. Enclosed with the application were certain
accounts and reports by Pinders on Southside Street, Embankment Road and
Mayflower Street. I have not seen the latter two reports and they are not
relevant to this claim. But that on Southside Street, dated October 13 1990,
lies at the heart of this case.
On August 20
1990 Moreschi’s application came before UCB’s credit committee which expressed
certain doubts and deferred a decision, requiring in particular that Mr
Moreschi be interviewed by their branch manager in Exeter. His report was on
the whole favourable and on September 5 1990 the committee agreed the proposal
in the sum of £1.17m, ‘subject to Trethewey reports and ES approval’. The
latter reference was to Eagle Star Insurance Co, which at that time was
offering mortgage indemnity guarantee insurance on the top slice, that is
between 75% and 90% of valuation, of loans secured by mortgage. In fact,
neither of the committee’s provisos was complied with. Eagle Star declined the
proposal; while they may have had specific reasons for doing so on this
occasion, it seems that MIG cover was generally not available from them on
financial restructures. And an approach in November 1990 to Economic Insurance
Co for MIG cover was met with conditions that either were not acceptable or
could not be complied with. The proposal was not referred back to the
committee, which had the responsibility for approving loans in excess of
£600,000, but it was treated as one for 75% of valuation, that is to say the
maximum loan to value proportion that UCB were able to offer without insurance
cover.
Furthermore,
no report was obtained from Tretheweys, who are a major firm of valuers in the
West Country, but a report was commissioned instead from Pinders. There was
some debate about this departure from what, on the face of it, would seem to
have been a specific requirement of the credit committee; various reasons were
advanced with a view to convincing me that it mattered not to the committee
whether Pinders or Tretheweys did the valuation. The committee, whose member,
Mr Rainer, gave evidence, expressly disclaimed any intention of obtaining a
second opinion and, that being so, it does not seem to matter, save that it may
indicate a certain laxity at UCB, whether Pinders or Tretheweys were
instructed. Both are reputable firms, offering valuation services by competent
business appraisers with experience of the relevant geographical areas, and,
while Tretheweys may employ qualified surveyors whereas Mr Coombs, who carried
out the crucial appraisal for Pinders, had no formal qualifications, it is not,
nor could it be, suggested that this should have caused UCB to engage the former
rather than the latter.
In the event,
therefore, it was made a special condition of the mortgage offer to Moreschi on
September 11 1990 that there should be a satisfactory business report by
Pinders (updated and readdressed to UCB) over the Hosteria Romana at Moreschi’s
expense before the advance was made. Furthermore, it should be emphasised that
it is common ground that at any stage up until the advance was actually made,
that is to say February 14 1991, UCB were, notwithstanding the offer and
acceptance that were concluded on September 12 1990, entitled as a matter of
strict contract to change their mind about making the loan or the amount of it.
The offer and acceptance were complete at an early stage in the process of
making the loan, before any updated report by Pinders, before Lovells were
instructed and before even a bank reference was obtained. In terms of legal
effect, they should be seen as no more than an expression of intent.
In accordance
with what was deemed to be the committee’s requirement, Pinders were instructed
to update their report and Mr Grogan attempted to do so. However, Mr Moreschi
refused to permit him to revise that part of his earlier report that dealt with
the hotel and existing restaurant. He was able to discuss only the conversion,
then at a very advanced stage, from coffee shop to pizzeria. Obviously, since
the pizzeria had not opened for trade, no figures could be available and Mr
Grogan’s estimate, based, so far as I can see from the report itself, wholly on
Mr Moreschi’s orally expressed hopes, can hardly be regarded as founded on
rock. But he concluded that his previous valuation of £1.2m should be increased
to £1.25m.
Mr Moreschi’s
attitude was not acceptable to Mr Smith of UCB, who was then dealing with the
matter. On October 5 1990 he noted the position ‘with some concern’ and made it
plain that he saw the situation as being ‘quite simple: either Mr Moreschi lets
Pinder re-inspect [the property] or we withdraw from the deal … it is vital
that we have up to date valuations and reports’. Mr Moreschi, who had been to
UCB’s knowledge seeking since March to refinance, had no option but to submit.
Thus, it came
about that on Friday October 12 1990 Mr Coombs, in the absence on holiday of Mr
Grogan, was instructed to provide an updated report. He had Mr Grogan’s reports
and the information that Mr Grogan had had, but he had nothing tangible in the
way of accounts or otherwise that was new. He had, however, his own experience
and expertise; in particular, he was, or should have been, aware of market
movements, generally and in particular, since Mr Grogan had reported in early
March, and he had available to him the substantial database, running perhaps to
80,000 businesses, that his employers maintained. Furthermore, he had, or
should have had, the support of ‘devils’; these are senior persons at Pinders’
head office in Milton Keynes who review reports before they are sent out, and
in this case they were Mr Mitchell, an associate director (who was unable
through illness to give evidence), and Mr Hayton, whose evidence was read.
Mr Coombs had
been with Pinders just short of four years, working mostly in the West Country.
As I have said, he had no formal qualifications, but he had worked in business
sales and valuations since 1978. Such training as he received from Pinders
consisted of going out with experienced valuers at the start of his employment.
He approached conscientiously what must have been a difficult assignment —
taking over at short notice someone else’s case involving an unusual property
and business and a would-be borrower who, whatever his attitude towards the
ladies, had not shown the same favours to Mr Grogan. He was obliged by
pre-existing commitments to make his visit on Saturday October 13 and, true to
form, he appears to have elicited little of solid value from Mr Moreschi in the
hour that he spent with him. However, he did not regard it as sufficient merely
to reiterate what Mr Grogan had said in March; he considered that he was making
a fresh and independent valuation, which was £1.5m. Some of that was, however,
attributable to Mr Moreschi’s assertion that he had planning permission to use
the restaurant as a casino.
When the case
was reviewed by the ‘devils’, it was considered that the question of a casino,
over which Mr Coombs had already expressed his doubts, should be discounted.
The valuation was reduced to £1,250,000 and the report went out to UCB in that
form. 75% of this is £937,500, and that was the amount of the loan as made.
Involvement
of the solicitors
Meanwhile,
Lovells had been progressing the conveyance of the security with Mr Moreschi’s
solicitors, Woolcomb & Young. The person handling the conveyancing was an
experienced solicitor, Mr John Gordon, who was a partner at Lovells for 22
years before he retired in 1995. He, like Pinders, was frequently instructed by
UCB and he knew, since UCB’s standard instructions to solicitors said as much,
that UCB relied on their solicitors ‘to ensure that it obtains a fully
enforceable charge over a fully marketable title to the property valued’. The
standard instructions further emphasised that ‘it is the essence of secured
lending that the solicitor ensures that security is obtained over the property
valued …’. These general instructions were made specific by Mr Smith in his
letter of October 24 1990, in
is in accordance with the title deeds’.
It does not
seem that the error in referring to ‘value’ rather than ‘valued’ misled Mr
Gordon, for on October 30 he wrote to Pinders noting that his investigations
showed that the borrowers owned adjoining property separately registered and
not to be charged and seeking ‘to establish that the extent of the property to
which title has been deduced to us corresponds exactly with that which you have
valued’. This letter was sent by fax and he enclosed a plan, not a very good
one nor of full size nor in colour, showing the premises and adjoining property
and asking for Pinders’ confirmation that it ‘accurately shows the pizzeria,
hotel and restaurant premises which are the subject of your valuation’.
The property
to which title had been deduced appeared to be comprised within title no DN
179120. Lovells’ inquiries had shown that there was another title, registered
under title no DN 68438, which adjoined the Hosteria Romana, was owned by
Moreschi and was subject to a charge in favour of Barclays. But Mr Gordon had
not seen the property — UCB’s policy of avoiding all unnecessary expense would
have precluded a trip by a senior City solicitor to Plymouth, save possibly in
the most exceptional circumstances — and he was dependent on those who had
certainly seen it, namely the valuers and those who either had seen it or who
were able to rely on Moreschi, namely Woolcomb & Young, for his
understanding of how the various titles fitted together. In their answers to
inquiries/requisitions Woolcomb & Young had confirmed that it was only
title no DN 179120 that was to be taken into charge, but Mr Gordon followed up
the matter on October 30, when he asked for their specific confirmation that no
part of the establishment fell within DN 68438, enclosing for that purpose a
plan similar to that sent to Pinders. On November 7 Woolcomb & Young
responded by showing on the plan the extent of DN 68438 and confirming that
from their inquiries it appeared that no part of the establishment fell within
that title. However, they added the qualification that a proper survey would be
needed before, I infer, certainty could be achieved.
In fact, DN
68438, although correctly marked by Woolcomb & Young on the plan that they
sent back on November 7, did form part of the establishment. In particular, it
included the archway through which access was obtained to the courtyard and,
most crucial, it comprised the pizzeria, the entrance to it and two of the
hotel bedrooms. All this had, of course, been included in the valuation by Mr
Coombs; he plainly had no knowledge of the titles, but he would have known what
he had valued less than three weeks earlier.
