Negligence — Valuation of commercial properties for loan purposes — Valuation above sale prices — Whether valuers liable in contract or only tort — Whether bank contributorily negligent — Measure of damages
In respect of
the purchase of a number of commercial properties, property companies, set up
as special purpose vehicles (‘SPVs’), purchased each property. M persuaded the
plaintiff bank to advance to each SPV 90% of the value of the property. M also
procured for the plaintiff mortgage indemnity guarantees (‘MIG’) providing 100%
insurance cover against loss from the first defendant insurance company. M then
invited a number of valuers to give ‘armchair’ valuations and awarded a
contract to provide a valuation to the valuer who provided the highest
valuation. In respect of the transactions in issue, the valuations
substantially exceeded the purchase price of the property in question. In due
course the borrowers defaulted on the loans, the subject of the litigation, the
first defendant refused to pay the plaintiff under the MIGs alleging material
non-disclosure and that the valuations of the fourth and fifth defendant firms
of valuers were overvaluations. By the date of the trial the plaintiff and the
first defendant had reached a compromise whereby they were both to share in the
damages recoverable and settlements were reached with the second and fourth
defendants. In the course of the hearing the plaintiff abandoned its claim
against the third defendant, leaving the fifth defendant as the only surviving
defendant, although there were contribution proceedings between the fourth and
fifth defendants in respect of one property, Crusader House. The fifth
defendant admitted that two of their valuations were not competent. In respect
of the three transactions in issue: Trevelyan House was sold on March 9 1989
for £25.5m and valued by the fifth defendant at £44.35m on April 11 1989;
Cambridge Circus was sold on April 13 1989 for £73m, resold shortly afterwards
for £82.5m and valued by the fifth defendant on June 20 1989 at £103m; Crusader
House was sold on May 30 1989 for £59m, resold shortly afterwards for £63m and
valued by the fourth defendant on June 30 for £83.95m and by the fifth
defendant on July 3 1989 for £82m. The fifth defendant denied that the
plaintiff had any claim against it in contract and denied that the plaintiff
relied on its valuation when making the advance for Crusader House. It was
agreed that the plaintiff’s cause of action against the fifth defendant arose in
each case when they were entered into the relevant loan transaction. After that
date loans for Trevelyan House and Cambridge Circus were syndicated to other
banks, but the plaintiff contended it was still entitled to recover for the
full losses attributable to the negligent valuations and not merely the losses
after syndication because of the principle res inter alios acta. The
fifth defendant contended that it owed no duty to protect the plaintiff against
any losses attributable to the collapse in the property market. Trevelyan House
was deemed sold on March 3 1993 and Cambridge Circus was sold on December 22
1992; the plaintiff claimed interest as damages at base rate plus 1% on the
entirety of its advances down to the date of the sales, thereafter they claimed
interest under section 35A of the Supreme Court Act 1981. It was part of the
fifth defendant’s defence that the plaintiff had been contributorily negligent
in entering into the loans.
in respect of all three transactions lay in tort. The fifth defendant’s
liability to the first defendant in respect of Trevelyan House was also in
tort, the elements of proximity and reliance to give rise to a duty of care
were present. Where property has recently been sold, and provided that the
property was properly exposed to the market and competently marketed, the
market price will demonstrate the market value. Apart from express
instructions, a valuer who gives an open market valuation without considering
the implications of a recent sale in the market of the property being valued is
negligent. However, features of the marketing of a property and other facts may
suggest that the best price available in the market had not been obtained. The
fifth defendant’s valuer did not investigate and give due weight to the
marketing history of the properties he valued. The valuations of the properties
were negligent to the following extent: the open market value of Trevelyan
House was £27.5m and the maximum value a competent valuer could have attributed
was £30m; the open market value of Cambridge Circus was £75m and the maximum
value of a competent valuer was £80m; the open market value of Crusader House
was £60m and the maximum value of a competent valuer was £63m. Neither directly
nor indirectly did reliance on the fifth defendant’s opinion of the value of
Crusader House induce the plaintiff to enter into the loan and therefore its
claim against the fifth defendant in respect of this property failed. If the fifth
defendant had given competent valuations in the case of Trevelyan House and
Cambridge Circus, the plaintiff would not have entered into the loan
transactions based on those valuations. Damages fell to be assessed at the date
of judgment; the plaintiff can recover only damages it sustained and cannot
recover on behalf of the syndicate banks, who may have independent causes of
action. However, the insurance policy provided by the first defendant to the
plaintiff was res inter alios acta and the fifth defendant could not
claim credit for losses recovered by the plaintiff under that policy. The
plaintiff did not rely on the fifth defendant’s valuations to provide any
cushion against a fall in the property market and on the authorities the
plaintiff was not entitled to be awarded damages for that part of its loss so
caused. The plaintiff did not make inquiries as to the disparity between the
sale prices and the valuations and was contributorily negligent in entering
into the loan transactions in respect of Trevelyan House and Cambridge Circus;
this was a serious lapse from the standard of care to be expected of a merchant
bank and the plaintiff’s damages should be reduced by 30% to reflect
contributory negligence. The total sums recoverable, including interest, was
£1,304,544 in respect of Trevelyan House and £9,504,794 in respect of Cambridge
Circus.
The following
cases are referred to in this report.
Avco
Financial Services v Holstein (1980) 109 DLR
(3d) 128
Banque
Financiere de la Cite SA v Westgate Insurance
Co, sub nom Banque Keyser Ullmann SA v Skandia (UK) Insurance Co [1990]
1 QB 665; [1989] 3 WLR 25; [1989] 2 All ER 952, CA; [1991] 2 AC 249; [1990] 3
WLR 364; [1990] 2 All ER 947, HL
Baxter v F W Gapp & Co Ltd [1938] 4 All ER 457; [1939] 2 KB 271;
[1939] 2 All ER 752; (1939) 55 TLR 739, CA
Billings
(AC) & Sons Ltd v Riden [1958] AC 240;
[1957] 3 WLR 496; [1957] 3 All ER 1, HL
Caparo
Industries plc v Dickman [1990] 2 AC 605;
[1990] 2 WLR 358; [1990] 1 All ER 568, HL
Corisand
Investments Ltd v Druce & Co [1978] EGD
769; (1978) 248 EG 315, 407, 504
Davies v Swan Motor Co (Swansea) Ltd [1949] 2 KB 291; [1949] 1 All
ER 620, CA
Eagle
Star Insurance Co Ltd v Gale & Power (1955)
166 EG 37
Heskell v Continental Express Ltd [1950] 1 All ER 1033; 94 Sol Jo 339
HIT Finance
Ltd v Lewis & Tucker Ltd [1993] 2 EGLR
231; [1993] 9 PNR 33
Hughes v Lord Advocate [1963] AC 837; [1963] 2 WLR 779; [1963] 1 All
ER 705; 1963 SC (HL) 31; 1963 SLT 150, HL
JEB
Fasteners Ltd v Marks Bloom & Co [1983]
1 All ER 583, CA
Kenney v Hall Pain & Foster [1976] EGD 629; (1976) 239 EG 355,
[1976] 2 EGLR 29
Linden
Gardens Trust Ltd v Lenesta Sludge Disposals Ltd
(1992) 57 BLR 57
Livingstone
v Rawyards Coal Co (1880) 5 App Cas 25, HL
London
& South of England Building Society v Stone [1983]
1 WLR 1242; [1983] 3 All ER 105; [1983] EGD 921; (1983) 267 EG 69, [1983] 2
EGLR 131
Lowenburg,
Harris & Co v Wolley (1895) 25 SCR 51
Ministry
of Housing and Local Government v Sharp [1970]
2 QB 223; [1970] 2 WLR 802; [1970] 1 All ER 1009; (1970) 68 LGR 187; 21
P&CR 166; [1970] EGD 139; 213 EG 1145, CA
Mount
Banking Corporation Ltd v Brian Cooper & Co [1992]
2 EGLR 142; [1992] 35 EG 123
Murphy v Brentwood District Council [1991] 1 AC 398; [1991] 1 AC
398; [1990] 3 WLR 414; [1990] 2 All ER 908; [1990] 2 Lloyd’s Rep 467; (1990) 89
LGR 24, HL
Philips v Ward [1956] 1 WLR 471; [1956] 1 All ER 874, CA
Polenis
& Furness Withy & Co, Re [1921] 3 KB 560
Raylon
Investment Ltd v Bear Realty Ltd (1981) 20
RPR 288
Roe v Minister of Health [1954] 2 QB 66; [1954] 1 WLR 128 & 2
WLR 915; [1954] 2 All ER 131, CA
Ross v Caunters [1980] Ch 297; [1979] 3 WLR 605; [1979] 3 All ER
580
Saif Ali v Sydney Mitchell & Co [1980] AC 198; [1978] 3 WLR 849;
[1978] 3 All ER 1033, HL
Scholes v Brook (1891) 63 LT 837; 7 TLR 214; affd 64 LT 674
Seeway
Mortgage Investment Corporation v First Citizens
Financial Corporation (1983) 45 BCLR 87
Shearson
Lehman Hutton Inc v Maclaine Watson & Co Ltd
(No 2) [1990] 3 All ER 723; [1990] 1 Lloyd’s Rep 441
Singer
& Friedlander Ltd v John D Wood & Co [1977]
EGD 569; (1977) 243 EG 212 & 295, [1977] 2 EGLR 84
Smith v Eric S Bush (a firm) [1990] 1 AC 831; [1989] 2 WLR 790;
[1989] 2 All ER 514; (1989) 87 LGR 685; [1989] 1 EGLR 169; [1989] 17 EG 68
& 18 EG 99, HL
Smith v Leech Brain & Co [1962] 2 QB 405; [1962] 2 WLR 148;
[1961] 3 All ER 1159
St
Martins Property Corporation Ltd v Sir Robert
McAlpine Ltd [1993] 3 WLR 408
Swingcastle
Ltd v Alastair Gibson (a firm) [1990] 1 WLR
1223; [1990] 3 All ER 463; [1990] 2 EGLR 149; [1990] 34 EG 49, CA; [1991] 2 AC
223; [1991] 2 WLR 1091; [1991] 2 All ER 353; [1991] 1 EGLR 157; [1991] 17 EG
83, HL
This was the
hearing of a claim for damages by the plaintiff, Banque Bruxelles Lambert SA,
against the fifth defendant, John D Wood Commercial Ltd, the first, second and
fourth defendants, Eagle Star Insurance Co Ltd, Maurice Markovits and Lewis
& Tucker Ltd, having compromised the plaintiff’s claims against them.
Peter
Goldsmith QC, David Railton and Timothy Howe (instructed by Linklaters &
Paines) appeared for the plaintiff; Mark Cran QC, Mark Hapgood and Cyril Kinsky
(instructed by Lovell White Durrant) represented the first defendants; Romie
Tager and Hugh Jackson (instructed by Ince & Co) represented the second
defendants; Roger Toulson QC and Roger Stewart (instructed by Reynolds Porter
Camberlain) represented the third defendants; Timothy Lamb and Christopher
Russell (instructed by Kennedys) represented the fourth defendants; Christopher
Symons QC, Ewan McQuater and Christopher Smith (instructed by David Goodman
& Co) represented the fifth defendant.
Giving
judgment, PHILLIPS J said: The plaintiff, Banque Bruxelles Lambert SA
(‘BBL’), is a Belgian bank with a branch in London. In the first half of 1989
BBL made a series of loans secured by commercial properties. Those loans were
syndicated by BBL and I shall, in due course, consider the effect of that
syndication. Until I do so I shall treat BBL and the syndicates as if the two
were synonymous. The borrowers have defaulted on those loans and the properties
have proved inadequate securities. BBL have sustained heavy losses. In respect
of three of the transactions BBL contend that these losses were caused by
negligence on the part of the fifth defendant, John D Wood Commercial Ltd. BBL
contend that they were induced to enter into these transactions by negligent
overvaluations of the properties by John D Wood Commercial Ltd. In the case of
two of the properties John D Wood Commercial Ltd admit that their valuations
were not competent and, for reasons which I shall give, I find that the same is
true of the third. The extent of the overvaluations in each case is in issue.
The other issues which fall to be resolved are the nature and extent of any
duty owed to BBL by John D Wood Commercial Ltd, causation, measure of damage
and contributory negligence.
BBL took out
policies described as mortgage indemnity guarantees (MIGs) against the losses
that they have sustained with the first defendants, Eagle Star Insurance Co
Ltd. There was an issue between BBL and Eagle Star as to whether these were
contracts of insurance or guarantee. It is now accepted that they were, or can
be treated as, contracts of insurance and I shall refer to them as such. Eagle
Star purported to avoid the policies for non-disclosure and, initially, the
issue of whether they were entitled to do so lay at the heart of this
litigation. In the course of the hearing, however, BBL and Eagle Star settled
their differences on a compromise basis. Under the terms of the settlement BBL
will have to share with Eagle Star any recoveries that they make from John D
Wood Commercial Ltd. In the case of one transaction, however, Trevelyan House,
Eagle Star make a direct claim in negligence against John D Wood Commercial Ltd
for inducing Eagle Star to grant cover in respect of the transaction. Again,
the extent of the overvaluation, duty, causation and measure of damage are in
issue.
This
comparatively simple clutch of issues is all that remains of what started life
as four actions involving a host of complex issues of fact and law. In order to
set the issues that remain in context it is necessary to outline the nature and
history of the action in which they arise.
The moving
force behind all the transactions with which this litigation is concerned was
the second defendant, Mr Maurice Markovits. He acted at times as the
representative of the third defendants, Allied Dunbar Assurance plc, a
financial services company and a sister company of Eagle Star. In joining
Allied Dunbar, BBL alleged that Allied Dunbar were legally responsible for Mr
Markovits’ activities in relation to the transactions in which BBL became
involved. In the course of the hearing BBL abandoned this contention and
discontinued their claim against Allied Dunbar.
The framework
of a typical transaction was as follows. A property company purchased a
commercial property using a shelf company (a special purpose vehicle or SPV) to
do so. Acting for the sponsor Mr Markovits persuaded BBL to agree to advance to
the SPV 90% of the value of the property. BBL were only prepared to do this
provided that they were granted 100% insurance cover against loss. Mr Markovits
procured this cover from Eagle Star. The amount of the loan, and of Eagle
Star’s cover, thus depended upon the value of the property. Mr Markovits
invited a number of valuers to give him an ‘armchair’ valuation of the property
in question. A contract to provide a full valuation was awarded, at the
instigation of Mr Markovits, to the valuer who provided the highest ‘armchair’
valuation. BBL and Eagle Star accepted this valuation. The valuation
substantially exceeded the purchase price of the property in question. The
advance by BBL of 90% of the valuation enabled the sponsor not merely to cover
all its expenses in addition to the cost of purchase, but to pocket a
substantial instantaneous profit on the transaction.
Mr Markovits
also profited hugely from these transactions. He received a commission from the
sponsor for arranging the finance. He received a commission from BBL for
providing the customer. He received a commission from Eagle Star for procuring
the insurance transaction. An interest rate cap usually had to be purchased by
the borrower. Mr Markovits would arrange this — for a commission. Finally, Mr
Markovits persuaded BBL to make it a term of the loan that key personnel of the
sponsors would take out ‘keyman’ life cover for the benefit of BBL. In fact,
this was not a benefit that BBL required. The object of the requirement, as BBL
recognised, was to enable Mr Markovits to earn further commission by placing
the keyman policies with Allied Dunbar. Mr Markovits did not, however, remain
satisfied to profit simply by earning commissions. In two of the transactions
with which I am concerned he played the role of a sponsor, although it still
seems to have been considered appropriate that he should receive commissions as
before.
The status of
Mr Markovits was a bone of contention in the litigation. Eagle Star alleged
that he was the agent of BBL and that his knowledge was the knowledge of BBL
for the purposes of disclosure. This mirrored allegations by BBL that Mr
Markovits was Eagle Star’s agent and that everything known by Mr Markovits was
known by Eagle Star. Eagle Star claimed damages directly from Mr Markovits
alleging, inter alia, that Mr Markovits had fraudulently put forward
valuations which, by reason of the circumstances in which he had obtained them,
he knew to be excessive. BBL also made direct claims against Mr Markovits in
which these allegations were adopted.
John D Wood
Commercial Ltd was not the only firm alleged to have made negligent
overvaluations in the circumstances that I have just described. The fourth
defendants, Lewis & Tucker, were alleged to have given overvaluations in
respect of three transactions, one of which was a transaction in respect of
which John D Wood Commercial Ltd also gave a valuation.
At least at
the outset, the primary non-disclosure relied upon by Eagle Star to justify
avoidance of the policies was non-disclosure that the valuations were
overvaluations. As the case developed Eagle Star made, with a great wealth of
particularity, allegations that BBL had not conducted their business as a
prudent bank should and had failed to disclose this fact. These allegations
were, in due course, adopted or adapted as heads of alleged contributory
negligence pleaded by the valuers against BBL.
Initially, BBL
appeared to have adopted on a contingent basis against Lewis & Tucker and
John D Wood Commercial Ltd only the allegations made by Eagle Star that the
valuations were negligent. Some weeks into the trial they made it plain that
they were advancing a positive case of negligent overvaluation on the part of
the valuers. Thereafter, settlements were reached between BBL and Eagle Star,
Mr Markovits and BBL, Mr Markovits and Eagle Star and between Lewis &
Tucker and BBL, leaving John D Wood Commercial Ltd as the only surviving
defendant, although there are contribution proceedings between John D Wood
Commercial Ltd and Lewis & Tucker in respect of Crusader House.
All that I
think I need say about the implications of these settlements at this stage is
that the settlement between BBL and Lewis & Tucker reflected, and rightly
reflected, the fact that Lewis & Tucker had negligently overvalued the
properties with which they were concerned.
There is one
further matter that I should mention in connection with the history of this
litigation. When the hearing commenced John D Wood Commercial Ltd were not
represented. I was told that this was because they lacked the funds to instruct
counsel and the insurers providing the first layer of their E&O cover, who
had initially been funding their defence, had repudiated liability on the
ground that their clients had been not merely negligent, but fraudulent.
Happily, in the course of the hearing, other underwriters potentially on risk
have funded representation, which has not merely been of assistance to John D
Wood Commercial Ltd, but has greatly eased my task.
If Mr
Markovits was the moving force behind these transactions, his enthusiasm was
shared by two others who played an important part in the story. Mr Fraser was,
until June 1989, the manager of the corporate finance department of BBL. He
then left the bank to take up a position with Mr Markovits as a consultant.
While at BBL he enthusiastically supported the transactions proposed by Mr
Markovits. I heard evidence from Mr Fraser. I also heard evidence from a number
of other members of BBL’s management, both in London and in their head office
in Brussels. These included Mrs Ann Andrews, who became manager of the
corporate finance department when Mr Fraser left BBL.