Mr Coombs, as
it happened, did remember, save for one matter to which I will come, what he
had valued, although with such a small scale plan he could not necessarily
achieve complete precision. A ‘mother’, Mrs Bull, referred Lovells’ inquiry to
him and his response appears at F/191, with a fair copy at F/190 — I assume
that the question marks in the latter document represent uncertainty on the
part of the transcriber rather than of Mr Coombs. In short, Mr Coombs
identified a section which he thought, quite correctly, included the archway,
the pizzeria and some bedrooms and which had formed part of his valuation. He
marked it on the plan as ‘additional section?’, and it will be seen that it
corresponds pretty well exactly to DN 68438. But he went on in his note to
suggest ‘the best answer’ to the solicitors’ query, namely that Pinders had
valued ‘all the property from which the business is conducted ie restaurant,
letting bedrooms and the pizzeria’.
Mr Kidby,
whose statement was served, but who surprisingly was not called as a witness,
received Mr Coombs’ note and responded to Lovells. He did not adopt Mr Coombs’
‘best answer’; still less did he pass on what Mr Coombs had said about what he
had valued nor did he forward Mr Coombs’ marked up plan. He chose to say that:
‘Having referred the matter to our valuer we can confirm that the area shaded
[ie DN 179120] would appear to correspond with the premises’, valued. Absent Mr
Kidby, there is no explanation for this peculiar inversion of what Mr Coombs
had said; indeed, as Mr Davidson observed, the answer was so contrary that the
inclusion of a ‘not’ before ‘appear’ would have made it correct. But Mr
Birdseye, managing director of Pinders, who did give evidence, although it was
largely anecdotal in nature, did seem to suggest a sort of policy that Pinders
should equivocate in response to straightforward questions of this kind from
solicitors. No doubt they have to be careful in case they find themselves
saddled with an exorbitant liability in response to seemingly innocuous
questions, but, in order to comply with their instructions, solicitors must
ensure that security is obtained over the property valued; the valuers alone
know what they value and, if they do not say so in plain and accurate terms,
problems will occur, against which their standard terms and conditions, sent
with every report and with Mr Kidby’s letter, will avail them not at all.
In the event,
Mr Gordon took Mr Kidby’s response to be the confirmation he was seeking. He
thought that the response of Woolcomb & Young was ‘not exactly categoric’
confirmation, but, bearing in mind UCB’s desire not to cross every T and dot
every I if that could reasonably be avoided, he reported to Mr Smith that
completion could take place. He concluded his report by saying that ‘to be on
the safe side’ he had asked Woolcomb & Young to identify the use to which
DN 68438 was put and indeed he did ask them that question ‘on a point of
information only’. But they never answered during the following three months
and the question was not pursued. Mr Smith, on November 15 1990, confirmed that
he was happy with the ‘title’ points, notwithstanding that the situation was
not tied up ‘belt and braces’. So, some three months later the transaction went
ahead in the form outlined above.
It remains to
note as part of the historical background that, although it was not at any
stage present in Mr Coombs’ mind or apparently known to Woolcomb & Young,
the fire escape from some of the bedrooms occupied a narrow strip of land
running at right angles to the flank of the hotel giving access into
Blackfriars Lane. This turned out to be registered under title no DN 258000.
This, I understand, was owned by Mr Cinque and charged to solicitors, Gill
Akaster, whereas title no DN 68438 was charged to Barclays. This small parcel
of land, which cost UCB £10,000 to acquire, may seem insignificant, but, of
course, the provision of a fire escape was essential for the lawful use of the
premises as an hotel. Mr Coombs, having inspected the property, was aware of
the fire escape and it would have been taken into account in making his
valuation.
Finally, I
mention a small and uncertain area of unregistered land that may have existed
between titles nos DN 179120 and DN 68438. Somewhat strangely, it may have
comprised land on which the hotel staircase and part of the reception area
stood. But the index map that was subsequently obtained does not clearly show
this land separate from DN 68438, and it seems that the eventual sale of the
property in early 1996 proceeded successfully without any particular reference
to it and without any extra cost being incurred. If it ever existed, it has
played no part in this case and I need not refer to it again.
Liability
of the solicitors
It is common
ground that the starting point for consideration of liability on the part of
Lovells must be their retainer. But specific instructions have always to be
seen against a background of past dealings, which can shed light on what a
party expects of his professional advisers and what the latter expect of their
client. In this case it is for the defendants to establish a breach of the duty
of care that Mr Gordon owed to UCB — a breach which the clients themselves have
not alleged.
Mr Gordon had
had dealings with UCB or one of their previous incarnations since 1972. He knew
what the bank wanted and there is no reason to doubt that the bank had complete
confidence in him — even on this occasion Pinders’ conveyancing expert, Mr
Newman, accepted that Mr Gordon took his retainer seriously and acted
conscientiously. The starting point, as it seems to me, is to have in mind that
here were two men, Mr Smith of the bank and Mr Gordon of Lovells, who were
experienced in putting into legal effect routine
In general
terms, what UCB expected of Lovells was speed, efficiency and cost
effectiveness. I will consider the state of the market when I come to the
valuation, but in broad terms the late 1980s had seen a buoyant and highly
competitive market and there is no doubt but that in the autumn of 1990 the
existence of a serious recession had not been properly appreciated by many
lending institutions; the old competitive spirit still lingered. UCB were
comparative newcomers to commercial lending and, in order to break into the
market and increase their share of business, it was important to keep costs down
and provide a good service for borrowers. Thus, it was agreed that Lovells
would not prepare formal reports on title, advising the bank only if specific
title problems arose. Attaining the objective of cost efficiency, however, did
not mean that short cuts or shoddy work were to be permitted.
I have already
referred to UCB’s Standard Instructions to Solicitors — Commercial Mortgages
and I need not repeat the terms of the requirement. But I should also note the
additional requirement that the solicitor should ensure ‘that any unusual
features are brought to the valuer’s attention and that any assumptions made by
the valuer so far as they impinge upon matters investigated by the solicitor
are verified to be accurate’.
Specific
instructions in relation to this transaction were contained in Mr Smith’s
letter of September 20 1990. The letter itself contains nothing of particular
relevance to the issues before me, but Mr Smith enclosed with it a copy of the
signed offer letter. What was of interest to Mr Gordon was obviously the
schedule, which gave him the basic information about the proposed transaction
that enabled him to set about deducing title. The basic information in regard
to the security was that the property to be charged was 58 Southside Street.
In the
original and unamended third party notice the claim against the solicitors was
essentially put on the basis that they failed to require Moreschi or his
solicitors to satisfy them that ‘they had good title to all the land upon …
which they carried on the business of the Hosteria Romana’. Particular emphasis
was put on the fact that Pinders’ letter of November 2 1990, accompanied as it
was by an ‘Appendix’, was not, so it was contended, unequivocal. The third
party notice underwent amendment and reamendment but, despite the opportunities
presented thereby, it was not until Mr Gordon was cross-examined that a
development of this contention, unheralded by Mr Newman’s report, was made
apparent. This was to the effect that UCB’s instructions were to obtain a charge
over 58 Southside Street, not over the premises from which the business of the
Hosteria Romana was carried on — a contention that coexists uneasily with the
terms of the pleaded case quoted at the beginning of this paragraph.
Of course, the
schedule to the offer letter did refer to 58 Southside Street. It was not until
Mr Gordon received a copy of Pinders’ report on October 28 that, so it seems,
he knew of the Hosteria Romana. The starting point for his investigation of
title was, of necessity, the postal address. And, having started there, the
position that he reached, probably in early October, was that ’58 Southside
Street’ comprised at least three registered titles, including DN 68438 and DN
179120, both of which were owned by the borrowers and both of which were
subject to a restrictive covenant that limited their use essentially to that of
a restaurant, on the ground floor at least.
There is
nothing in this knowledge that, in my view, would necessarily lead a
conveyancer to conclude that DN 179120 was not a self-contained unit, suitable
as security. Mr Christopher Harrison, another experienced conveyancer who was
called as an expert by Lovells and who struck me as a careful and compelling
witness, did not think so and I accept his view. No doubt the position called
for inquiry and that is what Mr Gordon followed up, when by enquiry/requisition
13, dated October 17, he noted that the deed of variation of November 9 1987
referred to ‘the premises’, namely 58 Southside Street, being registered under
the two title numbers and asked whether DN 68438 referred to adjoining premises
owned by the borrowers and not to be charged. Woolcomb & Young confirmed
that this was so, adding, in answer to the following inquiry, that the property
to be charged consisted of three separate units, pizzeria, hotel and
restaurant, each with separate entrances, which could be used as a
self-contained unit. They marked on the attached plan precisely that area
comprised in title no DN 179120. They were thus telling Lovells that the entire
business was contained within DN 179120 and that that business and that title
were to comprise the security.
Mr Gordon
placed no reliance on the postal address. What interested him was what the Land
Registry said and the title number which he was investigating, namely DN
179120. If the title had extended beyond 58 Southside Street, it would all be
taken into charge; conversely, if it did not encompass the whole of the postal
address, he would not seek to extend the charge beyond the limit of the title
number. As Mr Harrison put it in cross-examination: ‘solicitors pay very scant
regard to postal descriptions. A conveyancing solicitor would see the relevance
of 58 in the offer letter as nothing more than a number on a door.’ Such an
approach seems to me to be entirely consistent with Mr Gordon’s instructions,
quoted above, which were to ensure that the security was obtained ‘over the
property valued’, not over a postal address.