I would make
one general comment about the oral evidence called by BBL. Very detailed
witness statements had been prepared. Their preparation must have been a
laborious task and I have no doubt it received the scrupulous diligence and
attention to detail that has been the hallmark of the legal representatives in
this case. Inevitably the preparation of the statements must have involved a
substantial degree of reconstruction of events from contemporary documents. It
was not apparent, however, from the statements how much was based on
recollection and how much on reconstruction. This remained true, to a degree,
when witnesses were cross-examined, for there was a tendency to cling
dogmatically to the contents of the witness statements even when it became
apparent that these could not be accurate. This did not reflect dishonesty on
the part of the witnesses, but the difficulty long after the event in
differentiating between recollection and reconstruction and the anxiety not to
agree to any proposition put in cross-examination unless certain of its
correctness.
The other
enthusiast was Mr Ron Buxton. He was the financial insurances manager at Eagle
Star. He was responsible for the MIG business that was written by Eagle Star
and was pursuing an ambition of making Eagle Star the leader in this field. He
was the first, and as it happened the only, witness called by Eagle Star.
Mr Buxton had
been responsible for what had proved a disastrous series of underwriting
decisions in relation to MIG business.
He had been
retained in the employment of Eagle Star to assist with the conduct of this
litigation. The strain placed on him by the events giving rise to this
litigation must have been considerable. Over the years he has, I suspect, gone
through a natural process of rationalising and justifying to himself his part
in these events. I believe that he was doing his best to give truthful
evidence, but when he was speaking of his own reasoning and motivation at the
time of the transactions I did not find his evidence reliable.
The partner at
Lewis & Tucker who was principally responsible for their valuations was Mr
N Allan Bauernfreund*. He was not called to give evidence. The partner at John
D Wood Commercial Ltd principally responsible for their valuations was Mr
Anthony Browne [FRICS]. He was not called to give evidence.
*Editor’s
note: At the time, Allan Bauernfreund was an FRICS. Subsequently he has been
suspended.
Mr Markovits
did not give evidence.
At the outset
of the trial I was provided with a schedule of basic information. This proved
so valuable that I propose to incorporate it, with some minor amendments, at
this stage of the judgment.
The transactions
with which I am directly concerned are Openhouse, Cruhouse and Bridgecirc. The
other transactions have some relevance as background, particularly in relation
to the issue of contributory negligence.
See Schedule
of Basic Information (table opposite).
It will be
necessary, in due course, to consider in some detail aspects of the
transactions with which I am concerned. At this point I propose to sketch in
outline the circumstances in which these transactions were concluded and the
essential features of the transactions.
Grant of the
facilities
BBL is the
second largest commercial bank in Belgium. It has foreign branches in a number
of countries, including a branch in London. The structure of BBL can be
explained, in so far as necessary for the purposes of the judgment, in the
context of a description of the procedure normally followed when the London
branch granted a loan facility.
A customer
seeking a loan would make his request to an account officer. The account
officer would prepare a presentation, in standard form, detailing the proposed
transaction and giving information about the borrower. The presentation would
then be put before the credit analysis section of the risk analysis and loans
administration department (‘RLA’). Mrs Marie-Claire Swinnen-Paramesh (‘Mrs
Swinnen’) was head of the RLA. A credit analyst in the credit analysis section
would consider the presentation and make an analysis of the risk which would be
endorsed on the presentation form. The account officer would also endorse his
conclusions and recommendations on this form. The presentation form was then
circulated to the London Credit Committee (‘LCC’). During 1989 the LCC was
chaired by Mr Lenotte, the general manager of the London Branch. The other
members of the LCC were a Mr Ross, head of the corporate finance department of
the London branch, Mr Christensen, head of the
|
SCHEDULE OF BASIC INFORMATION |
|||||||
|
TRANSACTION |
LEEGATE |
OPENHOUSE |
CORNLEASE |
PICCADILLY |
CRUHOUSE |
BRIDGECIRC |
|
|
Property |
Leegate Centre |
Trevelyan House |
Island Site Finsbury Pavement |
109-111 Piccadilly Manchester |
Crusader House |
Cambridge Circus |
|
|
Borrower |
Leegate |
Openhouse |
Cornlease |
Hatchville |
Shelfco |
Shelfco |
|
|
Sponsors |
Realex/Triex |
LPT |
LPT |
Realex/Triex |
LPT, Markovits |
LPT, Markovits |
|
|
Vendor |
Merryhaven |
Norwich |
London |
Legal |
Hartstreet |
Norwich |
|
|
Sale agreed |
2 Dec 1988 |
9 Mar 1989 |
16 Feb 1989 |
3 Mar 1989 |
30 May 1989 |
13 Apr 1989 |
|
|
Sale price |
£7.725m |
£25.5m |
£75m |
£3.55m |
£59m |
£73m |
|
|
Intermediate vendor |
– |
– |
– |
Old Park Lane (Piccadilly) |
Chetwood (LPT) |
Finebreak (LPT) |
|
|
Intermediate price |
– |
– |
– |
£3.7m/£4.225m |
£63m |
£82.25 |
|
|
First presented to BBL |
22 Feb 1989 |
10 Mar 1989 |
22 Feb 1989 |
12 Apr 1989 |
21 Jun 1989 |
11 May 1989 |
|
|
Credit Committee approval |
7 Mar 1989 |
14 Mar 1989 |
11 Apr 1989 |
?? |
26 Jun 1989 |
12 May 1989 |
|
|
Facility letter |
7 Mar 1989 |
16 Mar 1989 |
3 Apr 1989 |
25 Apr 1989 |
27 Jun 1989 |
12 May 1989 |
|
|
Valuer |
Lewis & Tucker |
John D Wood |
Lewis & Tucker |
John D Wood |
Lewis & Tucker/John D |
John D Wood |
|
|
Valuation |
£10m |
£44.35m |
£99.5m |
£5.3m |
£83.95m*/£82m |
£103m |
|
|
Valuation date |
14 Mar 1989 |
11 Apr 1989 |
13/14 Apr 1989 |
14 Apr 1989 |
30 Jun/3 Jul 1989 |
20 Jun 1989 |
|
|
Loan amount |
£9m |
£39.915m |
£89.55m |
£4.77m |
£72m |
£92.7m |
|
|
Request for policy from |
16 Mar 1989 |
5 Apr 1989 |
5 Apr 1989 |
2 May 1989 |
28 Jun 1989 |
27 Jun 1989 |
|
|
Closing date |
28 Mar 1989 |
24 Apr 1989 |
2 May 1989 |
6 Jun 1989 |
5 Jul 1989 |
21 Jul 1989 |
|
|
Accurate value per BBL |
£7.7m |
£27.5m |
£62.9m |
£3.75m |
£60m |
£75m |
|
|
Max reasonable value per |
£8.5m |
£30m |
£67.4m |
£3.95m |
£63.5m |
£80m |
|
|
*Editor’s note: Lewis |
|||||||
commercial loans department of the London branch, and Mrs Swinnen.
At the next meeting of the LCC, at which a quorum of three members would be
present, the account officer would make a formal presentation and answer
questions posed by the LCC. If the LCC approved of the proposal, they would
endorse this approval on the presentation. The London branch had only limited
authority to make advances. If the LCC approved a proposal which fell outside
this authority, the presentation would be forwarded to head office in Brussels
for further consideration. If the facility proposed exceeded BFr250m, it was
considered by a subcommittee of the Commission des Credits Etrangers (‘CCE’).
If the proposal was for more than BFr500m it was considered by the CCE itself.
If the proposal was for more than BFr1bn — about £16m — the CCE had to forward
the proposal, with a favourable opinion, to the Comité de Direction (‘CD’).
Urgent
procedure
BBL London had
established an ‘urgent procedure’, which originally was intended for use only
‘in very rare situations’. Under this procedure the account officer could
approach LCC members individually and, by obtaining the signatures of the
chairman and one other member, obtain approval for a facility. The account
officer then had to submit a formal presentation to the next meeting of the LCC
for ratification of the facility.
Grant of
the enveloppe
Before March 1
1989 the authority of the London branch to make loans without reference to
Brussels was limited to £1m. On that date this authority was increased to
£1.5m. Much larger loans than this were made, with authority from Brussels, but
they related to aircraft leasing. There was no history of making large property
loans. This was probably because BBL’s head office were unenthusiastic about
property loans. There was no one at BBL’s London office with substantial
experience of property lending.
Collingwood
House — Sandyrent
In October
1987 Mr Markovits approached Mr Fraser with a proposal that BBL should provide
a loan of £10.85m to refinance the purchase of a property known as Collingwood
House, London W1, by Sandyrent Ltd, a company of Land & Property Trust
(‘LPT’). The proposed loan was said to be 70% of the value of the property, as
demonstrated by a valuation in the sum of £15.5m prepared by Lewis &
Tucker. The purchase price of the property was, however, only £11.5m. Mr
Markovits explained to Mr Fraser that the owners, Legal & General, had sold
the property below its value because LPT had offered a prompt cash payment,
adding that the management of Legal & General were unimaginative and
unaware of the true value of their property. Credit du Nord were prepared to
participate in the loan to the extent of £3.5m and it was proposed that BBL
should provide the balance of £7.35m and undertake the role of agent bank.
The LCC
approved this proposal and forwarded it to Brussels. Brussels, however, refused
to authorise the loan.
Hill of
Rubislaw
In September
1988 Mr Markovits approached Mr Fraser seeking a loan facility in the sum of
£32m to finance the purchase of four office blocks in Aberdeen known as Hill of
Rubislaw. This represented 80% of the valuation of these properties which were,
however, being purchased for only £31m. Mr Markovits explained that the vendor
needed to raise cash quickly to finance the takeover of another company. Mr
Markovits subsequently made a variation to the proposal; the borrower would pay
the premium for Eagle Star to provide a ‘top slice’ indemnity policy covering
the difference between 70% and 90% of valuation. With that protection Mr
Markovits invited BBL to lend 90% of valuation. The LCC approved the proposal
and it was forwarded to Brussels. Brussels gave only qualified approval. BBL
could participate to the extent of £10m, but could not lead the facility.
Ultimately the facility was led by Arab Bank and BBL participated to the extent
of £8.2m, protected by a £3.3m Eagle Star top-up policy.
Collingwood
House — Fordgate
In January
1989 Mr Markovits brought to Mr Fraser a further loan proposal in relation to
Collingwood House. Credit du Nord were prepared to lead a syndicate to advance
a total sum of £28.9m to a company called Fordgate Ltd, which had acquired the
property in 1988. This loan was said to be 85% of valuation, and 15% was to be
protected by a top-slice mortgage indemnity policy to be granted by Eagle Star.
The valuation in the sum of £34m was provided by Lewis & Tucker. Mr
Markovits invited BBL to participate in the loan to the extent of £10m. The LCC
approved the transaction, but Brussels declined it on the ground that it was
not the standard policy of BBL to take part in real estate financing ‘except
eventually for excellent files with well-known names’.
Approval
of insurance-backed lending
In January
1989 an insurance broker had suggested to Mr Fraser that a bank might be able
to obtain insurance cover against loss in respect of 100% of loans secured by
property. The broker introduced Mr Fraser to an underwriter at Sun Alliance
Insurance Co who was involved with the underwriting of mortgage indemnity
policies. In about January 1989 Mr Fraser attended a meeting with this
underwriter at which members of Sun Alliance’s estate department and a credit
assessor were also present. Sun Alliance indicated that the 100% insurance was
a possibility if certain criteria were satisfied. The loan had to be based upon
the valuation by an independent professional valuer of property acceptable to
Sun Alliance. The property had to be let to acceptable tenants under leases
which provided a reliable rental stream to service the debt. Debt servicing
was, where appropriate, to be buttressed by interest rate caps and guarantees
from those sponsoring the transaction. Sun Alliance indicated that, where all
these matters were satisfactory, they were prepared, in principle, to insure
loans of up to 90% of the valuation.
When Brussels
declined to approve the Collingwood House transaction on February 6 Mr Fraser
resubmitted the proposal to the LCC, but on a new basis. In addition to top-up
insurance from Eagle Star based on 20% of the valuation, Sun Alliance would
provide insurance cover based on a further 70%. Thus, the proposed loan based
on 90% of valuation would have a 100% insurance cover. In his memorandum to the
LCC Mr Fraser commented:
We now
replace the recourse on property with a recourse against an insurance company.
The property is therefore no longer a material component in our credit
consideration.
The LCC
forwarded this proposal to Brussels. There it was considered by, among others,
Mr Osterrieth, the senior chief manager in charge of the International and
Corporate Department, who had specific responsibility for BBL’s loan portfolio
at its various foreign branches. Brussels gave their approval to the
Collingwood transaction and asked that a policy paper be submitted in relation
to future business. Mr Fraser was keen to present such a paper. Mr Markovits
had raised with him the possibility of six specific loan transactions, of which
two were the Leegate and Cornlease transactions. On February 23 1989 Mr Fraser
submitted to the LCC a memorandum proposing a £100m loan facility which would
be 100% covered by insurance, to be provided by Sun Alliance. The details of
the proposal and Mr Fraser’s recommendation were as follows:
Sun Alliance
will provide cover to BBL for up to 90% of valuation. The level of cover would
determine our loan advance so that in all cases our security would be 100%
against the insurance policy. We are not interested in the valuation of the
property per se as a matter of credit consideration. It is the cover that we
are concerned with in establishing the amount advanced. Sun Alliance will
determine their level of cover on the basis of their due diligence.
BBL would
typically be lending to an SPC whose only asset is the property to be financed.
BBL will take
all of the normal security:
— 1st priority
mortgage over property
— assignment
of rental income
— assignment
of interest rate caps where required.
— charge over
shares of SPC
The loans
will be 5 years and bullet repayments. Interest paid 3 or 6 monthly based upon
the relevant LIBOR.
At the 5 year
maturity, if there is a default, we would prosecute our interest in the
property and arrange an enforced sale at fair market prices.
When sale
proceeds are realised and assuming there is a deficiency, Sun Alliance would
meet our loss within 30 days of claim. Then cover will be for 100% of loss to
include rolled-up interest costs.
Pricing
We have
proposed transactions that would yield a net margin of 85 basis points per
annum after payment of Insurance premium (guide cost 30 basis points per
annum). In addition we would expect 25 basis points flat fee. All legal costs
for borrowers.
|
eg £100 million @ 85 bp = £850,000 pa |
|
fee |
|
£1,100,000 |
Syndication
The only way
in which we could reasonably expect to meet with success in the face of extreme
competition from some very large banks is by underwriting a complete package.
It is clear
that if we retain the entire portfolio on our books, the above pricing is
entirely satisfactory.
We do believe
however that we could offer participation to other banks where participants
could have a put on BBL in event of a default (this would protect our insurance
scheme from UK competitors). A partial sell down at 50 bp in those
circumstances is not unreasonable.
Conclusion
and recommendation
This is
insurance risk. The underlying transactions are commercial property transaction
structured upon normal property lending criteria. We will look for refinance
from third parties or sale of the properties to repay our loans but in all
circumstances our principal and interest costs will be fully covered by Sun
Alliance.
We have
prepared a portfolio of 6 property transactions to Sun Alliance. Each of them
meet with known criteria of Sun Alliance and they are undertaking their own
rigorous and formal review. The loan value of transactions submitted is £200
million (this includes our £10mio approval last week to participate in
Collingwood House). Sun Alliance will be invited to choose out of these
properties to the value of £100mio under our underwriting facility. Committee
is asked to recommend that we underwrite those loans that are approved by Sun
Alliance, our underwriting to match the percentage cover offered so that we are
100% on insurance company risk.
This is an
underwriting proposal and we would seek to sell down participation to other
banks. Naturally, if the worst comes to the worst, we will be left with a
substantial portfolio of assets on excellent risk and at an excellent margin.
Failure to sell down would however limit the possibilities of entering into
subsequent transactions on Sun Alliance risk and we would therefore seek to
sub-participate in order to preserve the opportunity to do future business with
them.
The LCC approved
of this proposal. Mr Ross and Mr Fraser then travelled to Brussels to make a
formal presentation to the CCE. The CCE approved of the proposal, save that it
did not approve of the idea of syndication and submitted the matter to the CD.
On March 1 1989 the CD authorised London to establish a portfolio of
either £50
million or £100 million to be syndicated down to £50 million on a non-recourse
basis composed of property transactions, in which BBL would grant loan advances
covered entirely by an insurance policy issued by an insurance company approved
by us.
(I have
corrected some mistranslation). This authority was known as ‘the enveloppe’.
Subsequently, Brussels indicated that both Sun Alliance and Eagle Star were
insurance companies of which they approved.
In his witness
statement Mr Osterrieth commented:
It is my view
that the London branch would never have been sanctioned by head office in
Brussels to act as the underwriter and lead manager in the absence of 100%
mortgage indemnity cover from an insurance company. This was a very important
factor to BBL and the fact that the insurance company was prepared to accept
the risk was interpreted as an indication that the insurance company was
satisfied that the transactions were sound.
By May 3 1989
BBL had completed the first three transactions with which this action was
originally concerned, Leegate Centre, Trevelyan House and Island Site Finsbury
Pavement and was on the way to completion of the fourth, Piccadilly,
Manchester. £830,000 had been earned on this business and those at BBL London
were keen to obtain an increase of the limits of the enveloppe in anticipation
of being offered individual transactions which exceeded £100m. In these
circumstances the LCC ‘strongly recommended’ the following proposal of Mr
Fraser and Mrs Andrews:
We propose an
increased lending limit to £100 million from £50 million. We propose increasing
the £100 million underwriting limit to £150 million.
On May 29 1989
Brussels approved the following variation to the enveloppe:
Maintain the
underwriting limit of £100 million and increase from £50 million to £100
million the portfolio (lending limit), composed of property transactions in
which BBL would grant loan advances covered entirely by an insurance policy
issued by an insurance company . . .
The effect of
this change is a matter to which I shall refer in due course.
Loan facilities
I now propose
to outline, in relation to the three facilities with which I remain directly
concerned, the manner in which the facilities were granted, the terms of the
facilities and the terms of the cover granted by Eagle Star.
Trevelyan
House
On Friday
March 10 1989 Mr Markovits wrote to Mr Fraser to make a formal presentation of
the transaction. He first described the property and its situation. He provided,
by a separate letter, details of the 25-year lease to the Secretary of State
for the Environment, in respect of which since December 1985 the rent had been
£1m pa, subject to upward-only rent reviews every five years, the first of
which was due on June 24 1991. Mr Markovits suggested that the estimated rental
value of the property was some £3m. He sought a loan of £35/37m on the basis of
a loan to value ratio of 85/90%. The term of the loan was five years. The
security was a first charge over the property, the assignment of an interest
rate cap at 6.75% for the five-year term, recourse to the LPT balance sheet for
the immediate shortfall between the current income of £1m and the £3m expected
on the rent review and an indemnity policy issued by a reputable insurer such
as Eagle Star for the top slice of the loan exceeding 70% of the value. The
borrower would be an SPV, wholly owned by LPT.
On Monday
March 13 Mr Fraser prepared a proposal for insurance brokers with a view to
obtaining cover for the first 70% of the loan from Sun Alliance. In effect he
repeated the presentation made by Mr Markovits. He used this proposal as a
presentation to the LCC. On March 14 this presentation was endorsed by Mr
Lenotte and Mrs Swinnen ‘agreed within the limits set by HO on this type of
transaction’.
On March 16
BBL sent a formal offer letter to Iris Properties Ltd, the proposed borrower.
The terms of the offer included the following:
|
Amount: |
Minimum 70% of valuation, to |
|
Term: |
3 years from date of |
|
Repayment: |
In full in one amount on |
Security shall include inter alia:
(a) The Borrower to execute a first legal
mortgage over the property identified and known as Trevelyan House.
(b) A charge in favour of the Bank over 100% of
the shares of the Borrower.
(c) A fixed and floating charge over all the
assets of the Borrower.
(d) All rental income from the property to be
assigned to the Bank and paid to a charged account with the Bank.
(e) An assignment to the Bank of the benefit of a
3 year interest rate cap, the terms of which are acceptable to Bank. The costs
of the cap are for the Borrower. The monetary value of the cap will be set at a
level to ensure that the proceeds of the cap together with the rental income
stream from the property at all times equals at least 100% of the interest due
under the loan facility. In the event the level reduces below 100%, an
additional cap(s) will be provided at the Borrower’s expense to make up the
shortfall. Failure to provide an additional cap(s) will be an event of default.
(f) The Property to be insured against normal
risks, with the Bank noted as loss payee.
(g) ‘Top up’ insurance to be provided by an
insurer acceptable to the Bank for a value of up to 20% of the valuation.
Conditions
Precedent
. . .
(c) A satisfactory legal report on the Property
and all the leases and documentation thereof and evidence that the Security has
been created in a form satisfactory to the Bank and is in full force and
effect;
(d) A satisfactory structural survey of the
Property following a physical inspection of the aforesaid Property by surveyors
acceptable to the Bank.
(e) A satisfactory valuation report by valuers
acceptable to the Bank confirming the open market value of the Property.
(f) Satisfactory Bank references on such tenants
as the Bank may require.
The offer
invited the borrower to indicate acceptance by signature, which was done on the
following day, March 17.
On April 12
1989 John D Wood Commercial Ltd’s valuation was received, valuing the property
at £44.35m.
A report on
title was prepared by Simmons & Simmons. This recited that Iris Properties
Ltd had contracted to purchase the property from Norwich Union for £25.5m.
Although originally Mr Fraser had anticipated obtaining a bottom-slice policy
from Sun Alliance, the brokers indicated that there might be difficulty in
obtaining this cover. Mr Markovits told Mr Fraser that he thought he could
obtain both bottom-slice and top-slice cover from Eagle Star. Thereafter, so
far as BBL were concerned, Sun Alliance faded from the picture and insurance
cover for loan transactions was provided by Eagle Star.
Insurance
cover
Eagle Star
issued two policies in respect of the loan facility of up to £39.915m. One was
for the first 70% of valuation, namely £31,045,000, and the second for the top
slice 20%, namely £8,870,000. for the following indemnity:
if any of the
following events occurs:–
(a) the Property is sold following an Event of
Default and pursuant to a power of sale contained in the Security Documents; or
(b) the Property is sold, the net proceeds are
applied in repayment or prepayment of the Outstanding Debt and the Borrower has
not paid any remaining balance of the Outstanding Debt within 21 days of formal
demand by the Insured or by or on behalf of the Banks; or
(c) the Property is sold by agreement to or to
the order of any competent authority after a power of compulsory purchase or
other compulsory acquisition has become exercisable in relation to the Property
and the net proceeds are applied in repayment or prepayment of the Outstanding
Debt; or
(d) the Property is compulsorily purchased or
otherwise compulsorily acquired; then, if the proceeds of sale arising pursuant
to the sale referred to in (a), (b) or (c) or if the compensation proceeds
arising in connection with the events referred to in (d) are less than the
Outstanding Debt at the time at which the same arise, the Company will pay the
amount of the deficit to or to the order of the Insured within 30 days of
receipt of a written statement from the Insured or by or on behalf of the Banks
stating which of the above events has occurred and stating the amount of the
deficit.
Each policy
was subject to the following clause in relation to disclosure:
5.3 Disclosure
The Insured’s
duty of disclosure leading up to the issue of this Policy shall be treated as
having been fulfilled if:–
(a) the Insured has carried out all such
investigations and made all such enquiries in relation to the Borrower and the
Property as it would carry out or make if proposing to enter into the Loan
Agreement without the benefit of this Policy or insurance providing cover of
the type or to the extent of that provided by this Policy (and so that Schedule
2 of the Loan Agreement did not provide for such a policy) but assuming:–
(i) the existence of all the rights and
obligations (other than as specified above) provided for in the Security
Documents between the Borrower, LPT, the Banks and the Insured; and
(ii) a policy of insurance issued by a reputable
insurer in favour of the Insured and the Banks providing that
(iii) the event of any of the circumstances referred
to in Clauses 3.1 (a), (b) (c) or (d) arising and the proceeds of sale being
less than the amounts due to the Insured and the Banks from the Borrower such
insurer would pay to the Insured and the Banks an amount equal to such
shortfall up to a limit of 20% of the amount originally advanced,
and is not as
a result of such enquiries and investigation aware of any fact, matter or
thing, other than any such which it has disclosed to the Company, which would
cause it not to enter into the Loan Agreement in such circumstances;
Loan
agreement
Under the loan
agreement BBL granted to the borrower, Openhouse, a loan facility of £39.915m.
The agreement made the following provision as to the use of facility:
Purposes: The Borrower shall apply the entire proceeds of the Advance in or
towards (a) payment of the purchase price of the Property, stamp duty and Land
Registry fees incurred by it in connection therewith; (b) the fees payable
under Clause 4; (c) the making of the Deposit; (d) the payments to be made by
the Borrower under the Interest Rate Cap Agreement and (e) the payment of all
other fees, costs, charges and expenses incurred by it in connection with the
acquisition of the Property and the Facility.
The deposit
and rate cap agreement there referred to provided cover for the shortfall that
would occur between the rent payable and the interest due up to the rent review
date of June 21 1991. The estimated rental value of the property was assumed to
be high enough to ensure that after the rent review the rent would cover the
interest. The agreement made provision, however, for the borrower to enter into
an additional interest rate cap agreement should the estimated rental value
fall below that which was necessary to cover the interest payments after the
rent review.
This was one
of the borrower’s obligations that was subject to the following covenant by
LPT:
LPT covenants
as long as any sum remains to be lent or remains payable under any of the
Security Documents that it will procure fulfilment by the Borrower of the Borrower’s
obligations . . .
Cambridge
Circus
On the evening
of May 10 1989 Mr Markovits telephoned Mr Fraser with a proposal in relation to
Cambridge Circus. On the following day he wrote to Mr Fraser about this
transaction. His letter began:
This letter
will be dealing only with the property aspect; I shall be writing to you under
separate cover shortly regarding the loan transaction. Suffice it to say that I
expect the loan amount to be approximately £90-95m on the usual basis.
Mr Markovits
then described the various elements which made up the property, informed Mr
Fraser that the passing rents amounted to £4,289,003, stated that the total
current rental value for the entire property was in the region of £8m pa and
went on to comment that continuing rental growth was expected and that the
prospects of this would continue to fuel investor demand.
On May 12 Mr
Fraser and Mrs Andrews out before the Credit committee a short two-page
presentation for a loan facility of about £90m-£95m with a maximum of 90% of
valuation for two years, extendable to five years at BBL’s option. Debt
servicing was to be ensured by a deposit which would boost the current rent of
£4.28m to £8m pa to cover the two-year period, coupled with an interest rate
cap. Otherwise security followed the same form as in the Trevelyan House
transaction, including cover from Eagle Star in respect of 100% of the loan.
The approval of all four members of the LCC was endorsed on this presentation
on the same day. Still on the same day an offer letter, in similar terms to the
Trevelyan House offer letter, was sent to Finebreak Ltd, an SPV owned by LPT,
which was intended to be the borrower. The offer was accepted on May 23 1989.
Mr Markovits then reached agreement with LPT as to terms on which he would take
a 50% share in the transaction. A second offer letter was written on June 9
1989 to Mr Markovits in which the borrower was described simply as ‘SPC’.
On June 20
1989 John D Wood Commercial Ltd produced their valuation in the sum of £103m.
On June 28 1989 Simmons & Simmons produced a report on title. This recorded
that Norwich Union had exchanged contracts to sell the property to Finebreak on
May 12 1989 at a price of £73m and that Finebreak would contract to sell the
property to a company controlled directly or indirectly by Mr Markovits.
Policies
The Eagle Star
bottom- and top-slice policies differed from those in respect of Trevelyan
House in certain material respects: the indemnity was subject to the following
proviso:
(1) No liability shall arise under this Indemnity
in respect of such part of any Deficit as may be attributable to the assumption
specified in sub-paragraph (2) hereof. . . proving to be false.
(2) The assumptions referred to in the preceding
sub-paragraph are that the . . . valuation . . . fully and accurately, for the
purposes of the insured as mortgagee, in all material respects:–
Values the
property at the date of this indemnity (taking into account the Borrower’s
title thereto and all material rights, obligations, defects in title, incumbrances
and other matters relating thereto).
Clause 5.3
provided as follows:
In fulfilment
of its duty of disclosure (and so that its duty shall be deemed fulfilled):
(a) the Insured confirms that it has carried out
before the date of this Indemnity (both in its capacity as an agent and as an
original lender) such investigations and made such enquiries in relation to the
Borrower and the Property in accordance with the standard property lending
criteria observed by it (i) in carrying out credit analysis and document
negotiation in relation to secured property lending transactions and (ii) when
proposing to enter into loan and security documentation similar to the Security
Documents, in each case, without the benefit of an indemnity or insurance
policy providing cover of the type or to the extent of that provided by this
Indemnity and it is not, as a result of such investigations and enquiries,
aware of any fact or circumstances which it would, in accordance with its usual
procedures as an agent, disclose to a member or prospective member of a
syndicate of banks of which it was agent in relation to the Security Documents
and which it has not disclosed to the Company.
Loan
agreement
The loan
agreement was dated July 21 1989. The sum advanced was £92.7m. There was a
similar clause to that in the Trevelyan agreement as to the uses which could be
made of the loan. Although the initial proposal had been for a two-year loan,
it had subsequently been agreed that this should be shortened to a term of a single
year.
This reduced
the cost of putting up the deposit and interest rate cap which the loan
agreement required to bridge the gap between rent income and the interest that
was payable under the agreement.
Crusader
House
Mr Fraser, by
now acting for Mr Markovits, made a formal presentation to Mrs Andrews in
relation to Crusader House on June 21 1989. He described the property and asked
for a loan to the maximum of 90% of valuation with the benefit of insurance
provided by Eagle Star. He informed Mrs Andrews that a valuation report was
being prepared and that he had been advised that £84.25m could be expected
which would allow for a loan of £75.825m. The borrower was stated to be a
special purpose company that would be jointly owned by LPT and Mr Markovits.
Details of the tenants were given — a 25-year lease to Jardine Insurance
Services Ltd at an initial rent of £4.25m pa commencing on May 25 1988. This
rent would be enhanced by a mixture of deposit and interest rate cap so as to
provide for debt service through the loan term. Mrs Andrews made a presentation
to the LCC on June 26 1989. The LCC did not approve the proposal, but asked
that it be represented with additional information as to, in particular, the
proposed term of the loan and the financial quality of the tenants. This
information was subsequently provided to the satisfaction of the LCC and an
offer letter, in similar terms to the Trevelyan House offer letter, was sent to
Mr Markovits on June 27. This offered a loan of a maximum of 90% of valuation
on provision of 100% insurance indemnity cover to a borrower described as
‘Special Purpose Company (to be named) (jointly owned by M Markovits (51%) and
Land and Property Trust plc (49%))’.
Lewis &
Tucker’s valuation dated June 22 1989 valued the property at £84.25m. The
circumstances in which the advance was based on a value of £80m are dealt with
elsewhere in this judgment.
Insurance
policies
Eagle Star’s
top and bottom-slice policies were subject to the same clauses that I have set
out when considering Cambridge Circus.
Loan
agreement
The loan
agreement was dated July 5 1989 and granted a facility of £72m to Shelfco no
368. The agreement contained the same uses clause as the other two loan
agreements.
Were there
contracts between BBL and John D Wood Commercial Ltd?
Whether BBL’s
claim lies in contract or in tort may assume greater importance if my judgment
is appealed. Before me BBL have accepted that John D Wood Commercial Ltd can
raise a plea of contributory negligence to liability in tort. They have reserved
their right, however, to challenge this on appeal.
BBL’s case is
a simple one. They contend that, in the case of each property, either Mr Fraser
or Mrs Andrews instructed John D Wood Commercial Ltd to produce a valuation,
John D Wood Commercial Ltd agreed to do so and that it was implicit that BBL
agreed to pay John D Wood Commercial Ltd’s reasonable fee. John D Wood
Commercial Ltd deny that they acted pursuant to instructions from BBL, deny
that there was ever any intention on the part of BBL and John D Wood Commercial
Ltd to enter into legal relations and deny that BBL were liable to pay for the
valuation. In relation to this issue John D Wood Commercial Ltd have the
disadvantage that they have chosen not to call any witness of fact, but to rely
upon concessions obtained from BBL witnesses in cross-examination and
inferences to be drawn from the documents.
Trevelyan
House
BBL’s offer
letter of March 16 1989 made it a condition precedent of the advance that BBL
should receive ‘a satisfactory valuation report by valuers acceptable to the
Bank confirming the open market value of the property’. This made it clear
that, as between BBL and the borrower, it was for the borrower to procure and
pay for the valuation. Despite this, it is BBL’s case that they entered into a
contract with John D Wood Commercial Ltd under which John D Wood Commercial Ltd
undertook to produce a valuation and BBL implicitly agreed to pay John D Wood
Commercial Ltd’s reasonable fees for so doing. This I find inherently unlikely.
Valuations of commercial properties are expensive and I find it hard to believe
that a valuer would enter into a contract to produce one without express
agreement as to the amount of his fees or the basis upon which they would be
calculated. I find it even more unlikely that a bank in the position of BBL
would make itself liable for the valuer’s fees. Mr Peter Goldsmith QC, for BBL,
sought to draw a comparison with the liability to pay Eagle Star’s insurance
premium undertaken by BBL, but discharged by the borrower. The comparison is a
false one. The insurance premium became payable only on completion. The
valuation had to be paid for even if it proved unsatisfactory or the
transaction did not proceed for some other reason.
What evidence
is there to support BBL’s contention that they contracted with John D Wood
Commercial Ltd?
In his witness
statement Mr Fraser stated that he spoke to Mr Browne on or about March 17 1989
and ‘told him that we were considering taking a mortgage over property . . .
and that we wanted John D Wood to provide a valuation’. Under cross-examination
Mr Fraser was unable, from recollection or otherwise, to explain his reason for
dating this conversation as early as March 17. It was put to him on the basis
of the contemporary documents that he did not speak to Mr Browne until April 11
and he accepted that this was possible. I find it unlikely that Mr Fraser spoke
to Mr Browne as early as March 17. It is plain from Mr Fraser’s witness
statement that, by the time of this conversation, Mr Browne had learned quite a
lot about Trevelyan House. He was, however, instructed by Mr Markovits to
prepare an armchair valuation of this property only on March 15. Whenever the
conversation with Mr Fraser took place, it did not, in my judgment, give rise
to a contractual relationship between BBL and John D Wood Commercial Ltd. John
D Wood Commercial Ltd would appreciate that they had to be approved by BBL and
it would be perfectly natural for an officer of BBL to telephone to confirm
that approval. On April 3 Mr Markovits wrote to John D Wood instructing them to
value Trevelyan House and to revert to him to discuss fees. The valuation
report recited that it was made ‘in accordance with instructions received from
Mr Maurice Markovits of Allied Dunbar’. On April 19 1989 Mr Browne wrote to Mr
Markovits:
I am therefore
taking this opportunity of enclosing my firm’s fee note, which you will see has
been addressed to you as you issued the instructions. In the event that you
wish it to be addressed formally to the client that undertook the transaction,
then I will of course do that.
I am most
grateful to you for your instructions in this matter . . .
The invoice
enclosed recited:
To receiving
your instructions to give preliminary advice in connection with the proposed
acquisition of the above freehold property for long term investment purposes.
To giving
initial views and discussing the matter with you in general terms.
To reporting
to you and on 12th April 1989 to Banque Bruxelles Lambert in the sum of
£44,350,000.
To our fee at
the agreed rate of 0.1% of the reported value.
I find that
the contract pursuant to which the valuation was prepared was concluded between
John D Wood Commercial Ltd and Mr Markovits, acting for the borrowers. BBL’s
claim against John D Wood Commercial Ltd in relation to Trevelyan House lies in
tort.
Cambridge
Circus
The general
comments that I made in relation to Trevelyan House apply equally in the case
of Cambridge Circus.
Mrs Andrews
stated that she gave oral instructions to Mr Browne to prepare a valuation on
the Cambridge Circus properties in late May 1989. Mr Christopher Symons QC, for
John D Wood Commercial Ltd, cross-examined strenuously about this, but she
stuck to her guns. In the absence of any evidence from Mr Browne I see no
reason to reject Mrs Andrews’ evidence that she had a conversation with Mr
Browne. I do not, however, consider that this gave rise to a contract. Mrs
Andrews told me that she believed that there was a clear understanding with Mr
Browne that the obligation to pay the valuation fee was between the borrower
and the valuer. Mr Browne had already produced an armchair valuation of the
properties at the request of Mr Markovits. I do not consider that Mrs Andrews’
instructions to Mr Browne implicitly included a promise by BBL to be
responsible for John D Wood Commercial Ltd’s reasonable fees. There is no
direct evidence of instructions being given by Mr Markovits to Mr Browne, other
than the fact that Mr Browne’s draft valuation began with the recital: ‘In
accordance with instructions received from Mr Maurice Markovits of Allied
Dunbar’. The account for the survey ‘at the agreed rate of 0.1% of the reported
value’ was addressed to the borrowers, but sent to and paid by Mr Markovits. I
am satisfied that Mr Markovits reached agreement with Mr Browne under which the
borrowers were the clients who were contractually liable for his fees. No
contract between BBL and John D Wood Commercial Ltd is made out. BBL’s claim in
relation to Cambridge Circus lies in tort.
Crusader
House
The reasoning
that has led me to decide in favour of John D Wood Commercial Ltd on this issue
thus far applies with greater force in the case of Crusader House. I shall have
to consider the involvement of John D Wood Commercial Ltd in relation to this
transaction in detail at a later stage. For present purposes I can do so
briefly.
Mr Markovits
obtained armchair valuations from both Lewis & Tucker and John D Wood
Commercial Ltd in relation to Crusader House. At his instigation Lewis &
Tucker were instructed to provide the full valuation. This they did on June 30
1989, valuing the property at £83.95m. The valuation was acceptable to BBL, but
not to Mr Buxton of Eagle Star. Mr Markovits then told Mr Buxton that John D
Wood Commercial Ltd were in a position to provide a franking valuation and Mr
Buxton agreed that Mr Markovits should obtain this. Mr Markovits then
telephoned Mr Browne and arranged that he should send a franking valuation to
Mr Buxton at Eagle Star stating that it was also for the benefit of BBL.