It was,
therefore, an essential step in the performance of his general obligations and
in compliance with Mr Smith’s express instructions given on October 24 that Mr
Gordon wrote to Pinders his letter of October 30 1990, showing by means of a
plan the area covered by DN 179120 and seeking confirmation that that area
‘corresponds exactly’ with the area valued. The question asked was simple to a
degree and was one that Pinders, and Pinders alone, were able to answer. It has
been from time to time suggested that the plan was too small or not
sufficiently clear or should have been posted as well as faxed or that further
information about the title should have been communicated to Pinders or that Mr
Coombs could not be expected to remember or that Mr Gordon should have
expressed to Pinders whatever doubts he had about the title, but, in my
judgment, all these suggestions miss the mark. What shines through with utter
clarity is that Mr Coombs had no significant problem at all, save for the fire
escape which I believe he simply forgot, with recalling what he had valued and
showing accurately on the plan that his valuation did not correspond exactly or
at all with DN 179120 but had included DN 68438. Had he not suggested a ‘best
answer’ and had not Mr Kidby contrived his even ‘better’ one, which conveyed a
response that was as diametrically opposite to the true position as it was
possible to be, namely that DN 179120 did correspond with the area valued,
there would have been no problem. In any event, of course, if the form of the
question or any indistinctness of the plan had presented Mr Coombs with a
problem, he could always have asked for clarification. So, too, had his memory
let him down, he could always have said so or suggested a further visit.
It is said
that Mr Gordon was not entitled to rely, at least without further inquiry, on
Pinders’ response, because it was equivocal and did not adequately answer the
question posed, which was whether the property corresponded exactly with
what had been valued. Reference is made to Pinders’ appendix sent with their
response of November 2 1990.
In my
judgment, the answer that the area shaded ‘would appear’ to correspond with the
premises valued does not, as a matter of ordinary English, necessarily imply
any doubt or equivocation and certainly not to any significant degree. This is
particularly so when the words are immediately preceded by the words ‘we can
confirm …’ and when the question calls for a reasonably exact response. If the
responder cannot reasonably give the answer sought, then he would be expected
to say so. Much the same argument was addressed to Mantell J (as he then was)
in HIT Finance Ltd v Cohen Arnold & Co* and rejected. It may
be, of course, that Mr Kidby was intending to be non-committal or even to be
equivocal; I do not know what was in his mind since he has, though apparently
available, not given evidence. But if that was
intended to add to the protection from possible liability that he may have
fancied was afforded by equivocation by including the appendix, a document that
under the heading foreward forms part of Pinders’ reports of March and October
1990 and is attached as appendix to their letter/report of September 26. In my
view, however, this document is not apt to modify or attenuate the clear and unequivocal
message conveyed by the letter of November 2.
*Editor’s
note: Reported in [1998] 1 EGLR 140
I have to say
that so obvious is Mr Kidby’s error and so indefensible was Pinders’ position
on this letter, that I found it surprising that they should have mounted such a
vigorous defence of it. It was not until his closing submissions that Mr
Ullstein conceded that ‘of course’ the letter does not accurately set out what
Mr Coombs said in his memorandum. I was especially surprised that Pinders’
valuation expert, Mr Webber, should have gone out of his way, since he was not
directly concerned in this part of the case and, in any event, I am not much
helped by expert evidence on how to construe a letter, to defend the
indefensible, describing the answer as ‘understandable’ when it was nothing of
the sort. In the hotly contested matter of valuation, where Mr Webber was
matched against Mr Grimshaw, and I have to decide whose evidence was the more
compelling, Mr Webber’s defence of this letter weighed against him and
contributed to my preference for Mr Grimshaw’s evidence.
Had Mr
Gordon’s question been answered correctly, he would then have seen that DN
68438 needed to be taken into charge; likewise, if Mr Coombs had remembered the
fire escape, which he would have seen and could have recalled had he carefully
applied his mind to the question, DN 258000 could have been taken into charge.
On the balance of probability Barclays, who were sufficiently keen to see the
loan go through that they were willing to take a second charge over DN 179120
for such comparatively small balance of Moreschi’s debt as remained after UCB’s
refinancing loan had been paid to them, would have done likewise in regard to
DN 68438. The position regarding DN 258000 is less clear, but it seems unlikely
that such a comparatively small issue would have been permitted by Mr Cinque or
his partners to stand in the way of their proposed restructuring.
I do not see
how the causal effect of Pinders’ erroneous response can be in issue. A review
of the correspondence and Mr Gordon’s evidence, which I accept, satisfies me
that he took it that he had the confirmation that he was seeking. He said as
much to Mr Smith on November 6. When Woolcomb & Young on November 7 added
their response to the same effect, in this regard repeating what they had said
in their answers to inquiries, Mr Gordon reported to his client on November 8
with enclosed plan accurately showing the two titles. He considered that he
could rely on Pinders’ response and, in my judgment, he was entitled reasonably
to take that view.
I accept that
there was some unease at the ‘not exactly categoric’ confirmation of Woolcomb
& Young, but Mr Gordon fairly reported the position to his client and, having
regard to UCB’s desire for speed and cost effectiveness, it was a reasonable
decision to proceed, notwithstanding their knowledge that the situation was not
tied up ‘belt and braces’. It is difficult to see precisely what more should
have been done; a survey, for instance, had been suggested, but that would have
involved delay, the instruction of surveyors (since surveying was not part of
Pinders’ function) and a cost of perhaps £1,000 to the account of an already
impatient Moreschi. Perhaps it would have been better had Mr Gordon followed up
his inquiry about the use to which DN 68438 was put, but by then his client had
given him instructions to proceed, which were not contingent on a satisfactory
answer to the query, and the way in which the question was put hardly suggests
that much significance was to be attached to an answer. In any event, it is a
matter for speculation what Woolcomb & Young would have said in answer to a
request for information on a matter which, as they would have seen it, was of
no particular concern to Lovells.
The remaining
allegations against Lovells are of a different kind. Essentially, it is said
that certain steps should have been taken, which might, albeit as an incidental
consequence, have revealed the existence of the problem. Thus:
(i) Failure to
obtain a sufficient plan. Pinders do not provide plans and, since the plan of
the property sent to Pinders was adequate for Mr Coombs’ purpose, the plan here
referred to would have to be either a public index map or the filed plan of DN
68438. However, if Mr Gordon had obtained such a plan, and I do not regard his
failure to do so as negligent, it would have confirmed what he already
believed, on the basis of the plan marked by Woolcomb & Young and attached
to their answers to inquiries, to be the case. The public index map,
subsequently obtained for the purpose of the litigation, shows the various
titles, but does not show what Mr Coombs valued. Only the plan that Mr Coombs
marked up shows that and that plan, of course, was never passed on by Pinders.
(ii) It was
suggested that Mr Gordon might have deduced from the position and size of the
small rectangular area of land, DN 258000, that it was a right of way or escape
route. But that, as it seems to me, is a suggestion that owes much to
hindsight. I cannot see that a reasonable solicitor, concerned to keep costs
down and do the job expeditously, could assume in the absence of any specific
reason, but simply from looking at coloured titles on a plan, that adjoining
titles had anything to do with the title under investigation. Looked at another
way, I cannot see why he should be criticised, if he prefers to rely on a
direct and simple question addressed to a fellow professional, who had, or was
certainly expected to have, actual knowledge of what was where and what was
relevant.
(iii) Failure
to obtain the plan attached to the fire certificate. The standard instructions
required solicitors to check assumptions made by valuers, so far as they
impinged upon matters to be investigated by the solicitors. One of the
assumptions made by Pinders was that the property had the benefit of a fire
certificate. Mr Gordon should, therefore, have checked the existence of a fire
certificate. Indeed, Mr Harrison accepted that he should have done so, since
the absence of one will impact on the value of the security. In the event, Mr
Gordon did check the certificate and found it to be valid. But he did not
obtain the plan that went with it — usually, so he said, a complex document
detailing fire doors, escape routes, safety features and so on, and very often
not easily copied. Had he done so, he might have deduced that it was the fire
escape that went at right angles to the building and occupied DN 258000. Had he
realised that, he might have been alerted to the problem with DN 68438 as well.
As a general
rule and in the absence of some specific reason, I can see no good reason why a
conveyancing solicitor should need to obtain the plan attached to a fire
certificate. Mr Gordon said that he was not qualified to interpret such a plan
and usually did not obtain one. This was supported by Mr Harrison, who told me
that, once the competent solicitor satisfies himself that the plan exists, that
is where he stops. I accept that evidence. It seems to me unnecessary, and
possibly even unwise, because to do so may lead to a host of additional
obligations and inquiries which may not be capable of easy discharge and which
may lead to further cost, as a matter of practice to require a plan, likely to
be of an architectural nature and showing with greater or less complexity the
safety features of a property. What is he to do with it? Is he to check that
all devices are present and correct and, if so, how and by whom? It is no good
asking Pinders because they are business appraisers, not surveyors, and, even
were they to agree to give information to the effect that there was full
compliance with the certificate, they would almost inevitably need to make yet
a further visit at yet more expense. And all, be it remembered, not because Mr
Gordon or his clients were in fact interested in fire doors or escapes, but
because Pinders had made an error and by this means, although the error was not
foreseeable, it could or might have been discovered.