This summary
appears clearly from transcripts of recordings of telephone conversations made
by Mr Markovits. It conflicts with the account given by Mrs Andrews in her
witness statement. She stated that Mr Buxton telephoned her and suggested that
BBL obtain a second valuation from John D Wood Commercial Ltd, that she then
telephoned Mr Markovits to inform him that BBL required a second valuation and
then telephoned Anthony Browne and instructed him to prepare the second
valuation. In the witness box she corrected this account and said that she
actually telephoned Mr Browne to confirm with him the valuation instructions he
had received from either Mr Markovits or Mr Buxton. In cross-examination it
became apparent that her recollection of this conversation was far from clear.
John D Wood
Commercial Ltd’s fee was agreed between Mr Browne and Mr Markovits at £7,500
plus VAT and paid by Mr Markovits on behalf of Cruhouse. I have no doubt, on
the evidence, that John D Wood Commercial Ltd’s valuation was requested by Mr
Markovits. There was no contract between BBL and John D Wood Commercial Ltd in
relation to this transaction. Once again BBL’s claim lies in tort.
Valuations
I propose at
the outset to consider the principles to be applied in making a valuation
before turning to the particular facts with which I am concerned.
Basis of
valuation
The valuations
in the present case were valuations of ‘open market value’, as defined in the
Royal Institution of Chartered Surveyors (‘RICS’) Guidance Note No GN22:
1.1 ‘Open Market Value’ means the best price at
which an interest in the property might reasonably be expected to be sold at
the date of the valuation assuming:
(a) a willing seller,
(b) a reasonable period in which to negotiate
the sale taking into account the nature of the property and the state of the
market;
(c) that values will remain static during that
period;
(d) that the property will be freely exposed to
the open market; and
(e) that no account will be taken of any
additional bid by a purchaser with a special interest.
Mr Peter
Goldsmith QC at one stage invited me to apply the following passage in the
judgment of Gibson J in Corisand Investments Ltd v Druce & Co
(1978) 248 EG 315, at p322:
. . . if the
current open market price which the valuer judges would be realised at auction
at the time of valuation is based upon a market which the valuer knows to be
‘high’ and supported by speculative buyers apparently willing to pay prices not
justified by ordinary principles of investment return, then such
that state (which I shall call the ‘speculative content’) should either not be
included in a valuation for mortgage purposes, or should be identified as such,
and as so included, for the guidance of the lender, if at the time of valuation
there is substantial ground for the valuer to know that the speculative content
of his estimated market price will not or may well not be maintained in future,
or may well not be readily realisable on the forced sale of the property.
The basis of
valuation being described by Gibson J in this passage is a forced sale
valuation. His comments must not be applied to an open market valuation. Where
a property market is booming it is inevitable that the current market price
will be affected by the entry into the market of property speculators hoping to
make capital gains. No discount falls to be made from the open market valuation
on this account.
In the course
of giving evidence about the approach to valuation, Mr Castle, John D Wood
Commercial Ltd’s expert, said:
You do, I
think, have to reflect what the market place says; I accept that, but you also
should not put your name to a valuation if you feel that there is something
that the client ought to be aware of. If you say to the client, ‘look, I
believe the rents in this area are going to increase’ then I think you should
take that into account in your valuation. Some other people in the market place
might not agree with you. That is how you end up with a range.
This is not
the correct approach to an open market valuation. Mr Castle later corrected
himself and said that his comments related not to valuation, but to giving
investment advice. It seemed to me that Mr Castle’s error illustrated a danger
that in time of boom a valuer may overlook the nature of an open market
valuation and allow personal optimism or pessimism as to the future to affect
his valuation. For all I know that may be a factor in explaining the
overvaluations that have taken place in this case.
The properties
with which this action is concerned are commercial properties. Most purchasers
of commercial properties purchase them as investments and not in order to
occupy them. For this reason the predominant factor that governs the value of a
commercial property is the return that it is anticipated will be made on the
investment. Market forces tend to ensure that properties with similar
characteristics achieve prices which will result in similar anticipated
returns, or yields. The yield that an investor anticipates a property will earn
on a particular purchase price will depend upon:
(1) The rents currently being paid on such parts
of the property as are subject to existing tenancies.
(2) The rents that will be paid in the future
under fresh tenancies or rent reviews.
The latter
depend, in part, on how the rental market will move in the future, which is an
uncertain factor. In a time of property boom, when rents are rising, investors
tend to assume that the trend will continue. In these circumstance the prices
paid for commercial properties reflect market optimism that yields will
increase with the passage of time.
When a
property is properly marketed on the open market it is almost axiomatic that
the price which it realises represents its open market value at the time that
the price is agreed. Where market value cannot be established in this way, it
can be estimated only by comparison with prices achieved by similar properties
sold in the open market.
Valuation
by comparison
Valuing a
property on the basis of comparison with other properties involves:
(1) Determining, by comparison, the level of
rental income that the property is likely to generate.
(2) Determining, by comparison, the size of the
yield that the investor is likely to require from the property.
From this data
the price that the property is likely to realise if sold on the open market can
be calculated. Market sentiment as to how rents will move in the future is a
common factor in the case of all transactions — although of course that
sentiment may vary to a degree depending upon the type of property concerned
and the location of that property. This enables valuers to compare properties
on the artificial premise that any rents that fall to be fixed or agreed at a
future date will be fixed or agreed at current rental values.
Notwithstanding
this simplification, the task of producing a valuation by comparison is a
complex one. The starting point is relatively simple. The valuer has to
ascertain the current rental income being produced by the property. Provided
that details of the rent agreements can be obtained for the various units
making up the property, this does not pose a problem and thus the valuer
obtains the first ingredient that goes into the calculation of value. Next the
valuer has to estimate the current rental value for the property — that is the
rent that it would command at current rates if it were not subject to the
existing tenancies. This requires the valuer first to determine the rentable
areas, and the characteristics of those areas, and then to estimate, by
reference to rents recently fixed or agreed for comparable properties, the
current rental value for those areas. The reliability of this estimate depends
upon the quality of the data available and, in particular, on whether the
valuer has accurate information of recent rents agreed for premises that are
truly comparable. It is, moreover, not merely the location and physical
characteristics of a property that will determine whether its rent is a reliable
guide to the rental value of the property being valued. The rental value of a
property will also be affected by the terms of the lease itself — how
frequently it provides for rent reviews, the nature of its repairing covenants,
whether use is limited by restrictive covenants and so on. In order to make a
realistic estimate of rental value the valuer needs accurate data of this
nature both in respect of the property to be valued and in respect of the
properties which are being relied upon as comparables. Where the current rental
value significantly exceeds the current rental income the property is said to
be ‘reversionary’.
Armed with the
current rental value, and on the premise that this will not alter, the valuer
can calculate the increases in income to be anticipated when rents fall to be
reviewed.
The valuer
next has to consider the yield that the investor will wish to achieve from the
property. The higher the yield required, the lower the price that the investor
will be prepared to pay. Furthermore, if anticipated income is uncertain, the
investor will look for a higher yield. He will accept a relatively low yield in
relation to current rent that is actually being paid, but look for a higher
yield in respect of reversionary rent that will become payable only after rent
review. The modern valuer usually applies a formula to calculate a single
yield, known as the equivalent yield, which is in effect an average yield to be
applied to both current and reversionary rental income. This technique facilitates
the comparison of yields for properties which will almost inevitably be subject
to leases which make provision for rent reviews at different times.
The yield
expresses the relationship between the purchase price and the anticipated
rental income that the investor requires. Broadly speaking this can be expected
to reflect the income available from other sources of investment. But the
precise yield that the investor will look for, or be prepared to accept, from a
commercial property will to a degree also reflect the particular features of
the property and of the leases to which the property is subject.
The current
and anticipated rental income are not the only matters that will interest the
investor. The age, nature and structure of the building, its size, appearance,
its precise location, the nature of the leases to which it is subject and the
standing of the tenants who will be paying the rent are all matters to which
the investor will have regard when deciding upon the yield he requires from the
property and thus the price he is prepared to pay.
In order to
find evidence of comparable yields the valuer has to consider current sales of
commercial properties and to try to identify properties of sufficiently similar
characteristics to render their yields significant for purposes of comparison.
That done the valuer has to ascertain the yields resulting from the
transactions in question, or the data necessary to enable him to calculate
these, in order to derive from them the appropriate yield to apply to the property
that he is valuing.
It will be
apparent that in order to estimate the value of a commercial property on the
basis of comparable rental values and yields a valuer needs a substantial
volume of information much of which is not in the public domain. Some of this
information will be available within the valuer’s own company as a result of
other transactions with which the company has been concerned. Some can be
obtained from specialist publications or information services. Much of the
information will be available only on a hearsay basis, either directly or
indirectly, from those concerned with the transactions in question. It became
apparent from the expert witnesses, who in this respect at least were in entire
agreement, that there has grown up between valuers and surveyors a practice of
reciprocal provision of information in relation to transactions in which they
are or have been involved. It is plain that there is available to valuers in
this way a mass of market information, the source of which may not always be
clear nor the reliability certain. The art of valuation includes the
maintenance of a good intelligence network and skill in evaluating the
information received.
The complexity
of the task of producing a valuation by a process of comparison tends to
conceal a simple fact. A valuation is no more than the opinion of the valuer of
the price that the property is likely to realise if sold on the open market.
Forming this opinion on the basis of comparables is not a precise science.
Different competent valuers will produce different opinions. The experts agreed
that when valuations are based on comparables, one competent valuation may
differ from another by as much as 20%.
Valuing a
property that has just been sold
Where the sale
of a property has just been agreed, it might be thought that there is little
scope for the valuer’s art; that the value is demonstrated by the sale price.
But this will be so only if the property has been freely and competently
marketed on the open market. The possibility will always exist that a seller
may for one reason or another not have achieved the full market value of his
property, or that a buyer may have been prevailed on to agree to pay more than
the market value of the property. For these reasons a bank that is requested to
advance money for the purchase of a property on the security of the property to
be purchased will normally require a valuation of the property in question.
All the
experts were agreed that where a property has just been sold, the sale price is
potentially the most cogent evidence of the open market value of that property.
Provided that the property was properly exposed to the market and competently
marketed, the market price will demonstrate the market value. The experts were
also agreed that the fact that the property has just been sold does not relieve
the valuer of the need to consider comparables. The conclusion that the valuer
draws from comparables will be part of the material upon which he bases his
valuation. If the comparables suggest a value that differs significantly from
the sale price agreed, the valuer has to consider all the evidence in order to
decide why the discrepancy exists.
Mr Terence
Knight [FRICS], the senior partner of Weatherall Green & Smith, was called
primarily as a witness of fact in relation to the marketing of Cambridge
Circus. I found him a particularly impressive witness and ventured to ask him
about the approach of a valuer where the property to be valued has recently
been sold. He told me that he would regard it as part of his due diligence as a
valuer to find out what the purchase price was and to see what the marketing
had been. If he was satisfied that the sale had been an open market sale, with
no unusual features, he would base his valuation on this rather than on calculations
made from comparables. He explained that:
if there has
been a marketing of a particular property and it has been properly marketed,
that is the best evidence of value. It is the value. It is the best price that
was obtained in the market at that particular time on that day.
He also said
that if there was some special feature which explained why the price realised
did not represent the open market value, he would refer to that matter
expressly in his valuation.
BBL called
three valuation experts, members of the firm of Hillier Parker. They agreed
with Mr Knight’s evidence. In the first part of their report, written by Mr
John Edgcumbe [BSc FRICS], he stated:
In valuations
of property which has recently been sold, the most accurate source of value
will be the price at which the property has been purchased genuinely at arm’s
length, provided the purchase was agreed following a sufficiently extensive
marketing campaign to have fully exposed the property to the market. In
circumstances where a transaction was concluded at arm’s length between
unrelated parties following full exposure to the market, that evidence must be
regarded as the best indication of market value.
Mr Castle of
Dron & Wright, John D Wood Commercial Ltd’s expert valuer, accepted this
evidence.
The
significance of the price obtained in the open market as potentially the best
evidence of open market value does not need to be demonstrated by expert
evidence. It is obvious as a matter of common sense. Where a valuer is
instructed to advise a bank as to the value of a property the sale of which has
just been agreed, the marketing history of the property provides, potentially,
evidence of the view that the market actually took of the value of the
property. Plainly the competent valuer should explore as carefully as he is
able the marketing history of the property. The valuer will be aware of the
limitations of the exercise of considering comparables as a guide to the price
a property will actually achieve in the market. If the marketing history of the
property is such as to leave the valuer confident that the property was
properly marketed his consideration of the comparables will, essentially, be a
cross-check of the validity of the sale price as evidence of value. In such
circumstances one might expect the framework of the valuation to read along the
following lines:
The borrowers
agreed to purchase the property on the [date] for £X. We have investigated the
marketing history of the property. This suggests that the property was freely
exposed to the market and that the borrower’s offer represented the best price
reasonably obtainable. We calculate that the open market rental value of the
property is £Y. This means that the price reflects a yield of Z%. We have
considered a number of comparable transactions which suggest that this is a
relatively low yield, but not to the extent of throwing doubt on the evidence
afforded by the market’s reaction to this property. Accordingly we consider
that the purchase price represents the open market value at the time the sale
was agreed.
I note in the
file of documents prepared for the cross-examination of Mr Castle an
illustration Investment Property Purchase Report prepared by Gooch &
Wagstaff, which follows very much these lines. The evidence of the BBL experts
in this case leads me, however, to suspect that valuations do not normally
follow this simple format, but have a form which tends, whether by chance or by
design, to conceal the dominant role that evidence of a recent sale has or
should have in a property valuation.
It appears
that some valuers consider that their role is restricted to forming an opinion
on value by reference to comparables without reference to the recent marketing
history of the property being marketed.
In Mount
Banking Corporation Ltd v Brian Cooper & Co [1992] 35 EG 123,
[1992] 2 EGLR 142* at p128 the judge said:
I am
satisfied, on what Mr Connie and Mr Castle told me, that a body of competent
valuers considers it proper to make a valuation without ever knowing the
proposed purchase price.
*Editor’s
note: Also reported at [1992] 2 EGLR 142.
On the basis
of this evidence the judge ruled that such a practice was not negligent.
In this case
neither (the same) Mr Castle nor any other expert witness has suggested that a
competent valuer can ignore a recent sale price of the property being valued.
There was evidence that sometimes a valuer is instructed to disregard a recent
sale price and to base a valuation exclusively on comparables. Such a valuation
may have its uses, but it will not give the most reliable indication of market
value. Absent such express instructions, a valuer who gives an open market
valuation without considering the implications of a recent sale in the market
of the property being valued is, in my judgment, negligent.
When valuing
each property John D Wood Commercial Ltd should have ascertained the purchase
price of the property, obtained as much information as they could as to how the
property had been marketed and considered whether the purchase price agreed
appeared to represent the best price that could reasonably be obtained on the
market. If it did, they had to consider whether comparable transactions could be
reconciled with the price agreed for the property being valued and, if not, the
extent to which, if at all, this justified abandoning the purchase price as the
best evidence of value. If any features of the marketing of the property
suggested that the best price available on the market has not been obtained, or
that more than the market price had been agreed, John D Wood Commercial Ltd
then had to decide, again with the aid of comparables, the extent to which the
open market value differed from the purchase price.
My primary
task in relation to this area of the case is to decide the maximum value that
John D Wood Commercial Ltd could have ascribed to each property had they
competently performed the exercise that I have described above.
To assist me
in this task I would have expected the expert witnesses to have performed a
similar exercise to that which John D Wood Commercial Ltd should have
performed, having regard only to data that should reasonably have been
available to John D Wood Commercial Ltd at the time. Before turning to the
details of each valuation I propose to say a word about the approach both of
John D Wood Commercial Ltd and of the valuation experts.
Approach
of Mr Browne
Although Mr
Browne did not give evidence, a lengthy witness statement containing evidence
that it was proposed that he should give was served on behalf of John D Wood
Commercial Ltd before the trial. Naturally, and in my view properly, the
experts have in their reports dealt with the evidence in Mr Browne’s witness
statement. Both BBL and John D Wood Commercial Ltd proceeded on the basis that
it was legitimate for the experts and for me to have regard to the explanation
given by Mr Browne as to how he achieved his valuations. Mr Christopher Symons
QC submitted, however, that this had no relevance — that all that is relevant
is the extent to which Mr Browne’s valuations differ from the valuations that a
reasonably competent valuer could have given. I see the force of this and I do
not propose to comment in detail on the various shortcomings of Mr Browne’s
valuations. I shall simply mention what seems to me his most fundamental error.
Mr Browne did not investigate and give due weight to the marketing history of
the properties that he was valuing. This was, for the reasons I have given, a
most serious shortcoming. Mr Browne valued Trevelyan House at £44.35m,
Cambridge Circus at £103m and Crusader House at £82m.
Experts
BBL called Mr
John Edgcumbe to give evidence in relation to Trevelyan House and Cambridge
Circus and Mr Geoffrey Dale [FRICS] to give evidence in relation to Crusader
House. John D Wood Commercial Ltd called Mr Castle to give evidence in relation
to all three properties. Hillier Parker is one of the largest firms of
chartered surveyors and valuers in the country. They have at their own disposal
in large measure the market information necessary to provide expert evidence in
this case. Mr Edgcumbe has particular professional experience in respect of
properties in the West End and Mr Dale of properties in the City of London —
hence their division of labour in this case. Their experience is, however, in
the field of rental values rather than yields. Mr Castle’s firm is much
smaller, but Mr Castle has a wide, general, experience, including that of
giving valuations of commercial properties, as a consultant, throughout the
United Kingdom.
All three
experts were inclined to be infected by the adversarial nature of the
proceedings. If Mr Edgcumbe and Mr Dale were rather more dogmatic in support of
their reports than Mr Castle, this was because they had done their homework
more thoroughly and at greater leisure so that they stood on firmer ground.
Approach
of Mr Edgcumbe
Mr Edgcumbe’s
reports in relation to Trevelyan House and Cambridge Circus took the same form.
First he examined rental values of comparable properties to produce an
estimated rental value for the property being valued. Then he set out his
calculation of the capital value of the property on the basis of that rental
value, stating the equivalent yield that had been applied. Then he set out the
comparable properties that had been considered when deciding upon that
equivalent yield. Then he commented that his opinion of the capital value of
the property was ‘reinforced’ by the price at which it was actually agreed to be
sold. His estimate of the value of Trevelyan House of £27.5m compared with a
sale price of £25.5m. His estimate of the value of Cambridge Circus of £75m
compared with a sale price of £73m. Finally, Mr Edgcumbe expressed the view
that the maximum value that a competent valuer could have ascribed to Trevelyan
House was £30m and to Cambridge Circus £80m. The reports thus gave the
impression that Mr Edgcumbe’s valuations were based exclusively on comparables
and were merely reinforced by their proximity to the actual sale price. When Mr
Edgcumbe gave evidence, however, it became apparent that the sale price
achieved played a very significant part in his conclusion as to the value of
each property and the appropriate equivalent yield.