I accept the
evidence of Mr Gordon and Mr Harrison. Pinders have not satisfied me that the
solicitors were negligent. The problems that arose in regard to both titles
were solely attributable to Pinders’ incorrect and misleading answer to a
simple question. I will deal with the quantum of loss that flows from this
error and with any
issue, to which I now turn.
Basis of
the valuation
It is common
ground that the basis for valuation in a case such as this is the open market
value (OMV) of the premises with the benefit of its existing use as a fully
operational restaurant, hotel and pizzeria. Whenever I have hitherto, in this
judgment, referred to a valuation, it has been a valuation on this basis. That
is the basis adopted by Mr Coombs and he was correct to do so.
The route,
known as the profits method, by which the OMV is reached is deceptively simple.
If the information is available, and it was in this case, it involves first
valuing the business as a going concern. To do this, a broad analysis needs to
be made of recent accounting information and the net profit adjusted to take
out items personal to the business, such as loan interest, bank charges and
depreciation. Assuming that the resulting net profit is in accordance with
industry expectations, an appropriate multiplier is applied to it and the
figure thus reached is the going concern value. The next step is to work
backwards, stripping out the goodwill that is personal to the operator and the
tenant’s fixtures and fittings. This may be done as a separate exercise,
assessing the fixtures and fittings and making an estimate of the personal
goodwill by applying a multiplier to the adjusted net profit, or it may be done
globally by applying a higher multiplier to the adjusted net profit. Either
way, the objective is to reach a valuation on the basis that the business is
sold as a fully operational concern, but with an average competent operator.
If, therefore, the existing operator has exceptional ability and flair, the more
necessary it will be to be sure to make due allowance for the fact that he will
no longer be at the helm, either by making an appropriate discount or by the
choice of the multiplier or both.
If the
accounts are not available and an adjusted net profit cannot be ascertained,
the exercise can be done with turnover figures only. In this event, a
multiplier, much less than that to be applied to the net profit, is applied to
the turnover, thus giving the going concern figure. From there the appropriate
discount can be made by taking the normal industry-wide net profit percentage
and proceeding as before. Clearly, this is a less satisfactory method, but
people tend to be coy about their net profit, whereas they are more forthcoming
about turnover and, since comparables serve as a desirable check that the right
multiplier is being applied, it is often the only method that can be used to
confirm a proposed valuation.
It will be
evident that this approach to the valuation of commercial property is quite
unlike a residential valuation, where it is the bricks and mortar that are
being valued. The profits method does not directly take account of the value of
the building as such, having regard to its size, location, condition and so on.
But it may be compared to a bricks and mortar valuation and may even loosely be
referred to as such: see for example Pinders’ internal form which specifically
refers to B&M, when they and Mr Coombs who filled it in actually meant open
market value. But the methodology has an obvious logic: a business is an
income-producing asset and it is treated as such, not as a building or a home.
Furthermore, while Acacia Road may consist of a number of more or less
identical or at least comparable houses, businesses by their nature are
unlikely to be replicated to any great extent, so that it is far less easy to
make comparisons. This was especially so in the case of the Hosteria Romana;
not only were freehold properties extremely rare in the Barbican, but from what
I have already said it will be apparent that this business was unusual and
comparables, if they existed, would be hard to come by.
Valuer’s
duty
The task
facing the valuer was in this case a difficult one. Because it was difficult
and possible comparables did not on any showing exceed one or two, I accept the
evidence of Mr Grimshaw, the very experienced valuer called on behalf of UCB,
who has been involved in valuing and dealing with commercial and leisure
property in the West Country for over 28 years, to the effect that it is
reasonable to allow for a 20% margin of error either way in making the
valuation. He saw that margin as ‘slightly generous on valuers’ and it
certainly does permit a substantial variation, sufficient almost to wipe out
the cushion of 25% that UCB allowed themselves. But it has to be borne in mind
that valuation is an art, not a science, and precision is simply not possible.
The valuer is expected to do no more than exercise reasonable skill and care,
whether that duty is an implied term of his contract or arises concurrently in
tort or by virtue of section 13 of the Supply of Goods and Services Act 1982.
I have already
made reference to Pinders’ appendix or foreward. In the course of the hearing
the provisions of this document were described as exclusion clauses, but I do
not see them as such. I see them as spelling out for the benefit of lenders,
who may be inclined to note only the last page of a report, what is the basis
of the valuation, to make clear that Pinders are giving information, not advice
on whether the loan should be made, and to bring home to the lender that he
needs to ensure that he carries out his own proper investigations. Knowledge of
all these things, save possibly for the basis of the valuation which in this
case was understood by UCB, would in any event be imputed to the lender. For my
part, therefore, I do not see these conditions as significantly altering the
obligations that would be normally imposed on the lender, although no doubt it
is as well to emphasise them. They do not purport to excuse Pinders from the
consequences of failing to take care in advising on the OMV nor do they
restrict the nature and scope of the duty owed. That duty, in short, was to
take reasonable care that the open market valuation which they placed on the
business and which they knew would be relied on by their client for the purpose
of making a loan, was reasonably accurate. That objective was to be achieved by
the use of appropriate multiplicand and multiplier.
Valuation
The
methodology adopted by Mr Coombs followed the conventional basis described
above and no complaint is made about that. But complaint is made about the
multiplicand, the multiplier and to a limited extent the discount and I must,
therefore, turn to the detail.
Multiplicand
The
multiplicand adopted by Mr Coombs was £295,000. He reached this by taking the
turnover, £609,460, shown by the accounts for the year ended August 31 1989,
the last certified accounts that were available, deducting £25,000 for the
coffee house that was to become the new pizzeria, adding £150,000 for the new
pizzeria and adding a further percentage to reflect the optimism that Mr
Moreschi had exhibited when he spoke to him on October 13. In the result he
achieved a projected turnover of £800,000. His net profit, £295,000, showed a percentage
of nearly 37% to turnover.
Both Mr
Grimshaw and Mr Webber were of the opinion that the fully maintainable net
profit was £240,000. No issue turns on the coffee shop/pizzeria projection of
£125,000 net pa, but there seems little warrant for reflecting optimism and
certainly not to the extent projected by Mr Coombs. Historically, the accounts
had not shown any steady upward progression. The five-month draft accounts,
from September 1 1989 to January 31 1990, that were available to Mr Coombs
showed takings of £180,398, which, if projected over 12 months, would produce
£430,000; while one view might be that, as those months were spread over the
winter, they would show a low turnover, another might be that they included the
Christmas period and were consequently fairly representative, so in the end all
one can say is that they gave no solid foundation for any increase. They may
have given some cause for pessimism. Mr Coombs’ net profit to turnover
percentage, 37%, was significantly above the industry norm of about 31%. Even
the projected income from the pizzeria, although it is agreed as reasonable,
was untested and unsupported by any experience.
Bearing in
mind that Mr Coombs was carrying out a valuation, which he knew was likely to
be relied on in the making of a substantial
uplift, and certainly not of the order of 10–15%, to reflect the unsupported
say-so of Mr Moreschi expressed in a one-hour interview. In my judgment, the appropriate
multiplicand should have been no more than £240,000.
Multiplier
Mr Coombs took
a multiplier of × 7. When applied to his multiplicand, he reached a going
concern valuation of £2,065,000, which he rounded down to £2m. The question is
whether this multiplier was too high.
Mr Coombs did
not rely on any solid support for his multiplier, which he plucked from what he
considered to be an acceptable range of × 6 — × 9, a range that also lacked
solid support and exceeded the range even of Pinders’ expert, Mr Webber, which
was × 5 — × 7.5. No evidence was forthcoming that either Mr Coombs or the
‘devils’, who were later to consider his report, consulted Pinders’ database.
One other property was considered by Mr Coombs, Buddies Diner at 3–5 The
Barbican, but this was a defunct business which had been operated from premises
quite unlike the Hosteria Romana and for which there was an asking price of
£440,000, but no takers. I do not consider that this property provided the
slightest justification for × 7 and the contrary has not been argued. Apart
from this slender reference, there was no transactional evidence of any kind
from Mr Coombs, although he had available Mr Grogan’s very limited comparables
which, in the absence of Mr Grogan, have hardly featured in this case either.
Of Mr Hayton and Mr Mitchell, who considered the report at head office, Mr
Mitchell was unwell and did not give evidence, while Mr Hayton, whose statement
was read, adduced no transactional evidence of any kind; if and to the extent
that Mr Coombs relied on the ‘devils’ for the appropriate multipliers, he
received no support.
The assumption
underlying the going concern value is that the business will be sold as a going
concern. A sale presupposes that the current operator will no longer be there
and consequently an assumption has to be made about who will be there. The
assumption is that this person will be the average competent operator. If the
current operator has particular talent, an allowance has to be made for this
which may be done by discounting the multiplier. Much debate has taken place
over the extent to which Mr Moreschi was an above average operator, with
consequent need to exclude his personal goodwill from the valuation.
There is a
substantial body of evidence that what was referred to as ‘the Moreschi factor’
was significant. In particular, I note Mr Coombs’ reference in his para 9 to
the ‘exceptional quality and uniqueness’ of the business. In evidence he
accepted that this was ‘entirely due to the way in which it was operated’ by Mr
Moreschi. Mr Webber confirmed that the business was ‘unique and of exceptional
quality’. Mr Grimshaw expressed the view that the value of the business lay in
its style, which was personal to Mr Moreschi, not in the land or buildings, and
that it was Pinders’ job to bring this to the attention of UCB. I conclude that
the value of the business did lie to a significant extent in the Moreschi
factor and that in reaching the OMV this factor had to be stripped out. It
would be better to do this by discounting the multiplier, but, one way or the
other, it had to be done by the time the OMV was reached.
Another
important factor that needed to be reflected in the multiplier was the state of
the market. In Mr Coombs’ view, the commercial market was still very buoyant in
the autumn of 1990; it was ‘the peak of the market’ as he said in evidence. But
he adduced no basis for this view; he did not refer to any periodicals or
articles that he might have read, no transactional evidence was led nor was
there anything to tell me how Pinders at head office kept themselves or their
valuers in the field informed about market trends, appropriate multipliers and
so on.
In my
judgment, Mr Coombs is wrong in his recollection that the autumn of 1990 saw
the market peak. I accept the evidence of Mr Grimshaw, supported by his graphs,
that the residential market had begun to suffer serious decline in 1989, if not
in late 1988, following the abolition of joint mortgage relief. The commercial
property market started to decline in December 1989 and by October 1990 it was
well down. There may have been regional variations, but Mr Grimshaw was based
in the West Country and I do not accept that that area did not also share in
the general decline.
The
comparables to which Mr Grogan referred at F/50 have hardly been discussed in
evidence and, without Mr Grogan, I can make little of them. In any event, I am
not clear how a competent valuer would approach a leasehold business and asking
prices, as opposed to actual transactions, cannot confidently be relied on for
mortgage valuations, especially on a falling market. Mr Grimshaw’s comparables
at para 18.4 post-dated October 1990. However, there were two comparables that
were hotly debated and on which I have to express a view. These were the Sharks’
Fin at Mevagissey, sold in April 1990 for, I believe, £624,000, and the Horn of
Plenty sold in August 1990 for £500,000. The turnover of the Sharks’ Fin was
£400,000, so this would give a multiplier of × 1.56; the multiplier for the
Horn of Plenty would be × 2.4 on turnover. Mr Webber has been able to find out
that the net profit multiplier on the Horn of Plenty was × 8.33 on the basis of
their valuers’ projection and × 14.95 on the basis of the historic net profit
for the year ended May 1989.
I do not
consider that the Horn of Plenty provides a useful comparable. This
establishment is a country house hotel in 5 acres of grounds with a
distinguished restaurant and it would attract a ‘pride of ownership’ premium.
Most important, there was the confounding factor of substantial living
accommodation for the operator, unlike the Hosteria Romana. It provided a home,
and a nice one, in a desirable area on the edge of Dartmoor, as well as a
business. Once that element is stripped out, perhaps at £100,000–200,000, then
the balance can be treated as a commercial valuation. Mr Grimshaw can
accordingly justify a multiplier of × 5 to the net profit, having deducted from
the purchase price £200,000 to take account of pride of ownership and the house
and grounds. But the figure of £200,000 is imprecise, although it is, no doubt,
a best estimate. A deduction of £150,000 produces a multiplier of nearly × 6;
if no reduction is made then, as I have said, the actual multiplier may be seen
as over × 8. Mr Coombs told me that this establishment compared to the Hosteria
Romana as chalk does to cheese and I am content to accept that view.
The Sharks’
Fin is said by Pinders not to be useful as a comparable. It was down-market,
almost a fish and chip shop operation, not in a major town, but in a remote
and, at least in winter, a desolate seaside resort. But, as Mr Grimshaw points
out, there were no ‘special operational features’ and, granted that one is
valuing an income-producing asset, namely a business, not a building, I consider
that I should have some regard to what the Sharks’ Fin realised on the basis of
the income that it was capable of generating. It was, moreover, a business in
the leisure sector and not too far distant, either in time or location. Mr
Coombs was not aware of this transaction and I cannot say that he was negligent
in not informing himself of it or that his employers were negligent in failing
to take it into account when they reviewed his report. But, with effectively
nothing else to go on in this regard, it does assist me in reaching a
conclusion as to what was the correct multiplier and from there the correct
valuation.
In my
judgment, having regard in particular to the factors that I have considered
above, Mr Coombs’ multiplier, at the top of Pinders’ own expert’s bracket, was
too high. I consider that a multiplier no higher than × 5.25 should have been
used.
Discount
There is no
great dispute on this, at least on the basis that a multiplier such as × 5 is
used. If a multiplier of × 7 were to be used Mr Davidson would argue that the
Moreschi factor, in order to be fully stripped out from the calculation, would
demand a greater discount, effectively reducing the net profit multiplier to ×
3 or thereabouts. Mr Coombs discounted by × 2.
Mr Grimshaw
applies a discount of × 1.5 to the net profit, but, in addition, he adds to the
discount £105,000 for fixtures and fittings. This, as I have already explained,
is an equally good — he would say more accurate and therefore better —
approach. On the basis of a multiplier no higher than × 5.25, it seems to me
that a discount of × 2 is appropriate.
Conclusion
The true value
of the Hosteria Romana was, therefore, as follows:
|
|
|
|
|
|
|
Net profit |
£240,000 × 5.25 |
£1,260,000 |
||
|
Less |
£240,000 × |
480,000 |
||
|
£780,000 |
||||
|
Or Net |
£240,000 × |
£1,260,000 |
||
|
Less |
£240,000 × |
£360,000 |
||
|
and |
£105,000 |
465,000 |
||
|
£795,000 |
||||
|
Say: |
£800,000 |
|||
I have already
held that a reasonable margin on the facts of this case would be 20% either
way. That means that a valuer exercising reasonable care could reasonably have
concluded that the Hosteria Romana should be valued on an open market basis at
anything between £640,000 and £960,000. Of course, following consideration at
head office Mr Coombs’ valuation was reduced to £1.8m for a going concern and
£1.25m for OMV. It follows that both these figures were too high. The open
market value, which was the critical figure, was £450,000 in excess of the true
market value of the business.
In reaching
this conclusion I take comfort from some of the valuations that have been made
and are set out in Mr Grimshaw’s para 7.11. Trethewey’s valuation in July 1987
produces a figure, updated to October 1990, of £812,000. Dancey & Joyce
would produce £785,000–855,000. Mr Hornby I approach with much caution. He was
evidently under pressure from Mr Moreschi to come up with a figure of £1.2m to
match the supposed Gill Akaster offer of £1m to £1.2m. His best figure
(although his methodology is unknown) was £680,000 to £997,000, which in
October 1990 would represent, say, £700,000 to £1,040,000, and how he got from
there to £1.2m was not revealed. Nor was it revealed how or why his January
1988 valuation of £1,038,000 had reduced to £680,000–£997,000 by November 1988,
leaving him, despite his endeavours to accommodate his client, ‘short of the
figure he was looking for’. Even a downward movement of 20%, at a time when all
seem agreed that the market was moving up, would not have produced £680,000.
But, for what it is worth, my figure is within Mr Hornby’s actual bracket, as
adjusted. As for the Gill Akaster offer, it remains wrapped in mystery; Mr
Grimshaw has done an elaborate calculation which produces an adjusted figure of
£636,500, but in the absence of any evidence that this offer was genuine, it is
safer to ignore it.
A report that
certainly exceeds a valuation of £800,000 is Brodies’ of February 1990, which
would have been £1.25m by October 1990. This report is before the court, but no
one has been called to explain the methodology. The doubts surrounding Mr
Hornby’s figure of £1.2m point up the dangers of giving weight to
unsubstantiated statements of opinion that have not been tested by
cross-examination. If necessary, I would hold that Brodies were wrong and
substantially overvalued the business, but it may be better simply to ignore
their report. The same goes for Mr Grogan’s reports of March and September
1990; he has not given evidence, although he could have been called to support
his reasoning and conclusion. Mr Coombs saw these reports, though not the
working papers, but he did not purport to rely on the conclusion. His report
was a freestanding one and it is his conclusion that has to be judged. If and
to such extent as may be necessary, I would hold that Mr Grogan’s valuations
were wrong.
Following on
from these observations I reject the contention of Mr Ullstein to the effect
that, on the basis of the Hornby and Brodies valuations, there is a responsible
body of professional opinion which would have regarded Mr Coombs’ valuation or
the valuation that went out to the client as reasonable: see Bolam v Friern
Hospital Management Committee [1957] 1 WLR 582. No such body or opinion has
been established to my satisfaction. I do not consider that the mere production
of reports and their inclusion in a court bundle can possibly mean that the
valuations, which are contained in those reports and which are substantially in
excess of what I have held to be a generous margin of the true value, are to be
seen as valuations made by reasonably competent valuers: see Nyckeln Finance
Co Ltd v Edward Symmons & Partners (unreported) CA 1996. Nor do
such reports gain in cogency or weight simply by being referred to, or even
approved, by Mr Webber: see his para 7.13.