Mr Dale’s
approach
From a careful
reading of Mr Dale’s report it is possible, although not easy, to deduce that
he also was strongly influenced by the sale price of Crusader House when
estimating the value of that property and when he gave evidence he confirmed
that this was the case. Mr Dale valued Crusader House at £60m and expressed the
view that the maximum value that a competent valuer could have ascribed to that
property was £63.5m.
Mr Symons has
criticised the approach of the Hillier Parker experts on the ground that they
were overinfluenced by the sale prices of the properties that they were
valuing. I shall consider this criticism in the context of the individual
properties.
Mr
Castle’s approach
Mr Castle
initially produced reports in relation to the three properties which made no
reference to the prices at which they were sold. These reports did not place an
estimate on the actual value of the properties in question, but gave Mr
Castle’s opinion of the maximum and minimum figures that a competent valuer
might have given for their values. This was based on an analysis of comparable
rental values and yields and I shall, in due course, consider a criticism made
by BBL’s experts of the method adopted for this analysis. In a subsequent
report Mr Castle set out a number of factors in relation to the marketing of
the properties which he suggested justified the competent valuer in relying
upon comparables rather than upon the sale price achieved. Mr Goldsmith
submitted that Mr Castle had originally ignored the evidence of the sales of the
properties when making his report and that his subsequent report was an attempt
to justify an approach that could not be defended. Regardless of when Mr Castle
first thought of them, I must consider in the context of each property whether
the factors identified by Mr Castle justify his disregard of the sale price
achieved.
Trevelyan
House
Trevelyan
House stands on the north side of Great Peter Street, in the City of
Westminster, approximately a quarter of a mile south-west of Parliament Square.
It is a modern office building developed during the mid-1980s to provide
approximately 60,000 sq ft of office accommodation on lower-ground, ground and
six-upper floors. The property is leased to the Secretary of State for the
Environment and occupied by the Lord Chancellor’s Department.
The SPV which
purchased Trevelyan House, and to which BBL advanced the loan, was Openhouse
Properties Ltd. On March 9 1989 Openhouse agreed to buy Trevelyan for £25.5m,
subject to contract.
£44.35m. It is BBL’s case that the highest value that a competent valuer could
have put on the property on that date was £30m. John D Wood Commercial Ltd
concede that their valuation cannot be supported, but contend that a competent
valuer could have concluded that the property was worth as much as £33.5m.
I propose
first to consider, on the basis of the evidence adduced before me, whether
Trevelyan House was marketed in such a way as to achieve the best price
reasonably available and then to consider the conclusion that John D Wood
Commercial Ltd should have reached on this question had they considered it on
the material available to them at the time.
Trevelyan
House was sold by Wright Oliphant on behalf of the owners, Norwich Union. Mr
Richard King [ARICS], a valuation surveyor employed by Norwich Union, was
called to give evidence as to the circumstances of the sale. He told me that
Norwich Union was reducing its property portfolio and that Trevelyan House was
one of a number of properties it decided to sell. At the end of 1988 Norwich
Union set a target date of June 30 for selling the property. In
cross-examination Mr Symons sought to make out a case that the pressure on Mr
King to sell by this date meant that he was prepared to sell, and did sell, the
property at less than the price that could have been obtained on the open
market. Mr King would not have this. His own valuation of the property was
£23,684,000 based on a yield of 7.07% and an estimated rental value of the
offices of £33.50 per sq ft. He instructed Wright Oliphant to sell the property
in order to be sure of obtaining a proper market price. Mr Philip Brown
[ARICS], a director of Wright Oliphant, also gave evidence. He said that his
instructions from Norwich Union were to achieve the highest figure obtainable.
He did not feel that the June deadline affected the price he could obtain. He
estimated the value of the property at £24m and recommended marketing it at
£26m. Particulars were widely circulated to agents, property companies and
institutions. Only two offers were received, a firm offer of £25.5m on behalf
of LPT and a conditional offer of £27.5m from a Dutch pension fund, ABP. The
offer was conditional on board approval and subject to Norwich Union withdrawing
the property from the market while the board considered the matter. Mr King was
not prepared to agree to this and gave instructions for the property to be sold
to LPT. In so deciding he was not affected by the June 30 deadline.
The attack
made by Mr Symons in cross-examination was not reflected by Mr Castle’s
evidence. He had no criticism to make of the marketing campaign and did not
suggest that lack of time had affected the price achieved. His comment, valid
in so far as it went, was that the sale price was ‘historic’ in that the sale
was agreed about a month before the date of John D Wood Commercial Ltd’s
valuation. I am satisfied that Trevelyan House was properly exposed to the
market and competently marketed. I reject the suggestion that time constraints
resulted in a failure to achieve the best price reasonably obtainable.
If John D Wood
Commercial Ltd had inquired into the marketing of Trevelyan House they would
have discovered that it was widely marketed at an offer price of £26m and sold
for £25.5m. They might have been informed of the conditional offer of £27.5m
made by ABP. Were it not for Mr Edgcumbe’s evidence I would see no reason to
expect John D Wood Commercial Ltd to have reached a different conclusion on the
evidence available to them from that which I have reached on the evidence
adduced before me. Under cross-examination, however, Mr Edgcumbe agreed that
the estimated rental value of £33.5 per sq ft that was adopted for the purpose
of valuing the property before sale was too low. He accepted that the property
was marketed at too low a price and expressed the view that the sale price was
less than the open market value. Having regard to this evidence I feel bound to
accept that John D Wood Commercial Ltd could properly have reached the same
view. They could not, however, reasonably have concluded on the basis of the
marketing evidence that Trevelyan House had an open market value that exceeded
by more than a modest amount the £25.5m for which the property was sold.
Comparables
Mr Edgcumbe
arrived at an estimated rental value (‘ERV’) for the best space at Trevelyan
House of £37.5 per sq ft. This was based on an analysis of six comparables. The
yield adopted by Mr Edgcumbe was 7%, producing a capital value for Trevelyan
House of £27.5m. The comparables considered by Mr Edgcumbe when arriving at
this yield had yields which ranged between 6.2% and 7.85%. Mr Edgcumbe’s choice
of a 7% yield resulted in a value to Mr Edgcumbe’s view that more skilful
marketing would probably have resulted in a sale at a slightly higher value
than the £25.5m achieved. This was no coincidence. As I understand Mr
Edgcumbe’s evidence his approach to the yield comparables was to consider
whether they were consistent with the yield that had to be applied to his estimated
rental value in order to achieve a value that accorded with the sale price. Mr
Edgcumbe was satisfied, having regard to the comparables, that a 7% yield could
properly be adopted. In my judgment, this was a perfectly proper and reasonable
approach. If a valuer concludes that a recent sale price is prima facie
the best evidence of open market value, the consideration of comparables will
essentially be a cross-check. I can understand that some valuers would wish to
form an initial view based on comparables without reference to the sale price.
At the end of the day, however, the valuer has to review the comparables to
decide whether they are compatible with the sale price.
Mr Edgcumbe
expressed the view that a competent valuer could have estimated the value of
Trevelyan House to be as much as £30m. This was on the basis of an ERV for best
space of £40 per sq ft and an equivalent yield of 6.83%. It is not clear to me
whether this view was reached on the premise that no competent valuer could
have believed that the sale of Trevelyan House failed to achieve the best price
available on the open market by more than a margin of £4.5m or because Mr
Edgcumbe believed that no competent valuer could deduce a higher value from the
comparables.
Mr Castle did
not attempt to form his own view of the value of Trevelyan House at the date of
valuation. He set out to decide the highest and the lowest value that a
competent valuer might have attributed to the property. To do this he first
looked at comparables to decide the highest and the lowest estimated rental
value that a competent valuer could have attributed to Trevelyan House. Then he
performed the same exercise in relation to yield. Finally, he combined the
highest rental value with the lowest yield in order to arrive at the highest
valuation and the lowest rental value with the highest yield in order to arrive
at the lowest valuation. The highest valuation thus achieved was £33.5m based
on an ERV of £45 and a yield of 6.82%. The lowest competent valuation he
estimated at £26m, based on an ERV of £40 and a yield of 7.77%.
BBL’s experts
criticised this approach. They said that a competent valuer would never
estimate a value on the basis of both the keenest possible yield and the most
extravagant possible rental value. Mr Castle did not accept that his approach
was flawed. His hypothetical valuer was not one who deliberately adopted what
he recognised were at the extremes of possible brackets, but figures which
represented his best estimate of both rental value and yield. I follow the
logic of Mr Castle’s reasoning, but I believe that his approach is flawed. A
valuer looking at a comparable property which has just been sold will
necessarily consider both its ERV and its yield. The one will depend upon the
other. The valuer may well have a degree of uncertainty about each. The higher
the ERV the higher will be the yield and vice versa. I accept the evidence of
BBL’s experts that, in relation to any property, a competent valuer will be
using his experience to strike a reasonable balance between the two uncertains
of rental value and yield. A valuer who had estimated the rental value of
Trevelyan House at the highest that could competently be deduced from a study
of comparables would, when considering the yield, be expected to deduce from
the comparables a yield that accorded with the high ERV adopted, which would be
a yield near the top rather than the bottom of the possible bracket.
The more
serious flaw in Mr Castle’s approach is that there is not built into it the
vital requirement for the competent valuer to have
disregards this. In his final written submissions Mr Symons sought to justify
this on the following basis:
It is not
necessary to prove that the sale price was not a true reflection of the open
market value. It is sufficient to establish that there were grounds for a
reasonably competent valuer to doubt whether the sale price reflected the best
price achievable at the date of valuation (and not at the date the sale price
was agreed). It is submitted that the evidence clearly establishes that a
reasonably competent valuer would have had such doubts and would have been
entitled to stand by his figure.
The suggestion
that a valuer who has doubts about the sale price can properly disregard it and
stand by a valuation based on comparables is an oversimplification. The valuer
has to balance any uncertainties that arise from what he knows, or does not
know, about the marketing of the property on the one hand and the uncertainties
that are implicit in the exercise of attempting to value by comparison on the
other. A valuer who had considered the marketing of Trevelyan House might have
had some doubts as to whether the campaign was quite long enough or the asking
price quite high enough, but these doubts should not have led him to disregard
the evidence of the sale price. No competent valuer could properly have reached
the conclusion that Trevelyan House was sold for £7.5m — about 25% — less than
its market value.
Both Mr
Edgcumbe and Mr Castle were cross-examined at length on the comparables that
had been taken into consideration in relation to ERV and yield. It is
unnecessary to make a minute analysis of this evidence. The vital question is
the maximum value that a competent valuer could have reached after giving due
regard to the manner in which the property was marketed, the sale price
achieved, the delay of about a month between achieving that price and the date
of valuation and relevant comparable transactions. So far as the comparables
are concerned I was satisfied on the evidence that the figure of £37.5 adopted
by Mr Edgcumbe was too low. Under cross-examination he accepted that Mr
Castle’s range of £40 to £45 was reasonable, if one disregarded the evidence of
sale price, though he largely retracted this evidence in re-examination. In my
judgment, the competent valuer would have been likely to select an ERV from the
range of £40 to £45, the figure depending in part upon the yield adopted. As to
the yield the experts were agreed that the keenest yield suggested by the
comparables was about 6.82%. The extent to which a higher yield might have been
adopted was not really explored.
The
comparables, if considered in isolation, would have suggested a higher value
than the price of £25.5m for which the property was sold. The competent valuer
could properly have concluded that this reflected a failure, to a degree, to
obtain the best price reasonably available on the market and the fact that, to
the extent of a month or so, the sale price was historic. I do not consider,
however, that a competent valuer could have concluded that on April 11
Trevelyan House would have realised more than £30m on the open market. On this
point I concur with the conclusion of Mr Edgcumbe, although I would not analyse
the breakdown of this figure in quite the way he has done. I find both his
figure for ERV of £40 and his equivalent yield of 6.83% a little low.
Summary
John D Wood
Commercial Ltd’s valuation of Trevelyan House at £44.35m was negligent to this
extent. The actual open market value of the property was £27.5m and the maximum
value that a competent valuer could have attributed to the property was £30m.
Cambridge
Circus
This property
comprised a number of distinct and self-contained buildings standing on an
island site. The buildings provided offices, retail and residential
accommodation. The most significant building was 125 Shaftesbury Avenue. This
was constructed in 1982 and provided approximately 145,000 sq ft of office accommodation
on 10 floors. The reception was on the ground floor, where there was also a
retail arcade providing some 10 shops. About 80% of the income of Cambridge
Circus derived from this building.
115-123
Shaftesbury Avenue was a smaller building dating back to the turn of the
century. The ground and basement levels provided retail accommodation and there
were a further four floors of offices.
The third
substantial building making up the property, 88 Charing Cross Road, was of the
same vintage. It provided retail accommodation at ground and basement level and
self-contained residential units on six upper floors.
John D Wood
Commercial Ltd valued this property on June 20 1989 at £103m.
Mr Castle,
applying the technique that I have already described, stated in his report that
the lowest value a reasonably competent valuer could have put on the property
was £80.8m and the highest value £104m. On the basis of this evidence John D
Wood Commercial Ltd deny that their valuation of £103m was negligent.
Mr Edgcumbe
estimated the value of the property as at June 20 1989 at £75m. He considered
that the maximum value that a competent valuer could have placed on the
property was £80m, on the basis of a rental value of £42.50 per sq ft for 125
Shaftesbury Avenue and an overall equivalent yield of 8.46%.
Marketing
of the property
Mr Browne
valued Cambridge Circus without regard to the marketing and sale price of the
property. It is John D Wood Commercial Ltd’s case that there were features of
the marketing of the property that would have left a reasonably competent
valuer ‘to have doubts about the sale price and to stand by the valuation he
had reached on the basis of the comparables’. Those features were, first of
all, that Norwich Union was disposing of “this and other property in their
portfolio to a deadline and, in consequence, there was insufficient time to
explore the full potential of the market. Second, it is said that the price at
which the property was marketed was substantially too low. It is necessary to
consider whether, in fact, the property was marketed with undue haste and at
less than its true value and whether reasonable inquiries by a competent valuer
might have suggested that this had occurred.
Mr Stephen
Hubbard [ARICS], a partner in Richard Ellis, was called to give evidence by
BBL. He had extensive marketing experience, particularly in marketing
investment properties in the West End of London. In January 1989 he was
commissioned by Norwich Union to sell the Cambridge Circus properties. He was
asked by them to work to a June deadline and the fee structure gave him an
incentive to meet the deadline. It was suggested to him that Norwich Union were
more concerned to dispose promptly of the property than to obtain the maximum
price available in the market. This he denied. His instructions were to obtain
the best price and he told me that Norwich Union ‘played a very straight
wicket’ in maximising sale proceeds for their policy holders. In accordance
with Mr Hubbard’s advice offers were invited in excess of £77m. He said that on
the information available to him in January 1989 he was satisfied that this was
the right figure to take to the market. Mr Symons put to him that with
hindsight, including knowledge of the rent that was fixed at the next rent
review, this figure was too low. He accepted the possibility that he might have
advised a slightly higher figure had he known this, but emphasised that he
considered passing rent to be more significant than reversion. He did not
accept, however, that if a property is marketed at too low a price a sale below
market value will result. A number of bidders might well be attracted who would
be likely to correct any undervaluing by competitive bidding. That did not
occur in the case of Cambridge Circus — the initial response from the market
was disappointing.
Mr Hubbard
decided that the best way to market Cambridge Circus was to target directly
selected potential purchasers and agents. It is not suggested that this was
inappropriate or that the property was not adequately exposed to the market in
this way. Particulars were circulated on February 16 and 17. By April 11 Land
& Property Trust had been identified as the most likely purchaser and a
sale to them for
confirmed to Norwich Union that this price fairly reflected their view of the
value of the property in the light of the marketing exercise.
Having heard
Mr Hubbard, I am satisfied that John D Wood Commercial Ltd’s criticism of the
way in which Cambridge Circus was marketed is without merit. The property was
adequately exposed to the market, a proper time was allowed for the market to
respond and the best price reasonably obtainable was achieved. The paradoxical
suggestion that purchasers were put off because the asking price was too low
receives no support from the evidence and I reject it. In my judgment, the
price received of £73m demonstrates the open market value of the property on
April 13 1989.
Mr Hubbard was
asked how much of the marketing information would have been available to John D
Wood Commercial Ltd had they made inquiries at the time. Mr Hubbard said that
if he had been asked for information he would have done his best to assist and
would have told John D Wood Commercial Ltd that the property had been freely
exposed to the market, marketed for a reasonable length of time and achieved
the best price available. If more detailed information had been sought he would
probably have given it. I conclude that if Mr Browne had set out to investigate
the circumstances in which Cambridge Circus was sold and the nature of the
marketing campaign he would have had good grounds for concluding that the best
price reasonably obtainable had been achieved and no reason to believe that
£73m did not represent the market value of the property in April 1989.
Comparables
I have
concluded that the price realised for Cambridge Circus of £73m was and should
have been seen to be satisfactory and strong evidence of market value of that
property at the time of the sale. I turn to the comparables to see the extent
to which, if at all, a competent valuer could have been induced by them to
disregard the evidence of the sale price when valuing the property.
The most
significant building was, as I have said, 125 Shaftesbury Avenue. Mr Edgcumbe
deduced from comparable properties that the ERV of this property was £40. He
accepted, however, that a competent valuer might have differed from this
conclusion to the extent of attributing an ERV of £42.50 to the property. Mr
Castle considered that a competent valuer’s conclusion of the ERV might have
fallen anywhere in the bracket £40 to £45.
In supporting
Mr Castle’s conclusion Mr Symons relied heavily upon the fact that a rent
review for the third floor of 125 Shaftesbury Avenue fixed the new rent at
£42.35 with effect from the end of March 1989. He argued that this demonstrated
that a competent valuer could have concluded that the ERV in March 1989 was £43
and that by June 1989 it would have risen to £45. The rent review in question
took place with retroactive effect after June 1989. The competent valuer would
thus have been unaware of this agreement. Nor were rents moving steadily
upwards between March and June 1989, although the trend was still upwards. The
review, none the less, lends some support to Mr Castle’s higher figure. Many
comparables were referred to when the rental value was being considered. Once
again I do not find it necessary to attempt to analyse them in detail. I do not
consider that they would have led a competent valuer to estimate the rental
value of 125 Shaftesbury Avenue at a level as high as £45. I am not, however,
satisfied that a competent valuer might not have pitched the figure somewhat above
£42.50. Having regard to the comments that I am about to make in relation to
yield it is not necessary to attempt to pinpoint the highest ERV that a
competent valuer might have attributed to 125 Shaftesbury Avenue.
Yields
Mr Edgcumbe’s
valuation of £75m reflected an equivalent yield for the entire property of
8.5%. It became apparent in the course of his evidence that Mr Edgcumbe had
done no more than adopt that yield which was necessary, when applied to Mr
Edgcumbe’s estimated rental values, to produce a valuation that accorded with
the sale price actually achieved. It was Mr Edgcumbe’s evidence that there was
no satisfactory comparable from which a yield could be deduced.