Mr Webber does
not himself adduce comparables in support of his multiplier of × 5 — × 7.5 and
the only multiplier to which I consider I should have regard, namely the
Shark’s Fin, supports a multiplier of × 5 or thereabouts. I do not accept his
evidence that the bracket for a reasonably competent valuer in October 1990
could have been anything from × 5 — × 7.5 — a bracket which, especially when a
20% margin either way is added, is so enormous as to make the obligation to
take reasonable care little more than an illusion. I prefer the evidence of Mr
Grimshaw, backed as he was by an actual transaction.
Mr Coombs’
methodology was, in my judgment, flawed and the flaws were carried over into
the valuation that was sent to UCB. The flaws lay primarily in the choice of
too high a multiplier, in that insufficient regard was paid to the downturn in
the commercial market, perhaps of the order of 10%, the Moreschi factor was
insufficiently taken into account and Mr Coombs was not sufficiently cautious
having regard to these factors and to his inability to find useful comparables.
The choice of multiplicand was also flawed; Mr Ullstein says that this was only
by £55,000, but that is sufficient to skew the calculation when the multiplier,
especially if it is too high, is applied. In consequence, the open market
valuation was too high and outside the permissible bracket. In my judgment, the
Pinders’ valuation was negligently made. In making this finding, I make every
allowance for difficulties presented by the market, the business, the dearth of
comparables and the circumstances in which Mr Coombs had to make his valuation.
Reliance
The contention
of Pinders, which found florid expression through their lending expert, Mr
Williams, was that Mr Coombs’ report was useless and either was not or could
not reasonably be relied on. The basis for the contention was that the report
was so devoid of any new content and was so hedged about by the qualifications set
out in the foreward that it added nothing to the March report, thus leading any
reasonably prudent lender to say, ‘How can this be of any use to us, even as it
stands?’. Furthermore, it is said that not only was the October report useless;
UCB had relatively up to date information, including management accounts, for
the four months February to May 1990, and this, set against the background of
UCB’s contributory negligence, had the effect of undermining the October
report, thus adding to its uselessness.
I am quite
unable to accept this contention. The plain fact is that, starting with the
requirement of the credit committee, UCB throughout the transaction made it a
prerequisite, not only for the making of any loan but also for the amount of
it, that there should be a satisfactory Pinders’ report, updated and
readdressed. As Mr Smith forcibly put it on October 5 1990, ‘either Mr Moreschi
lets Pinder inspect it or we withdraw from the deal’. And, again, on October 24
he sent Mr Coombs’ ‘satisfactory’ report to Lovells and confirmed that he was
satisfied with it, thus permitting the transaction to proceed.
As to the
content of the report, it is true that Mr Coombs had no more financial
information than Mr Grogan had had in March. But it could not be assumed that
the market was static, the position in regard to the new pizzeria needed to be
investigated, and there had to be an updated inspection of the premises and
discussion with Mr Moreschi. More generally, had Mr Coombs, who intended his
report to be a useful document, really had nothing to add, he would, no doubt,
have said so, instead of making his own lengthy report, doing his own
calculations and actually increasing the valuation. UCB would not
have been familiar with the ingredients and methods that their valuer would use
to reach his figure and, in my judgment, they acted entirely reasonably in
taking his report at face value and relying on it as they plainly did. For the
reasons that I have already discussed, I do not agree that the foreward had the
effect of depriving the report of the usefulness that it purported to have.
I will deal
with contributory negligence later in this judgment. Suffice it to say at this
stage that I am not satisfied that UCB were at fault in not providing Mr Coombs
with the management accounts or with any other information that they might have
obtained. Mr Coombs had reached a clear and unequivocal valuation that did not
call for further accounts or any updated information. He said in his report
that he did not have any accounting information additional to that which Mr
Grogan had had, but nevertheless he went ahead and made his valuation. Had he
felt that his figure should be qualified or that it would be helpful to him to
have further information, he could have said so and asked for whatever it was
that he needed. Perhaps, with the benefit of hindsight, it would have been
better for UCB to send to Pinders at least the material that they had in their
possession but, in the absence of any requirement or request to that effect by the
person doing the valuation or by the ‘devils’, I cannot say that UCB were
negligent in not doing so. Furthermore, there is nothing in UCB’s conduct
generally that, in my view, negates the simple proposition that they relied on
and were reasonably entitled to rely on Pinders’ report.
Causation
Following on
from my last finding, I hold that Pinders’ valuation of £1.25m did cause UCB to
make the loan and specifically to make the loan in the sum of £937,500. Had
they valued the business correctly at £800,000, the loan on the balance of
probabilities would not have proceeded. The reason for this is that a loan of,
say, £600,000 would not have provided sufficient for refinancing. Even as it
was, there was nothing for Moreschi and the loan went entirely to pay off most
of Barclays’ loan. But it is difficult to see any benefit whatever from a
transfer of £600,000 from UCB to Barclays. Indeed, it may well be that because
the loan, as made and without the top slice that MIG cover would have given,
fell short of producing any benefit to Moreschi, that was the cause of the
latter’s immediate default. But the lower the loan, the less Barclays would
have co-operated. It is very unlikely, speculative even, that, on a loan of
£600,000 with a substantial debt still outstanding, Barclays would have agreed
to postpone their charge. Put another way, therefore, I hold that, had the
business been correctly valued, this would have been a ‘no transaction’ case.
Damages
The
plaintiffs’ loss overall from this transaction was about £1.4m. On the basis of
South Australia Asset Management Corporation v York Montague Ltd
[1997] AC 191* (SAAMCO) it might seem reasonably clear that this loss
could not be laid at the door of the valuers, either because it was not of a
kind in respect of which the valuers owed a duty or because the valuers did not
cause it. But Mr Davidson argues that because of the title error this case is
‘quite different’ from SAAMCO. The causative effect of the title error
was that instead of having a nil position in relation to the borrowers, UCB
borrowed money, lent it and suffered loss of £1.4m. The foreseeable and actual
consequence of the title error was that the loan was made on a property which
was not suitable as security and, since it was the essence of the transaction
that security was obtained over the property valued, that error should be
regarded as invalidating the whole transaction. Alternatively, says Mr
Davidson, this is not a case, such as Nykredit Mortgage Bank plc v Edward
Erdman Group Ltd†, where there was a negligent misrepresentation as to the
attributes of the security; this is a case where the security was worth
nothing: cp Western Trust & Savings Ltd v Clive Travers & Co
(unreported) CA 1996.
*Editor’s
note: Also reported at [1996] 2 EGLR 93
†Editor’s
note: Also reported at [1996] 1 EGLR 119
In my
judgment, this case falls fairly within the principles set out in SAAMCO.
I do not read Lord Hoffmann as laying down any novel principles or principles
of limited application. At p214C he said:
I think that
one can to some extent generalise the principle upon which this response
depends. 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 regarded as responsible for all the consequences of
that course of action. He is responsible only for the consequences of the
information being wrong.
While it may
sometimes be difficult to distinguish between advice and information, no such
problem arises in this case as regards the valuers. Pinders provided
information in their report in exactly the same way that the valuers in SAAMCO
did. They also provided information in their letter of November 2 1990. The
consequence of the first error was that UCB had less security than they
thought. Instead of having security worth £1.25m, it was worth only £800,000.
The loss occasioned thereby was, therefore, £450,000.
The
consequence of the wrong information in the letter was that UCB obtained
defective security. Theoretically, it might have been worthless; had it not
been realised, I can see that there could have been sharply differing views as
to how much it was worth, if anything. Even if it had been worthless, however,
the loss attributable to the information being wrong would not have been £1.4m.
It would have been £1.25m. But it has been realised. To enable it to be
realised and to perfect the title, it actually cost UCB £56,250 plus £10,000.
Had they mitigated their loss, as it is agreed they should have done, by
selling in December 1993, it would have cost them £62,500 plus £10,000. Since I
do not consider that the question of mitigation and any saving that might, by
reason of the agreement between the parties, have been effected thereby are
relevant to the assessment of damages, since the total loss is so far in excess
of the valuers’ liability, I do not for my part consider that UCB can recover
more than they actually spent to perfect the title, namely £56,250 plus
£10,000. But this point has not been argued and I am not clear whether it is
covered by the agreement. Subject to clarification of this point, however, I
record that the damages payable, assuming full liability on Pinders’ part, are
assessed in the sum of £516,250.
Contributory
negligence
A very great
number of allegations of contributory negligence have been made, largely on the
strength of Mr Williams’ evidence. It is, I think, particularly important, when
considering this detailed and systematic review of the conduct of UCB’s
business, their practices and their decision to make the major loan to Mr
Moreschi, to bear in mind that the latter would have presented as a respectable,
respected and successful businessman. It is all too easy, granted the gift of
hindsight, to ‘second guess’ the decision to lend.