When Mr Castle
was cross-examined he agreed that there was no exact yield comparable in the
area. There was a difference of 1.58% between the maximum and the minimum yield
that Mr Castle stated that the competent valuer might adopt for 125 Shaftesbury
Avenue (8.20% and 6.62%). He accepted that this was a much wider range than one
would expect and that it gave cause for concern. In an annexe to his report he
set out the manner in which he derived the yields. What he had done, or
appeared to have done, was to adopt the same old-fashioned approach to
valuation that Mr Browne stated he had adopted. Instead of using equivalent
yields, the valuer assigns an independent and different yield to the current
rent and to the rent that it is calculated will become payable at each
reversion. The more distant the reversion the higher the yield. All experts
agreed that it was legitimate for a valuer to use this old-fashioned method.
They also agreed that it made the task of finding yield comparables much more
difficult — particularly when the rental market was volatile. Mr Castle
confessed that he had, in fact, found the exercise impossible. What he had done
was to adopt in the first instance an equivalent yield and then to break this
down to different independent yields to produce the appearance of the exercise
that Mr Browne said he had carried out. I was unable to follow the precise
basis upon which Mr Castle had converted his equivalent yields to independent
yields. Nor was it clear to me that, when Mr Castle converted the independent
yields back into equivalent yields, he reached the same figures that had been
his starting point. I found Mr Castle’s evidence on this point confusing and
unsatisfactory. Nor was it satisfactory that his report gave a false impression
of his approach to the analysis of comparable yields.
This is not
the only unsatisfactory feature of that part of Mr Castle’s report which deals
with yields. In suggesting that a competent surveyor could have attributed to
125 Shaftesbury Avenue a yield as low as 6.62% Mr Castle relied heavily on the
comparable of Finwell House, shown in the relevant part of his report as having
been sold for £42.65m, reflecting an equivalent yield of 6.75%. Under
cross-examination it became apparent that Finwell House was not sold for
£42.65m. It was one of a portfolio of three properties, ‘the Baranquilla Portfolio’,
which was owned by a property company. Dron & Wright advised purchasers of
this company on the value of the portfolio and £42.65m was the value that they
ascribed to Finwell House. The property company was purchased at a
substantially lower price than the sum of Dron & Wright’s valuations of the
three properties, to the extent that Finwell House represented only £36.45m of
the total. That sum reflected an equivalent yield of 7.6%. Mr Castle defended
his adoption of the higher value because, so he told me, the property company
was purchased at a discount to reflect the fact that it would be liable to pay
capital gains tax if it sold the properties that it owned. He failed to satisfy
me, however, that the price paid for the company was other than a fair
indication of the value of the properties it owned. Mr Castle’s yield
comparables included, on the same inflated basis of valuation, the other two
properties in the Baranquilla Portfolio, each reflecting a yield of 7.5%. Mr
Castle’s evidence failed to persuade me that a competent valuer would deduce
from the comparables that it was appropriate to apply a yield below 7% for 125
Shaftesbury Avenue.
More
generally, and I believe more significantly, the evidence of both experts
indicated that the attempt to deduce an equivalent yield for 125 Shaftesbury
Avenue from a consideration of comparables would be likely to leave a competent
valuer in great uncertainty. A value derived from such an exercise would not be
one that any competent valuer would feel justified in preferring to the price
actually realised by the property in the open market sale that had taken place.
Cambridge
Circus did not, of course, consist only of 125 Shaftesbury Avenue. The task of
valuing the whole property by consideration of comparables was made the more
complex by the lesser elements, including domestic accommodation and retail
units, which made up the property. There was little difference of opinion
between the experts as to the rental value for the office space in 115
Shaftesbury Avenue. Mr Edgcumbe estimated this at £32.50 per sq ft, but
accepted that a competent valuer could put it as high as £35. Mr Castle’s range
was £32.50 to £37.50.
A problem
arose, however, in respect of the retail units. The rental value of retail
units depends upon the nature of the floorspace. The most valuable space is
defined as zone A, determined in part by proximity to shop frontage. In
performing their valuation John D Wood Commercial Ltd adopted zone A areas
provided by Norwich Union, Mr Castle did likewise, and on this basis attributed
to the retail element a value range of between £10,247,396 and £12,278,345. In
fact Norwich Union’s figures were inaccurate, overestimating zone A to an
extent calculated to result in a significant overvaluation of the retail
element, the precise figure depending, of course, upon the rental value and
yield adopted.
There was much
debate as to whether it was negligent of Mr Browne to rely upon the Norwich
Union figures without stating expressly in his report that he had not carried
out his own measurements. My conclusion on this issue is as follows. Whether or
not it would have been negligent to rely on Norwich Union’s figures in reaching
a valuation based solely on comparables, the answer is clear when the evidence
of the recent sale is taken into account. Any valuer who concluded that there
was a significant discrepancy between the sale price and the value indicated by
comparables should have sought an explanation for this. A rough check of
floorspace measurements would have been an obvious inquiry to make. A rough
check would have been enough to draw attention to the error in the zone A
areas, for the error was an obvious one. This point is probably an academic
one. For the reasons I have given, a competent valuer would have little
confidence in the reliability of a valuation of the major part of the property
— 125 Shaftesbury Avenue — based simply on comparables. The task of estimating
on that basis the best price that the entire composite property would achieve
on the open market was even more uncertain. I do not believe that a competent
valuer would be sufficiently confident of the inferences to be drawn from the
comparables to consider that they invalidated the evidence of the price
actually achieved.
Summary
Despite his
evidence to the contrary, I do not believe that Mr Castle can have given proper
consideration to the significance of the recent sale price of Cambridge Circus.
His suggestion that a competent valuer could have rejected the evidence of the
sale for £73m in favour of a value deduced from comparables of as much as £103m
is absurd. I do not believe that Mr Castle did so. I believe that he conducted
an exercise which bore no relation to the analysis that a competent valuer
would have carried out in order to value Cambridge Circus.
Mr Edgcumbe
stated in his report that a competent valuer could have valued Cambridge Circus
on June 20 1989 at a maximum of £80m. It is not clear to me what factors Mr
Edgcumbe considered would have justified the competent valuer in departing to
this extent from the price actually achieved. The only relevant factor that I
can identify is the interval of two months between the date on which the sale
was agreed and the valuation date. This might have justified an increment of
£2m, and on that basis I would accept Mr Edgcumbe’s estimate of £75m as
representing the actual open market value of Cambridge Circus on June 20.
Counsel for
BBL also had some difficulty in explaining Mr Edgcumbe’s figure of £80m, but
accept that, having regard to it, they must accept a finding that a competent
valuer might have valued Cambridge Circus at that figure. Accordingly, that is
the finding that I make. John D Wood Commercial Ltd negligently valued
Cambridge Circus at £103m when its actual value was £75m and the maximum value
that a competent valuer could have attributed to the property was £80m.
Crusader House
Crusader House
stands, in the City of London, approximately a quarter of a mile to the east of
the Bank of England. It occupies a corner site on the east side of Crutched
Friars at its junction with Crosswall. It is a modern office building completed
in 1988 with a restaurant in the basement and approximately 107,000 sq ft of
office accommodation on the lower-ground, ground and six upper floors. On May
30 1989 Chetwood, a shelf company sponsored by LPT, agreed to buy this property
from Rosehaugh for £59m. Contracts were exchanged on June 30. The property was
sold subject to a lease to Jardine Insurance Services Ltd. The lease was dated
June 29 1990, but was for a term of 25 and a half years commencing on May 26
1988. The initial rent was £4.25m, subject to upward-only rent reviews every
five years.
Mr Browne, of
John D Wood Commercial Ltd, valued the property on July 3 at £82m. John D Wood
Commercial Ltd accept that no competent valuer could have arrived at this
figure. It is BBL’s case that the open market value of the property on July 3
was £60m and that the maximum value that a competent valuer could have ascribed
to the property was £63.5m. John D Wood Commercial Ltd’s case, based on the
evidence of Mr Castle, is that a competent valuer could have reached a value
that fell anywhere within the range of £61.8m to £72.3m. Mr Symons submitted
that the sale price could be disregarded as evidence of value for the following
reasons:
(i) The property was marketed at too low a price.
(ii) The sale price was an apportioned sale price
forming part of a package by which LPT purchased a number of properties from
Rosehaugh.
(iii) Rosehaugh were anxious to dispose of the
property before the end of their financial year.
(iv) In May 1991 the property was sold in a forced
sale for a price of £53.25m. This is not consistent with an open market price
of only £59m in July 1989.
Crusader House
was marketed on behalf of Rosehaugh by Gooch & Wagstaff. Mr Peter Rose
[FRICS] of that firm gave evidence of the marketing campaign. Rosehaugh
formally instructed Gooch & Wagstaff to market the property on October 12
1988, but Mr Rose had already been asked to give consideration as to how it
should be marketed and at what price. Rosehaugh’s instructions were to obtain
the best price possible. There was never any suggestion that they were prepared
to accept a discounted price for a quick sale. Mr Rose recommended that the
asking price of the property should be set at £63m because he believed that any
higher price would deter market interest. He thought that £63m was optimistic.
The property was occupied by Jardine Insurance Brokers Ltd, whom he did not
regard, nor think that the market would regard, as a strong tenant. Mr Rose
planned the marketing campaign with Mr Andrew Ashenden [FRICS] of Rosehaugh.
They agreed to adopt a policy of targeted marketing aimed at about 25 specific
investors who were thought to be interested in that type of property and who
had available the necessary finance. At the end of October a brochure with
coloured photographs and marketing particulars was sent out to the targeted
investors. A number of potential purchasers inspected the property, but by
November 10 none had shown any eagerness to proceed. Because of this Mr Rose
widened the marketing and contacted further potential investors, so that in the
end over 70 investors and agents had received the particulars. There was a
degree of foreign interest at a level of around £59m and at about the end of
November 1988 an oral offer in this sum was received from LPT. This was not
considered adequate. In December 1988 Mr Rose wrote to Mr Ashenden advising
that there were signs that the market was starting to fall away and revising
his opinion of the value of the property to between £59m and £62m. At the
beginning of 1989 offers, subject to contract, were received in the sum of
£58.5m and £60m. The response to this was that Rosehaugh would not consider
less than £61.5m. In the course of January and February Mr Rose made use of the
trade press to advertise the property. In March and April offers in the sum of
£61.5m and £61m were received, subject to contract. These would have been
acceptable, but in neither case did the sale proceed. At the beginning of May
Mr Rose reported to Mr Ashenden that it would now be difficult to support a
value of more than £58m. LPT then made an offer of £57m
clients’ instructions. The final negotiations took place directly between LPT
and Rosehaugh. The figure of £59m was agreed in the context of a package
transaction which included two smaller properties.
Mr Rose
expressed the opinion that £59m was the best price that could be obtained on
the market at that time. I accept this evidence. The property had been widely
marketed and no sale had proved possible at a higher price. The suggestion that
the property was marketed at too low a price, thereby inhibiting its sale, is
without merit. It seems to me obvious that if this had been the case the
property would have been snapped up by one of the parties who had expressed
interest in it. The fact that two other properties were purchased by LPT at the
same time does not suggest that the price agreed of £59m, which had already
been negotiated over a period, was in any way artificial. That price
represented the open market value of Crusader House at the end of May when it
was agreed.
A reasonably
competent valuer would have had no difficulty in ascertaining the marketing
history that I have just described. John D Wood Commercial Ltd had, in fact,
received the selling particulars from Gooch & Wagstaff; the actual sale
price of the property could be obtained from the report on title. I see no
reason to think that Mr Rose would not have provided detailed information about
the marketing campaign had it been requested. In my judgment, a competent
valuer would have concluded that the sale price of £59m represented cogent
evidence of the open market value of the property at the end of May 1989. In
the month that elapsed between agreement of the sale and the date of valuation
the evidence suggests that the market in this part of London was at best
static. There are no reasonable grounds for concluding that the value of
Crusader House would have risen during this period. The forced sale price of
£53.25m in May 1991 does not cause me to alter my conclusion that the sale
price of £59m was the best price obtainable. It is true that by the time of the
forced sale in May 1991 the market indices showed that there had been a
substantial drop in property values. Those indices reflect, however, the value
of property with vacant possession, not tenanted properties with rents agreed,
at higher than 1991 levels.
Comparables
Once again I
turn to the comparables to see the extent to which, if at all, a competent
valuer could have been induced by them to disregard the evidence of the sale
price when valuing the property. Mr Dale estimated that the rental value of the
property was £4.345m pa. This was on the basis of a rental value for the best
office space of £44 per sq ft. On Mr Dale’s calculations the passing rent under
the Jardine lease represented a rent of £44.56 per sq ft for the best office
space, and he considered that rental values in the area had eased slightly
between May 1988 and the date of the valuation in June 1989.
Mr Castle
considered that a competent valuer could have estimated the rental value of the
best office accommodation at any point between £45 and £48 per sq ft. The
higher figure produced an estimated rental value for the property of £4,860,772
pa. I found the lengthy and detailed evidence given in relation to rental
comparables hard to evaluate. This is because the evidence of both experts made
it plain that in this part of the City precise location can be a very critical
factor in determining the rent that a tenant is prepared to pay. In supporting
their preferred comparables each expert identified specific factors which, it
seemed to me, necessarily involved a degree of subjectivity.
Mr Castle
scheduled to his report as rental comparables 10 properties with rents ranging
from £65 to £42 per sq ft. The extent of this range, even when compared with Mr
Castle’s own range of £45 to £48 per sq ft, illustrates the fact that many of
those properties had attributes which differed significantly from Crusader
House. Mr Dale attached particular significance to two properties. The first
was phase 7 of the Broadgate development, in respect of which one letting was
agreed in April 1988 at £43.75 per sq ft and another in June 1989 at £44 per sq
ft. The second was Beaufort House where, between April 1988 and June 1989, four
lettings were agreed at £42.50, one at £43.17 and one at £43.50. Mr Castle
suggested that these huge properties created a special market of their own,
with depressed rents because of the amount of space available. I was persuaded
by Mr Dale that these were valuable comparables, both as giving a good guide to
the rental value of Crusader House and, more significantly, as suggesting that
little upward movement of rents in this part of London had occurred since May
1988 when Jardine’s lease commenced. It seems to me that the competent valuer
would gain more assistance from consideration of the rent that had recently
been agreed for the Jardine lease, coupled with the degree of market movement
in the area over the past year, than from consideration of comparables.
Property indices enable one, with hindsight, to see that rental values in the
City of London peaked in the middle of 1989. This was something that had been
anticipated by speculation in the property press during the first half of 1989.
I do not believe that a competent valuer would necessarily have shared Mr
Dale’s view that the passing office rents of Crusader House marginally exceeded
current rental values. But I believe that he would have hesitated to ascribe to
the property a rental value based on much more than £45 per sq ft for the
office accommodation.
Yields
There was
little between the experts on the range of yields that might be adopted by
competent valuers, if basing the yield estimate simply on comparables. Mr
Castle’s range was between 7% and 6.4%. Mr Dale’s chosen yield was 7%, but it
became clear from his evidence that this was adopted to achieve a value, £60m,
which accorded with the actual sale price of £59m. He accepted that a competent
valuer could have valued the property at £63m, on the basis of an equivalent
yield of 6.75%, but was prepared in cross-examination to accept the possibility
that a competent valuer might have deduced a slightly keener yield from the
comparables.
Summary
Once again in
the case of Crusader House I do not see how a competent valuer could properly
deduce from the comparables that the sale price of the property was other than
the best evidence of its value. Mr Castle’s approach of combining highest
possible rental value with keenest possible yield is not a realistic exercise.
The competent valuer, when considering the evidence of comparables against the
actual sale price, would, in my judgment, have been able to reconcile an
acceptable combination of rental value and yield with the sale price. Mr Dale’s
approach was a proper one. It would, I think, have been more logical for him to
put forward the sale price of £59m as the value of the property, rather than a
figure of £60m which tended to conceal the extent to which his conclusion was,
quite properly, influenced by the sale price. Nor do I see the basis upon which
he conceded that a competent valuer might have valued Crusader House at as much
as £63m. This appears to have been on the basis that the actual sale price was
not taken into account. None the less I shall accept this, as BBL conceded that
I should, as the highest valuation at which a reasonably competent valuer could
have arrived.
John D Wood
Commercial Ltd negligently valued Crusader House at £82m when its actual value
was £60m and the maximum value that a competent valuer could have attributed to
the property was £63m.
Postscript
A considerable
amount of time was spent in this trial considering minutiae of measurements and
debating the different attributes of the rental comparables. This may be an
appropriate approach when attempting to determine the rental value of a
property on a rent review. Where, as in this case, the essential question is
whether a market sale truly reflects open market value, the exercise can be
unnecessarily meticulous. It will often be the case — and was certainly the
case with Cambridge Circus — that it is not possible to deduce from comparables
an appropriate yield with precision. In such circumstances it will be possible
to accommodate a degree of variation in the rental value by an adjustment of
the yield that does not throw into doubt the validity of the sale price.
Reliance
BBL’s
authority under the enveloppe was to make advances secured on property, but
covered by insurance against loss to the extent of 100% of the sum advanced.
Thus, each transaction involved a loan agreement between BBL and the borrower
and contracts of insurance between BBL and Eagle Star. The valuation of the
property concerned was central to each. Thus, the Trevelyan House letter to the
borrower offered a loan of:
Minimum 70%
of valuation, to increase up to 90% of valuation on provision of up to 20%
‘top-up’ insurance cover acceptable to Bank.
and each offer
was conditional upon:
A
satisfactory valuation report by valuers acceptable to the Bank confirming the
open market value of the Property.
The Cambridge
Circus offer letter had similar provisions. The Crusader House offer letter
made the advance conditional upon:
A
satisfactory valuation report by valuers addressed to the Bank and the
insurance indemnity company confirming the open market value of the property.
John D Wood
Commercial Ltd accept that their valuation was one of the factors that induced
BBL to enter into the Trevelyan House and Cambridge Circus loan agreement and,
to that extent, no issue arises in relation to reliance in respect of those two
transactions — although issues remain as to the nature and extent of the
reliance. But John D Wood Commercial Ltd deny that BBL placed any reliance on
their valuation when entering into the Crusader House transaction, and it is to
that issue that I turn first.
Crusader
House: the facts
On June 21
1989 Mr Fraser, in his new role of consultant to Mr Markovits, sent to Mrs
Andrews the proposal in relation to the Crusader House transaction. This
stated:
A valuation
report is being prepared and we are advised that £84.25mio can be expected
which would allow for a loan of £75.825mio.
Mrs Andrews
recommended this transaction to the London Credit Committee, which, on June 23,
approved a loan of about £76m with a maximum of 90% of valuation subject to
receiving certain additional information. Lewis & Tucker produced a
valuation report dated June 22 1989 which valued the property at £84.25m. Mrs
Andrews received this under cover of a letter dated June 27. She was happy with
it and had Eagle Star been satisfied the loan would have proceeded on the basis
of that report. Eagle Star, however, had reservations about the valuation. They
had learned that Crusader House was being purchased for only £59m and formed
the view that a valuation of £84.25m seemed very high. Mr David Crowley, Mr
Buxton’s assistant, approached Mason Phillips and asked them to comment on the
Lewis & Tucker valuation.
On June 30 Mr
Buxton telephoned Mrs Andrews and told her that Eagle Star were concerned about
the valuation and were making certain investigations. Later that day Mr Hall,
of Mason Phillips, told Mr Crowley that in his view Crusader House was worth
about £65m-£70m. Some heated telephone conversations then took place between Mr
Buxton and Mr Markovits which were recorded by Mr Markovits. Mr Buxton said that
he had received a valuation of £65m and would not be prepared to cover a loan
based on a valuation higher than £70m. Mr Buxton said that he could not do
better than that unless he had a higher valuation from another firm. Mr
Markovits asked Mr Buxton if he was comfortable with John D Wood Commercial Ltd
and Mr Buxton confirmed that he was. Mr Markovits had, in fact, obtained Mr
Browne’s ‘armchair’ view of the value of Crusader House at an earlier stage,
but had preferred to obtain the valuation of Lewis & Tucker as Mr Browne
was not prepared to value the property at more than £80m. Mr Markovits
contacted Mr Browne urgently on the telephone and after further reflection Mr
Browne said that he was prepared to provide a valuation of Crusader House in the
sum of £82m. Mr Browne offered to fax this to Mr Buxton and asked whether he
had to talk to BBL. Mr Markovits said ‘No’, he should just address the
valuation to Mr Buxton saying that it was also for the benefit of BBL.
Mr Markovits
then telephoned back to Mr Buxton and told him that John D Wood Commercial Ltd
were going to provide a franking report valuing the property at £82m. He told
Mr Buxton that he had been discussing the property with John D Wood Commercial
Ltd for the previous six weeks. Mr Browne then faxed to Mr Buxton a short
valuation of the property in the sum of £82m together with the calculations
that produced this sum. Mr Crowley discussed this calculation with Mason
Phillips who told him that they stuck to their original view. Mr Buxton told Mr
Markovits that he needed a little time to consider the John D Wood Commercial
Ltd calculations.
There then
followed a telephone conversation between Mrs Andrews and Mr Fraser. After
discussing other details of the transaction Mr Fraser gave Mrs Andrews details
of the John D Wood Commercial Ltd valuation that had been provided to Mr
Buxton. Mrs Andrews’ comments were to the effect that if Mr Buxton was relying
in whole or in part on the John D Wood Commercial Ltd valuation it was
essential that a copy of that valuation should be addressed tom.BL.
Mr Markovits
then telephoned Mr Buxton who told him that he was prepared to proceed on the
basis of a valuation of £80m, which was the best that he could offer. He told
Mr Markovits that he had bent over backwards to help him and that if it was not
for him he would not get the deal that was offered.
At this point
Mrs Andrews went on holiday leaving Mr Chris Hopkins, an account officer who
was assisting her, to deal with the completion of the transaction. In a
supplementary witness statement made on February 12 1993 Mrs Andrews said:
I was aware
from a telephone conversation with Fraser prior to my departure of the amount
of their valuation (approximately £82 million) and of the fact that, although
John D Wood had used a different valuation approach to Lewis & Tucker, they
had arrived at a very similar figure to them, and effectively confirmed Lewis
& Tucker’s original valuation. This reassured me as to the value of the
property and accordingly I was happy to proceed with the loan transaction at a
figure of 90% of a valuation of that order or at such other lower figure as
Eagle Star were prepared to give a full indemnity for. I informed Chris Hopkins
(who was to deal with the completion of the facility in my absence) that a
second valuation was required by Eagle Star and that John D Wood were sending a
written report to the bank. I believe that I told him that this should accord
with their opinion of value of about £82 million, and that if he considered
that their valuation report was satisfactory on its face he could proceed to
completion on that basis.
Mrs Andrews
was cross-examined at length about this part of her evidence and I am satisfied
that her witness statement gives a misleading picture. Mrs Andrews had no
concerns about the Lewis & Tucker valuation and did not require any
reassurance as to its reliability. When she went on holiday she was perfectly
content that the transaction should proceed on the basis of that valuation. But
it was essential that Eagle Star should be satisfied with the valuation and Mrs
Andrews left it to Eagle Star to decide to what extent, and on the basis of
what valuation or valuations, they were so satisfied. She did not expect Mr
Hopkins to give any independent consideration to the substance of the John D
Wood Commercial Ltd valuation, but simply to check that it appeared
satisfactory ‘on its face’.
In a short
written statement Mr Hopkins said:
Ann Andrews
told me that a second valuation had been requested by Ron Buxton and that a
valuation report from John D Wood would arrive at the Bank after she had
departed for her holiday. I believe that she told me that John D Wood’s opinion
of value was approximately £82 million . . . I read the John D Wood valuation
dated 3 July 1989 when it was received by the Bank and checked that it was
satisfactory on its face and contained nothing to give cause for concern. I
noted that it arrived at a very similar figure to the one provided by Lewis
& Tucker (whose valuation I had also read). Since we could not lend an
amount in excess of the indemnity cover which Eagle Star was prepared to
provide, we lent 90% of the figure which Ron Buxton considered acceptable (£80m),
but we were happy to do this on the basis that the Bank was lending less than
90% of the valuations so that we considered
property. I was therefore happy to proceed on the basis of these valuations.
On July 4
there was a further heated telephone conversation between Mr Markovits and Mr
Buxton in relation to a requirement by Mr Buxton that Mr Markovits should give
him a limited counter indemnity in relation to the transaction. In the course
of the conversation Mr Buxton made a number of comments in relation to his view
of the value of Crusader House. The following is a selection:
This
particular deal, we identified that the purchase price is significantly below
valuation . . . and we have come up with a valuation that shows a yield that is
significantly higher than our own professional advisers . . . think is viable
and we check really around the market place on the question of yields in the
City and that causes us to really question the figures put forward by the two
valuers. We think they are bullish, but we were . . . anxious to facilitate
Maurice Markovits. Had it been anybody else I would have pulled out of the
deal. To try and make the deal work, I convinced myself despite recommendations
from my professional advisers . . . The thing is Maurice, if it had been anyone
else, I would not have taken, I would not have agreed anything over £70 million
. . . I have gone out on a limb personally to sign this deal off on an £80
million deal. I have got no support at all from my financial people to do it. I
just felt, I have to a certain extent, stuck my neck out to do this deal for
you. It may not seem that way, but I can assure you from my end, that is the
case. My professional advisers are not comfortable with an £82 million. I have
agreed in a structure of this deal to try and make it work for you to take £80
million with a 5% deductible to give you a deal . . . The valuation that we
have been given are nearer £70 million than £80 million so in terms of the
professional advice we have been given, I have gone out on a limb, a long way
out on a limb.
After further
heated negotiations Mr Buxton finally agreed that the deal could go ahead if,
instead of giving a counter indemnity, Mr Markovits deposited with Eagle Star
the sum of £427,000.
Mr Buxton gave
evidence before the settlement between BBL and Eagle Star. He was strenuously
cross-examined by Mr Goldsmith as to his reasons for agreeing to provide cover
for the Crusader House transaction. Mr Buxton identified a number of reasons
for agreeing to this: Mr Markovits’ status as a special client; an agreement by
Mr Markovits to a 5% deductible; a statement by Mr Markovits that he had a
likely purchaser for the property in the immediate future; the fact that Mason
Phillips had expressed the view that the property would be worth around £80m in
a year’s time.
At one point
Mr Buxton agreed to this proposition:
The decision
to take £80 million was not based upon a view that the value was £80 million.
It was based upon a combination of factors, the expectation as to its future
value, Maurice Markovits’ offer, the position of Maurice Markovits, and the
other information that you had received.
But Mr Buxton
also emphasised in the course of his evidence that he had relied on the two
valuations received from professional valuers.
On the basis
of the evidence that I have just summarised I make the following findings. So
far as the value of the property is concerned, BBL were satisfied with Lewis
& Tucker’s valuation. They required no reassurance as to the value of the
property. BBL could not, however, proceed with the loan unless Mr Buxton was
satisfied with the valuation. The John D Wood Commercial Ltd valuation was of
interest to BBL only in so far as it was a valuation relied upon by Mr Buxton.
In that event BBL required the valuation to be addressed to them.
I have already
commented on the impression made on me by Mr Buxton. In his negotiations with
Mr Markovits he was no doubt prepared to resort to a degree of hyperbole. None
the less I consider that what he said in those conversations is a more reliable
guide to his attitude to the value of Crusader House than his statement in the
witness box that he had relied on the valuations provided by Lewis & Tucker
and John D Wood Commercial Ltd. Mr Buxton told me, and this I accept, that in
respect of the Crusader House transaction he appreciated for the first time
that the valuation was very much higher than the purchase price. I believe that
this fact, coupled with the Mason Phillips opinion on the value of the
property, left Mr Buxton with a scepticism about the Lewis & Tucker
valuation which the John D Wood Commercial Ltd franking valuation did not
allay.
The fact that
Mr Buxton received the franking valuation from John D Wood Commercial Ltd
encouraged him to go ahead with the transaction, but not because it satisfied
him that either the Lewis & Tucker or the John D Wood Commercial Ltd
valuation was correct. Mr Buxton believed that both valuations were too high.
In re-examination Mr Buxton stated that he believed that the value of Crusader
House was £80m. Having considered the contemporaneous evidence and heard Mr
Buxton cross-examined on it in the witness box I cannot accept that evidence.
Mr Buxton was not satisfied that the current value of the property was £80m. He
went ahead with the transaction at £80m because of the pressure he was
subjected to by Mr Markovits, the fact that Mr Markovits was a special client,
Mr Markovits’ statement that he had a likely purchaser for the property, the 5%
deductible subsequently replaced with the more modest deposit and the opinion
expressed by Mason Phillips that property values would go on rising, so that at
the end of the year the property would be worth £80m.
Mr Buxton was
recalled to deal specifically with what he would have done if he had not
received the John D Wood Commercial Ltd valuation. He said that he would not
have proceeded with the transaction at a level of £80m. I accept this evidence.
Mr Buxton was able to justify to himself proceeding with the transaction having
received the second valuation. But that valuation comforted Mr Buxton only as a
justification for the transaction and not because it reassured him that the
Lewis & Tucker valuation was accurate.
The law
Mr Markovits
made it absolutely clear to Mr Browne that whether or not the transaction was
to proceed depended upon his valuation. Mr Browne had reason to believe, and I
have no doubt did believe, that both Eagle Star and BBL would proceed on the
strength of his valuation. He addressed his valuation to both companies. In
those circumstances there can be no doubt that he owed both Eagle Star and BBL
a duty of care. Had Mr Browne given a competent valuation rather than a
negligent valuation, the transaction would not have proceeded.
BBL contend
that these facts are enough to establish John D Wood Commercial Ltd’s
liability. They submit:
In order to
establish the necessary degree of reliance to found a claim for damages, it is
only necessary to prove that the particular report was one, even if not the
sole, reason for proceeding with the transaction. In short, if the transaction
would not have gone ahead without the John D Wood valuation, that is sufficient
to demonstrate reliance on John D Wood’s report even if BBL also relied on
other matters.
John D Wood
Commercial Ltd challenge this contention. They submit that it is not enough for
BBL to show that, but for John D Wood Commercial Ltd’s valuation, the
transaction would not have proceeded. They must show that the valuation played
‘a real and substantial part’ in inducing them to enter into the transaction — JEB
Fasteners Ltd v Marks Bloom & Co [1983] 1 All ER 583 at p589.
John D Wood Commercial Ltd submit that Mr Browne’s opinion as to the value of
Crusader House played no part in inducing BBL to enter into the transaction. I
accept this submission. For the reasons I have given I am satisfied that BBL
had already decided to proceed on the basis of Lewis & Tucker’s valuation
and did not require to be satisfied by a franking valuation from John D Wood
Commercial Ltd that the valuation was sound. For this reason BBL are not in a
position to make out a conventional claim for damages for misstatement.
Mr Goldsmith
has, however, another string to his bow. He submits that it is not necessary
for BBL to show that they relied upon Mr Browne’s valuation. He referred me to
the following passage in the speech of Lord Oliver in Murphy v Brentwood
District Council [1991] 1 AC 398 at p486A:
The essential
question which has to be asked in every case, given that damage which is the
essential ingredient of the action has occurred, is whether the relationship
between the plaintiff and the defendant is such — or, to use the
upon the latter a duty to take care to avoid or prevent that loss which has in
fact been sustained. That the requisite degree of proximity may be established
in circumstances in which the plaintiffs injury results from his reliance upon
a statement or advice upon which he was entitled to rely and upon which it was
contemplated that he would be likely to rely is clear from Hedley Byrne and
subsequent cases, but Anns [1978] AC 728 was not such a case and neither
is the instant case. It is not, however, necessarily to be assumed that the
reliance cases form the only possible category of cases in which a duty to take
reasonable care to avoid or prevent pecuniary loss can arise. Morrison
Steamship Co Ltd v Greystoke Castle (Cargo Owners), for instance,
clearly was not a reliance case. Nor indeed was Ross v Caunters [1980]
Ch 297 so far as the disappointed beneficiary was concerned. Another example
may be Ministry of Housing and Local Government v Sharp [1980] 2
QB 223, although this may, on analysis, properly be categorised as a reliance
case.
Mr Goldsmith
postulated the following facts. John D Wood Commercial Ltd knew that their
report would be relied upon in connection with BBL’s decision whether to
advance a loan secured on Crusader House. They knew that BBL might leave it to
Eagle Star to decide whether the report was satisfactory and, if Eagle Star was
satisfied, to advance the loan.
In these
circumstances Mr Goldsmith submitted that John D Wood Commercial Ltd would be
liable in negligence to BBL if, as a consequence of causing Eagle Star to rely
on the valuation, they indirectly induced BBL to make the loan. He submitted
that the postulated facts were stronger than the following cases in which
plaintiffs recovered damages for pecuniary loss foreseeably caused by
negligence of the defendant in dealings with a third party: Ministry of
Housing and Local Government v Sharp [1970] 2 QB 223*, Smith v
Eric S Bush (a firm) [1990] 1 AC 831†
and Ross v Caunters [1980] Ch 297.
*Editor’s
note: Also reported at (1970) 213 EG 1145.
† Editor’s
note: Also reported at [1989] 1 EGLR 169.
Although the
facts postulated by Mr Goldsmith did not represent his primary case, I find
they accurately reflect what occurred in this case. When Mr Markovits urgently
phoned Mr Browne to seek the valuation he made it plain that the vital
requirement was to get the information to Mr Buxton. He was told that
completion was expected that day. When he asked whether he should talk to BBL
he was told that there was no need provided that the valuation was stated to be
also for their benefit. It must have seemed quite clear to Mr Browne that it
was Mr Buxton who required to be satisfied about the value of the property if
the transaction were to proceed.
Had I found
that Mr Buxton was induced by Mr Browne’s opinion to believe that Crusader
House had a value of £82m and that, in consequence, he gave his approval to the
transaction, I would have accepted Mr Goldsmith’s submission that Mr Browne
thereby indirectly induced BBL to enter into the transaction, and I would have
held John D Wood Commercial Ltd liable for the legal consequences.
Mr Goldsmith
submitted that it was not essential that Mr Buxton should have accepted the
precise amount of Mr Browne’s valuation provided that Mr Browne’s opinion
carried weight in inducing Mr Buxton to enter into the transaction. This
submission gains support from the approach of Goff J in Kenney v Hall
Pain & Foster (1976) 239 EG 355, [1976] 2 EGLR 29. In that case the
plaintiff wished to move home and sought a valuation of his present house in
order to assist him to decide how much he could afford to pay for a new house.
Mr Bannister, an employee of the defendants, valued it at £100,000. The
plaintiff formed the view that this valuation was too high, but none the less
proceeded to buy a new house in the belief that the cost would be covered by
the sale of the old one.
In fact Mr
Bannister had greatly overvalued the old house, so that it could not be sold at
a price sufficient to cover the new one and the plaintiff suffered loss in
consequence. The defendants argued that the plaintiff could not demonstrate the
necessary reliance on Mr Bannister’s opinion. Goff J rejected this submission.
He said at p433:
Secondly, it
was argued that by the time he decided to commit himself to Wickham Lodge, the
plaintiff was no longer acting in reliance on Mr Bannister’s advice. He had
already been warned by Mr Fuller that the asking price was a big handicap; he
suspected that the defendants’ valuation of Culverlands House was too high; and
he decided to reduce the asking price to £85,000 or lower. By August 6,
therefore, when he made his offer of £47,500 for Wickham Lodge, the plaintiff,
it was argued, had ceased to rely on Mr Bannister’s advice, and was really
acting on his own assessment of the situation. In my judgment, however, that is
too superficial a view of the plaintiff’s position. Certainly by August 6 he
had come to suspect that Mr Bannister’s valuation was rather high; he was also
exercising his own judgment, in the light of all the factors known to him, but
one of those factors remained Mr Bannister’s advice, and I am satisfied that
the plaintiff was still relying substantially on that advice, in the sense
that, even allowing for the fact that he suspected Mr Bannister’s figure to
have been rather high, still the valuation made him feel that he could safely
commit himself to spending £65,000 on Wickham Lodge and cover his commitments
by achieving a quick sale of Culverlands House by a dramatic reduction of 25%
in the asking price. He felt that, in the light of the advice that he had
received from Mr Bannister, even allowing that his valuation might have been
rather high, this was a risk that he could safely take.
I accept the
validity of the approach of Goff J on the facts of that case. The difference in
the present case is that Mr Buxton did not believe that Mr Browne’s opinion
meant that he could safely commit himself to the transaction on the basis of a
value of £80m. I find that Mr Buxton did not rely substantially upon the advice
that he had received from Mr Browne when agreeing to proceed on the basis of a
valuation of £80m.
Mr Browne did
not warrant that Crusader House was worth £82m. He merely expressed an opinion
to that effect. Neither directly nor indirectly did reliance upon that opinion
induce BBL to enter into the loan transaction. For this reason BBL’s claim
against John D Wood Commercial Ltd in respect of the Crusader House transaction
does not succeed.
Top slice
of the loans
Mr Symons
argued that John D Wood Commercial Ltd were not responsible in respect of any
transaction for BBL’s decision to lend more than 70% of the valuation — that is
the top slice of the loan between 70% and 90% of valuation. This argument was
advanced on the following basis.
The evidence
of BBL’s banking expert, Miss Craighead, demonstrated that a reasonable banker
would wholly discount the security offered by the top 30% of the valuation of a
property. She considered that BBL were relying on the existence of insurance
cover and not on the value of the property to justify the advance of the top
slice of the loans. This, said Mr Symons, was confirmed by the evidence of
BBL’s witnesses — in particular Mr Fraser. As BBL were not relying on the value
of the security to justify lending the top slice, John D Wood Commercial Ltd
owed no duty of care in relation to this segment of the loans.