Furthermore, I
should say at once that I was not impressed by Mr Williams. It was not just his
florid language and vehement advocacy in Pinders’ cause. He seemed, with his
substantial caseload on behalf of defendants alone, to be set against what he
regarded as an ‘arriviste’ bank. Also, his treatment of the quotation from The
Lending Banker by the late Lord Mather left much to be desired: omitting a
passage with which he disagreed, thus making it seem that Lord Mather was on
his side when that was not truly so, was regrettable. In general, I preferred
the evidence of Mr Bloomfield, who was prepared to concede that his clients
might be wrong.
The issue of
contributory negligence should be seen against Mr Coombs’ foreword, which made
it clear what information had been obtained by him and spelt out that it was
for UCB to make all necessary inquiries and investigations, such as to justify their
decision to lend. The valuers’ job was to value the security, not to make an
assessment of the applicant, analyse his accounts, require references, make
credit searches and so on. The evidence was that a prudent lender would have
regard to serviceability first and security second
approach, preferring to see the proposal in the round, there can be no doubt
but that, save in exceptional circumstances, it would be wrong to trust too
much to the security, let alone allow it to wag the dog. No amount of security
will make a bad deal good.
I should also
bear in mind that what may seem slipshod when a fiasco is considered
retrospectively may contemporaneously have had some commercial rationale. UCB
were in business to make loans and, if they were to succeed in a competitive
world, it did not behove them to be too fastidious. But, that said, there are
several areas where the conduct of UCB does, in my judgment, fall below what
might reasonably be expected of a prudent lender:
1. No up to
date accounts were obtained, although the year ended on August 31 1989 and the
transaction was not completed until February 1991. I refer here to certified
accounts; there were draft accounts for the following five months and
management accounts for the four months thereafter. I appreciate, of course,
that sometimes accounts are delayed a good deal longer than the five months
that would have elapsed before February 1991. But here was a business that
required a loan in excess of £1m and there is no evidence that UCB even asked
for accounts, let alone required them. Even UCB’s own Guide to Underwriting
required full certified accounts for the last three years. What they would have
shown, of course, is anyone’s guess. Whether or not Mr Senny was truly right to
accept that UCB were ‘desperate to lend’, it does seem as if they were prepared
to suffer Mr Moreschi making the running to a greater degree than would
normally be acceptable. However keen they were to lend, I cannot accept that
that should be any excuse for failure to insist on the obvious step of
requiring, and insisting on the production of, up to date accounts.
Whether UCB
would have considered with care any such accounts is also doubtful; as Mr
Ullstein demonstrated in cross-examination of Mr Senny and Mr Colcomb, no great
analysis took place of those accounts which they did have. In particular, the
increasing indebtedness of the business was not recognised nor was it seen that
these accounts, for what they were worth, showed that it was at least
questionable whether Moreschi could make out of the earnings from the Hosteria
Romana the substantial monthly repayments that were required, at any rate if
the partnership were to have anything left to live on.
2. No bank
statements of any consequence were obtained. There were outstanding the
Barclays’ loan of £902,000, a Barclays’ overdraft account standing at £60,000
and a NatWest loan of £148,000, a total indebtedness, excluding what was handled
by the Manchester branch, in excess of £1m. Yet the only bank accounts
apparently obtained were those for the period August 31 1990 to October 31 1990
and even these, because of the absence of regular and significant withdrawals,
did not give the appearance of a normal trading account. It may even have
appeared from them that NatWest were putting pressure on Moreschi to reduce his
overdraft. It was essential, in my view, to obtain details of how the Barclays’
accounts had been managed, particularly bearing in mind Barclays’ apparent
readiness, if not keenness, to see their own loan largely paid off even if it
meant postponing their charge, and the guarded, if not downright bad, reference
that Barclays did give on November 23 1990. Furthermore, it is to be noted that
on November 20 1990 Mr Colcomb, of UCB, required Mr Senny to be sure that the
Barclays’ loan account statements for 12 months should be obtained, so that UCB
could see that the account had been adequately serviced; good thinking, but no
one was able to explain why this was not done.
3. It was a
special condition of the mortgage offer that loan account statements from
NatWest regarding 94 The Ridgeway should be obtained. This was not done either.
4. Neither
Eagle Star nor Economic Insurance would offer MIG cover. It may be that
insurers were beginning to see the problems that were subsequently to beset
them and were putting forward specious excuses to avoid taking any further
risks, particularly in regard to hotels and the like, which were recognised as
posing special risks. But, specious or not, Economic’s response of November 21
1990 raised perfectly sensible concerns, as indeed did that of Eagle Star,
especially the requirement for certified trading and profit and loss accounts
for at least the last three years, which should have alerted UCB to
shortcomings in the information available to them. Barclays Bank, too, in their
reference of November 23 1990, assumed that UCB had access to recent trading
accounts, which, again, drew to their attention this outstanding deficiency.
The point, as it seems to me, is that independent and experienced concerns were
saying things that should have, but did not, alert UCB to the need for a proper
investigation of Moreschi’s businesses and their trading history.
5. The credit
committee required Mr Ring, of the Exeter branch, to interview and report.
While his report was generally favourable, he did suggest that any offer should
require an overdraft facility of not less than £50,000 for day to day working.
This was not done and no explanation has been forthcoming. Yet it seems obvious
sense, for without such a facility and especially without Eagle Star’s
guarantee, which reduced the loan from 90% to 75%, the loan would not achieve
its stated or any useful purpose, so far as either Moreschi or UCB were
concerned. No restructuring of consequence could take place nor was there any
available cash for day to day working. All that happened was that a large sum
of money went from UCB’s pocket into Barclays’ pocket and Moreschi was left to
carry on — or perhaps, I should say, not carry on — as before.
In these
respects it is my view that UCB were at fault. I do not accept that fault
should attach to them in any of the other respects alleged. For instance, I am
not satisfied that they fell short of the standard of a prudent lender in
failing to discover that Mr Moreschi had been adjudicated bankrupt; they
carried out appropriate credit searches, which did not reveal his bankruptcy.
Further and better searches, such as those carried out for the purpose of the
litigation, would have revealed the bankruptcy, but UCB did not have the
benefit of hindsight and they did what was usual. Nor do I consider that
anything done or not done by Mr Senny by way of assessing the merits of the application
or in reporting to the credit committee caused UCB to make the loan; proper
analysis of the management accounts, for instance, would be irrelevant because
up to date certified accounts should have been obtained and failure to do that
was the negligence that contributed to the loss. Nor am I satisfied that any of
UCB’s systems can reasonably be faulted. Matters such as the acceptance by the
Manchester branch of only a limited part of the application and the
unenthusiastic initial out of area report go to the overall picture and should
have made UCB yet more vigilant to attend to the matters identified above, but
failure to heed them does not in itself constitute negligence. As to the
allegation that by the time this loan came to be made the borrowers were
already in arrears on the Manchester repayments, the evidence of Mr Bloomfield
leads me to think that if they were in arrears at all, it was only to a very
limited extent.
On the basis
of the information that UCB had, and without taking the steps referred to
above, the loan should not have been made. I cannot say what might have been
the position had UCB followed up the various leads and required production of
the appropriate information. Perhaps they might have satisfied themselves that
the loan could properly be made. More probably, I believe, seeing that not one
regular repayment was made, the more they had inquired, the more dubious the
prospects, already borderline in the mind of the credit committee, would have
become. In my judgment, accordingly, UCB were negligent and their negligence
must be seen as having contributed to them making the loan and suffering the
loss that they suffered.
I do not
accept that there was any negligence that directly contributed to the loss
resulting from the overvaluation of the security. Mr Ullstein puts forward two
respects in which there was a direct contribution. First, he says that UCB
failed to heed the caveat in Mr Coombs’ report, to the effect that no recent
trading information had been seen and that the valuation assumed no decline in
the level of takings. Mr Colcomb accepted that the turnover figure of £609,000
in the accounts to August 31 1989 would, if unsustainable, undermine the £1.25m
valuation. And he contended that the failure by UCB to send to
also undermined the valuation.
I have already
given my reasons for not accepting that it was negligent for UCB not to send up
to date accounts to Pinders. In addition, I do not consider that it was
negligent not to heed Pinders’ caveat. The inquiries to be made and accounts to
be inspected were for the purpose of discharging the lenders’ obligation to
take care for their own interests. They were not for the purpose of checking
Pinders’ valuation, which was not made conditional on further information being
supplied. But in rejecting Mr Ullstein’s contention, I wish to make it clear
that I am referring only to a direct contribution to the loss occasioned by the
overvaluation. UCB were responsible for the decision to make the loan and the
taking of the security was an integral part of that decision. Their decision
resulted in them entering into this transaction; if they had investigated the
borrowers with greater thoroughness and drawn the correct inferences and acted
upon such information as they did have, they would not have made the loan and
consequently, of course, the question of security would never have arisen.
Before SAAMCO lenders were routinely fixed with a proportion of
liability for the whole loss on the basis of ‘no transaction’ and, while SAAMCO
has changed the perception of the valuers’ liability, I do not see it as
impacting on the lenders’ liability. Their liability for their own decision
remains the same and that decision resulted in the transaction proceeding and
the security being taken. The loss that flowed from the security being
overvalued was part of the loss suffered by UCB and was thus indirectly
attributable to UCB’s negligence, although at the same time it was directly due
to Pinders’ negligence.
As to the
allegation that UCB directly contributed to the title problem by not sending
Pinders a copy of the fire certificate nor supplying them with a copy of DN
68438, that also is rejected. In any event, to make good that proposition Mr
Ullstein would need to show that UCB were vicariously liable for Lovells’
alleged negligence. That has not been argued and I would need persuading that
in law a client is liable for incidental acts of his solicitor in carrying out
a conveyancing transaction.
Do the
damages fall to be reduced by reason of contributory negligence?
This question
gives rise to a ‘knotty problem’ that has already been addressed in a number of
cases at first instance. In the course of the hearing there was made available
a Court of Appeal decision in Cavendish Funding Ltd v Henry Spencer
& Sons Ltd*, but it is not clear that the problem arose in that case,
possibly because the contributory negligence was directly related to the taking
of the security. On the facts of that case the Court of Appeal appear to have
found no difficulty in reducing damages by 25% for contributory negligence.
Equally, of course, in SAAMCO itself, the House of Lords allowed the
trial judge’s 25% reduction to stand, although it does not seem that the point
was argued.
*Editor’s
note: Reported at [1998] 1 EGLR 104
Since
preparing this judgment, I have been supplied with a copy of the full judgment
of Aldous LJ in Cavendish, and with the written argument. It seems that
my assumption is correct; at the hearing the contributory negligence was
limited to a single allegation that was directly related to the security. It
was thus a question of fact. It does not appear that the legal point was argued
and it is certainly not referred to in the judgment.
The problem
can be succinctly put, as Moses J put it in Coventry Building Society v William
Martin & Partners*: Is it only such negligence as contributed to the
damages which resulted from the negligent valuation which will lead to a
reduction? A number of judges have held that the answer is ‘Yes’. They include
Phillips J (as he then was) in Banque Bruxelles v Eagle Star
Insurance Co Ltd [1995] 2 All ER 769†; Chadwick J (as he then was) in Bristol
& West Building Society v Fancy & Jackson unreported July 22
1997; Carnwath J in Alliance & Leicester Building Society v Wheelers
unreported January 23 1996; possibly (since I understand that he has recalled
his judgment) Thomas J in Interallianz Finanz AG v Independent
Insurance Co Ltd unreported June 5 1997‡; and, of course, Moses J himself
in Coventry Building Society. On the other hand, Jacob J has held to the
contrary in Platform Loans Ltd v Oyston Shipways Ltd§.
*Editor’s
note: Reported at [1997] 2 EGLR 146
†Editor’s
note: Also reported at [1994] 2 EGLR 108
‡Editor’s
note: Reported at [1997] EGCS 91
§Editor’s
note: Reported at [1996] 2 EGLR 110
I can well see
the force of Mr Davidson’s submission, on the basis of Colchester Estates
(Cardiff) Ltd v Carlton Industries plc [1986] Ch 80*, that I should
follow the later of conflicting first instance decisions, unless I am convinced
that it is wrong. Clearly, consistency is desirable at first instance, but I
cannot see that there is consistency here, in the light of the apparent
willingness of the House of Lords to accept the possibility of contributory
negligence.
*Editor’s
note: Also reported at [1984] 2 EGLR 64
Section 1(1)
of the Law Reform (Contributory Negligence) Act 1945 provides as follows:
Where any
person suffers damage as the result partly of his own fault and partly of the
fault of any other person or persons, a claim in respect of that damage shall
not be defeated by reason of the fault of the person suffering the damage, but
the damages recoverable in respect thereof shall be reduced to such extent as
the court thinks just and equitable having regard to the claimant’s share in
the responsibility for the damage.
As Lord
Denning MR made clear in Froom v Butcher [1976] QB 286, at p292,
the question is what was the cause of the damage, the damage being that
suffered by the plaintiff. Here UCB suffered damage to the tune of about £1.4m.
There were a number of causes of this loss: for instance, the fall in the
market, Moreschi’s impecuniosity, poor assessment of Moreschi’s
creditworthiness, possibly a failure to take reasonable steps in mitigation of
their loss and, of course, the defendants’ negligence, first, in overvaluing
the security, and, second, in misstating what they had valued. All these causes
contributed to UCB’s damage. Some may give rise to a cause of action by
UCB, in which case the extent of the defendant’s liability and the scope of his
duty will require evaluation. It may be, as SAAMCO held, that that
liability will be limited in its scope or causal effect, with the consequence
that the plaintiff’s recovery from that defendant will be limited. But that, in
my view, does not mean that that defendant’s negligence, unlike all the other
contributory factors that I have mentioned, ceases to be a cause of the
plaintiff’s damage. For my part, I have difficulty seeing why, because, where
there is a duty to provide information a plaintiff can recover only the loss
consequent on the incorrect information, it should be only such negligence as
contributed to that particular loss that will lead to a reduction. There is
nothing in the Act that leads to that conclusion, which seems, as Jacob J
implied, to confuse ‘damage’ with ‘damages’. The Act refers to responsibility
for the damage, not for that damage.
The essence of
an apportionment under the Act is that the court should do what is ‘just and
equitable’ and, in my view, a broad consideration of what is fair militates
against the principle that the valuer’s liability should not be reduced. It
should not be overlooked that, while in this case the plaintiffs’ loss
substantially exceeds that part for which the defendants are responsible, that
need not always be so. A negligent valuation of £1m, when the true value is
£800,000, will cause a loss which may be as much as £200,000; a 75% loan on the
faith of the wrong information, but made without adequately considering the
creditworthiness of the borrower, may in fact lead to a total loss of, say,
£100,000, if the security is realised at £650,000. On that hypothesis, the
contributory negligence of the lender would, if Mr Davidson is right, be
regarded as irrelevant to the overvaluation of the security and would be left
wholly out of account, with the plaintiff recovering in full from the valuer.
Other
hypotheses can be postulated, perhaps involving falls, recoveries or other
vagaries of the market. The defendants will, on the
of account, always take the top slice of liability. Any recovery in the market
goes first to extinguish loss caused by the contributory negligence or failure
to mitigate, and only when that is done, does it serve to reduce the valuers’
liability. That does not strike me as fair or consonant with ordinary
principles. Like Jacob J, I do not consider that subtle distinctions in the
type of contributory negligence can or should find a place in this area of the
law. And subtle distinctions will need to be drawn; in this very case it has
been argued that there was ‘relevant’ contributory negligence and it requires
little imagination to see the nature of the arguments with which the courts
will be faced when professionals, for instance engineers or architects, give
negligent information and it is sought to maintain a plea of ‘relevant’
contributory negligence.
For my part
and with respect to those who have taken a different view, I would hold that
the damages recoverable by UCB in respect of that part of their loss which
resulted from Pinders’ negligence, fall to be reduced to such extent as may be
just and equitable having regard to their contributory negligence. In reaching
this conclusion, I bear in mind Mr Davidson’s submission in regard to Professor
Glanville Williams’ discussion of The Scotia (1890) 6 Asp MLC 541 and Mahoney
v Beatman (1929) 110 Conn 184. But I do not believe that his
conclusions, with which I respectfully agree, are inconsistent with mine.
Clearly, the contributory negligence has to be causally related to the loss
suffered, although it may be permissible, following Froom v Butcher,
to adopt a broad brush approach to apportionment, rather than apportioning a
precisely quantified part of the overall damage. It is simply, as I see it,
that UCB’s contributory negligence was causally related to all their loss on
the basis that they were responsible for the decision to enter into the
transaction, and I do not accept that, because the loss for which Pinders are
liable is not coextensive, that means that the Act does not apply.
Apportionment
1. Pinders
were professionals engaged for a fee to do a particular task of crucial
importance for UCB, namely to give them information to enable them to have an
‘adequate safety net’, as Wright J described it in HIT Finance Ltd v
Lewis & Tucker Ltd [1993] 2 EGLR 231. In secured lending the security
is, as UCB made clear to their solicitors, the essence of the transaction. On
the other hand, Pinders were, as their foreward sets out, entitled to expect
that UCB would act as prudent lenders. They were, in my judgment, both
blameworthy in doing what was expected of them; but, in the area of loss that
falls for apportionment, namely the loss arising because the security was
overvalued, much the greater causative potency must rest with Pinders. UCB’s
negligence had, as discussed above, no direct impact on this area of loss.
Since it is this one area only which falls for apportionment, I consider that
it would be just and equitable to reduce UCB’s damages by one-third. This means
that they are entitled to £300,000.
2. As regards
the title problem, UCB were not to blame at all. The loss arose mostly through
a crass error, and to a lesser extent through forgetfulness, on the part of
Pinders, who were not only seriously blameworthy but, in terms of causative
potency, were wholly responsible for it. Bearing in mind that the title problem
was incidental to the transaction, for which I have already apportioned legal
liability, I do not consider that it would be just or equitable that the loss
represented by the cost of rectifying the title should be reduced on account of
UCB’s contributory negligence in making the loan.
Conclusion
It follows, therefore, that
UCB are entitled to judgment for £366,250, being £300,000 plus £66,250,
exclusive of interest. The third party claim will be dismissed.