This reasoning
is fallacious. It confuses the question of whether BBL were relying on John D
Wood Commercial Ltd’s valuation when deciding to lend the top slice of the loan
and their motivation for so relying. The amount of the valuation was the factor
which determined the amount that BBL lent — including the top slice of that
amount. In relation to both Trevelyan House and Cambridge Circus I am satisfied
that BBL believed that the valuation was a reliable indication of the value of
the property and that the decision to lend 90% of the valuation was premised on
that belief. The reason why BBL were prepared to run the risk of advancing more
than 70% of the valuation was the belief that this risk had been transferred to
Eagle Star, but that does not mean that BBL were not relying on the valuation
when deciding how much to lend.
Whether it was
prudent to lend the top slice is a question that may be relevant when
contributory negligence is considered, but if there was imprudence on the part
of BBL it did not break the chain of causation that links the valuations and
the totality of the sums advanced by BBL.
Damages
The assessment
of damages in this action raises difficult issues of principle which have not
been fully addressed, let alone resolved, in the decided cases.
BBL’s case
In the case of
both the Trevelyan House and the Cambridge Circus transactions, BBL advance
their claim for damages on the same basis. BBL are entitled to such award as
will place them in the position that they would have enjoyed had John D Wood
Commercial Ltd not been negligent. John D Wood Commercial Ltd’s negligence
caused them to make a loan. But for John D Wood Commercial Ltd’s negligence
they would not have made that loan or any lesser loan. Accordingly, they are
entitled to recover as damages the sum advanced and to recover interest for the
loss of use of the sum advanced. They must, however, give credit for the
benefits received under the loan transaction — in particular the proceeds of
sale of the property securing the loan and such payments of interest as were
received. This case requires careful analysis.
Would BBL
have advanced a lesser sum?
It is
necessary at the outset to consider whether BBL are entitled to advance their
claim in each case on the basis that, but for John D Wood Commercial Ltd’s
negligence, they would have made no loan at all. Neither party adduced any
evidence expressly directed to the question of what would have occurred had
John D Wood Commercial Ltd advanced competent valuations. BBL contended that
the onus was on John D Wood Commercial Ltd to prove that BBL would have entered
into a loan transaction for a lower amount had a competent valuation been
given. John D Wood Commercial Ltd contended that the onus was on BBL to prove
that they would not have done so.
The issue of
burden of proof on this point is not an easy one, but I do not need to resolve
it. On the evidence before me and on balance of probabilities I find that, had
John D Wood Commercial Ltd given competent valuations in the case of Trevelyan
House and Cambridge Circus, BBL would not have entered into loan transactions
based on those valuations. I make this finding because I do not believe that
the sponsors would have been interested in proceeding with the transactions had
finance been available only at those lower levels. Indeed, I do not find it
realistic to envisage that Mr Markovits would have attempted to broke
transactions at those levels.
It is material
to point out, having regard to considerations which come later in this
judgment, that there is no reason to think that BBL would not have been
prepared to enter into transactions at the lower levels that would have
resulted from competent valuations. They had taken the policy decision to enter
into such transactions in principle and, in their offer letters, offered to
lend 90% of satisfactory valuations. John D Wood Commercial Ltd’s valuations
influenced BBL in deciding how much to lend, but not in deciding in principle
whether to enter into the loan transactions. In this respect this case differs
from London & South of England Building Society v Stone [1983]
1 WLR 1242* and Swingcastle Ltd v Alastair Gibson (a firm) [1991]
2 AC 223† .
*Editor’s
note: Also reported at (1983) 267 EG 69, [1983] 2 EGLR 131.
† Editor’s
note: Also reported at [1991] 1 EGLR 157.
When did
BBL’s cause of action arise?
There is no
issue as to this question. Counsel for both parties agreed that BBL’s cause of
action against John D Wood Commercial Ltd arose in each case when BBL, induced
by the negligent valuation, entered into the loan transaction. This accords
with the view expressed by Buckley LJ in Stone at p1260.
What was
the measure of damage at the time that the cause of action arose?
This question
is a useful stepping stone towards the issues that divide the parties on this
aspect of the case. In Swingcastle Ltd v Alastair Gibson (a firm) [1990]
1 WLR 1223‡ at p1236 Sir John Megaw
suggested that, in a case such as this, the claim for damages arose only when a
shortfall was suffered on ultimate realisation of the security. The court may,
however, be called upon to assess damages before the security is realised. Such
a case was Eagle Star Insurance Co Ltd v Gale & Power (1955)
166 EG 37. In that case Devlin J held that, in assessing damages, credit had to
be given for the contractual rights enjoyed by the lender under the loan
transaction. Those contractual rights included not merely the value of the
security but also the value of the borrower’s personal covenant. In London
Building Society v Stone at p1255 O’Connor LJ (alone of the three
members of the court) expressed the view that Devlin J was wrong to have regard
to the personal covenant of the borrower. That view, whether justified or not,
does nothing to destroy the principle applied by Devlin J, which, in my
judgment, was plainly correct.
‡ Editor’s
note: Also reported at [1990] 2 EGLR 149.
In the present
case, had damages fallen to be assessed at the time that BBL concluded each
transaction, it would have been necessary for BBL to give credit for the
package of contractual rights, including the securities, granted to BBL under
the loan agreement. The detriment suffered by BBL was not simply, as BBL
suggest, the payment away of the moneys advanced under the facility, but the
entry into a complex financial transaction in respect of which the security was
inadequate. I do not propose to attempt the exercise of assessing the damages
at that stage, but plainly BBL would have had to give credit for, inter
alia, the actual value of the property securing the loan. It is hard to
envisage any basis upon which damages could have exceeded the difference between
John D Wood Commercial Ltd’s valuation and the actual value of the property
securing the loan.
Issues
Damages in
this case fall to be assessed not as at the dates when the causes of action
arose, but as at the date of judgment. Where a tort causes damage which is
subject to ongoing consequences, whether favourable or unfavourable for the
victim, the court when it gives judgment takes into account the relevant
consequences that have occurred prior to judgment and has to do its best to
evaluate any future relevant consequences. In this case a number of events have
occurred since BBL entered into the transactions which have affected the losses
suffered by BBL. The parties are at odds as to which, if any, of those events I
ought to take into account when assessing damages. Those events are:
(1) BBL have syndicated part of each loan.
(2) BBL have made a partial recovery under the
settlement agreement with Eagle Star.
(3) The property market has collapsed,
drastically reducing the value of the properties securing the loans.
BBL contend
that I should pay no regard to the effect of the first two events when
assessing damages; John D Wood Commercial Ltd contend that I should pay no
regard to the third.
Syndication
In order to
demonstrate the nature of the syndication that occurred in this case, I propose
at the outset to set out the lengthy relevant provisions of the loan
agreements. Each was in the same form so far as this topic is concerned and I
shall quote from the Trevelyan House agreement.
The agreement recited
that it was concluded between Openhouse (the borrowers), LPT, BBL and:
The banks and
financial institutions whose names are set out in the First Schedule below.
Clause 1
included the following definition:
‘Banks’ means
the banks and other financial institutions listed in the First Schedule as
lenders and the permitted successors and assigns of any of them and ‘Bank’
shall be construed accordingly. If and for so long as there is only one Bank
party hereto references herein to the ‘Banks’, the ‘Instructing Group’ and
similar expressions shall be taken as references to such a Bank alone and this
Agreement shall be read and construed as referring, where relevant, only to one
Bank, but the foregoing shall not prevent any assignment,
more than one Bank party hereto. The rights and obligations of each party
acquired or assumed in any such case (including the Available Commitment of
each Bank) shall be several;
Clause 2
provided:
(B) Participations: Subject to the
provisions of this Agreement, each Bank will participate through its Lending
Office in the Advance in the proportion borne by its Available Commitment to
the Available Facility immediately before the making of the Advance.
(C) Several Obligations: The obligations
of the Banks hereunder are several. The failure of a Bank to perform its
obligations hereunder shall not affect the obligations of the Borrower towards
any other Bank nor shall the Agent or any other Bank be liable for the failure
of such Bank to perform its obligations hereunder.
Clause 21
provided:
21. DISTRIBUTION
OF PAYMENTS
(A) Sharing Obligation: If any Bank shall
at any time receive payment or satisfaction of all or part of its participation
in the Advance, interest payable hereunder, arrangement fee or any other amount
payable hereunder (whether by direct payment, set-off, benefit of security,
banker’s lien counter-claim or in any other manner) and the result thereof is
that the aggregate of such amounts received is greater in proportion to its
participation than the aggregate of amounts received by any other Bank in
proportion to such other Bank’s participation, then, and notwithstanding any
contrary direction or appropriation by the Borrower:
(i) such Bank shall forthwith advise the Agent of
such receipt or recovery;
(ii) the Agent shall forthwith determine the pro
rata proportion of such amount due to each Bank, which determination shall be
conclusive in the absence of manifest error, and shall notify each Bank
accordingly;
(iii) such Bank shall, within 10 Business Days of
receipt of notice from the Agent stating the aggregate amount due to the other
Banks, pay to the Agent an amount equal to the aggregate amount;
(iv) the Agent shall distribute that payment to
the other Banks as if it were paid by the Borrower; and
(v) as between the Borrower and such Bank that
amount shall be treated as not having been paid.
(B) Proportionate Refund: If all or part
of any amount so received or recovered by such Bank pursuant to sub-clause (A)
has to be refunded by it, each Bank to whom any part of that amount has been
distributed shall in turn pay forthwith to such Bank its proportionate share of
the amount to be refunded.
(C) Appropriation: The Borrower and the
Banks expressly agree that payment by, or recoveries from, the Borrower shall
be appropriated between the Banks in accordance with the above procedure
without the need for further consent or the completion of any other formality
whatsoever.
Clause 24
provided:
(C) The Banks:
(i) Any Bank (for the purposes of this Clause
called the ‘Existing Bank’) may:
(a) assign all or any of its rights and benefits
under the Security Documents and the Eagle Star Indemnity; and
(b) transfer all or any of its obligations
hereunder by way of novation, to the United Kingdom branch or Lending Office of
any reputable bank or other financial institution recognised as a bank pursuant
to section 349 of The Income and Corporation Taxes Act 1988 (hereinafter in
this sub-clause (C) called a ‘Substitute Bank’) by delivering to the Agent a
duly completed and duly executed Transfer Certificate in the form set out in
the Sixth Schedule. Any disposal made by means of a Transfer Certificate shall
take effect upon the signature of such Transfer Certificate on behalf of the
Agent (on its own behalf and on behalf of the Borrower, LPT and each of the
Banks other than the Existing Bank), which signature shall be effected as
promptly as is practicable after presentation to the Agent of such Transfer
Certificate, in proper form and duly executed by the other parties thereto, not
less than 5 days prior to the date upon which it is intended that it shall be
effective whereupon:
(a) all the Existing Bank’s rights and benefit
under the Security Documents and the Eagle Star Indemnity in and to that
portion of the Existing Bank’s share of the Advance (the ‘Assigned Amount’) set
out as such in the Sixth Schedule to the Transfer Certificate shall be assigned
by the Existing Bank as beneficial owner to the Substitute Bank;
(b) to the extent that in such Transfer
Certificate the Existing Bank seeks to novate its obligations hereunder, the
Borrower and LPT shall each be released from further obligations to such Bank
hereunder and the respective rights of the Borrower and LP-1 against such Bank
and of such Bank against the Borrower and LPT shall be cancelled such rights
and obligations being referred to in this Clause 24(C) as ‘Discharged
Obligations’)
(c) the Borrower, LPT and the Substitute Bank
party thereto shall each assume obligations towards each other which differ
from the Discharged Obligations only insofar as the Borrower, LPT and the
Substitute Bank have assumed and/or acquired the same in place of the Borrower,
LPT and the Existing Bank;
(d) the Agent, the Substitute Bank and the other
Bank shall acquire the same rights and assume the same obligations between
themselves as they would have acquired and assumed had the Substitute Bank been
an original party hereto as a Bank with the rights and/or the obligations
acquired or assumed by it as a result of such transfer.
The transfer
certificate in the sixth schedule included the following provisions:
4. The
Substitute Bank hereby undertakes with the Existing Bank and each of the other
parties to the Agreement that it will perform in accordance with its terms all
those obligations which by the terms of the Agreement will be assumed by it
after (a) delivery of an executed copy of this Transfer Certificate to the
Agent, and (b) execution of this Transfer Certificate by the Agent, and (c)
satisfaction of the conditions (if any) subject to which this Transfer
Certificate is expressed to take effect.
5. On
execution of this Transfer Certificate by the Agent, the Borrower, LPT, the
Banks and the Agent accept the Substitute Bank as a party to the Agreement in
substitution for the Existing Bank with respect to all those rights and/or
obligations which by the terms of the Agreement will be assigned to or assumed
by the Substitute Bank after satisfaction of any further conditions (if any)
subject to which this Transfer Certificate is expressed to take effect. . . .
7. Each of
the Borrower and the Existing Bank confirms and acknowledges that on the date
on which this Transfer Certificate becomes effective it will have no rights of
set-off against the other in respect of the Assigned Amount or any other right
which it could asset against the other in diminution of the Assigned Amount;
In the case of
Trevelyan House, BBL was the only bank named in the first schedule when the
transaction was completed and BBL advanced the entire loan amount of £39.915m.
Syndication to a number of banks subsequently took place by means of transfer
certificates, leaving BBL with a final retention of £7.915m.
In the case of
Cambridge Circus, Sanwa Bank Ltd was a participant with BBL from the outset,
being named in the first schedule with a participation of £45m. A further £5m
was subsequently syndicated to the Bank of East Asia, initially by a risk
participation agreement, and subsequently by a transfer certificate.
Issues
The basic
issue is whether BBL is entitled to recover on the basis of the full amount of
the loss borne by all the syndicate banks or whether BBL is restricted to
claiming in respect of their own participation. BBL put their case in two
alternative ways:
(1) They contend that no regard should be paid to
the syndication on the grounds that it is res inter alios acta;
alternatively
(2) they contend that if it is right to have
regard to the effect of syndication it is also right to have regard to the
effect of clause 21. BBL contend that that clause will require them to share
with the other syndicate members any damages recovered, so that they will not
receive full compensation until they have made 100% recovery.
Res inter
alios acta
In Linden
Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1992) 57 BLR 57
Staughton LJ observed (p85):
When a
plaintiff’s initial loss has subsequently been made good by someone other than
himself, the general rule is that he can recover only nominal damages.
but then went
on to consider exceptions to that rule that fall within the rubric of res inter
alios acta. He identified recoveries achieved by the
on to hold (p28) that the exception was wider:
There may be
circumstances which are accidental, or peculiar to the plaintiff, or arise from
mere good fortune; recoveries to which these give rise do not benefit the party
in breach of contract.
Whatever
circumstances res inter alios acta embraces, they have, I believe, one
thing in common. They are circumstances in which a third party, or an
extraneous event, intervenes to provide a plaintiff with some form of
indemnity, in whole or in part, for the loss which the defendant has caused.
The law ignores the intervention so that the plaintiff remains entitled to
recover from the defendant the full amount of the loss or damage initially
suffered.
Can the
principle of res inter alios acta apply in the present case?
Sanwa Bank
I turn first
to consider the position of the participation of Sanwa Bank in the Cambridge
Circus loan. Sanwa was a party to the loan agreement ab initio. Under
the terms of the loan agreement Sanwa entered into severable obligations
towards the borrower and acquired severable rights. Pursuant to those
obligations Sanwa lent £45m to the borrower. It appears that the actual payment
was made by BBL, who had been put in funds by Sanwa for this purpose. I do not
think that affects the position. BBL was never at risk as to this portion of
the overall loan and has suffered no loss in relation to it. The loss arising
out of the loan of £45m has been borne directly by Sanwa. In these
circumstances I see no basis upon which BBL can argue that the participation by
Sanwa was res inter alios acta and that the loss incurred on the £45m
lent by Sanwa must be treated as if sustained by BBL.
Later
syndications
The banks
which joined in the loan transactions by subsequent syndication reimbursed BBL
in respect of part of the loans that BBL had advanced. They became parties to
the loan transactions by novation and had transferred to them a pro rata share
of BBL’s rights under those transactions, including BBL’s interest in the
properties securing the transactions. There was thus transferred from BBL to
the syndicate banks a share of the risks inherent in the loan transactions. BBL
contend that the court should disregard this transfer of risk and assess
damages as if the subsequent consequences of the transactions were born
exclusively by BBL. The principle of res inter alios acta requires the court to
disregard an indemnity received by the plaintiff from a third party in respect
of the loss caused by the defendant.
It does not
require or permit the court to assess damages on the basis of a fiction; to
treat losses sustained by third parties as if they have been sustained by the
plaintiff. The intervention of the syndicate banks did not indemnify BBL in
respect of consequences of entering into the loan transactions. It resulted in
the syndicate banks suffering those consequences in place of BBL. The loss
claimed by BBL is not loss suffered by BBL prior to syndication, but loss
suffered by all the syndicate banks after syndication. The principle of res
inter alios acta does not permit BBL to recover damages in respect of the
losses sustained by the syndicate banks.
Transferred
loss
Under the
heading res inter alios acta Mr Goldsmith sought to rely upon the recent
decision of the House of Lords in St Martins Property Corporation Ltd v Sir
Robert McAlpine Ltd [1993] 3 WLR 408. That decision did not turn on the
principle of res inter alios acta — which requires one to disregard the
intervention of a third party after loss has occurred. On the contrary, it
permitted the plaintiffs to recover damages in respect of loss which fell
directly on a third party in the first instance. None the less it is necessary
to consider whether the principle in that case can be applied in this one.
In St
Martins the plaintiffs entered into a building contract with the defendants
in respect of a property development. They then sold the development to a third
party on the basis that the third party would have the benefit of performance
by the defendants of their contractual obligations. A purported assignment to
the third party of those obligations was, however, held ineffective.
The
defendants, in breach of the contractual obligation that subsisted to the
plaintiffs, carried out their work defectively, so that the third party
suffered loss in the sum of £800,000. The House of Lords held that, by way of
exception to the general rule, the plaintiff could recover substantial damages
on behalf of the third party. The rationale for this exception was that it was
foreseeable that the defendants’ breach of contract would cause loss to the
third party who, by reason of the contract, could acquire no cause of action in
its own right. Thus, the exception to the rule was necessary to provide:
a remedy
where no other would be available to a person sustaining loss which under a
rational legal system ought to be compensated by the person who has caused it.
In my
judgment, there are the following grounds for distinguishing St Martins from
the present case:
(1) St Martins was a case of breach of a
contractual duty to supply work and material. This case involves inducing a
plaintiff to act to its detriment by negligent advice. In St Martins the
breach of contractual duty owed to the plaintiff was the clear and direct cause
of damage to the third party. In the present case John D Wood Commercial Ltd’s
breach of duty to BBL has not been shown to have been causative of loss to any
other bank in the syndicate. To establish the nexus of causation it is
necessary, at the least, to show that John D Wood Commercial Ltd’s valuation
was one of the factors that induced the bank in question to join the syndicate.
(2) In so far as other banks were induced by John
D Wood Commercial Ltd’s valuation to join the syndicate they are likely to
enjoy an independent cause of action in their own right. That cause of action
will be subject to any contributory negligence they may have shown, but will
not be impaired by contributory negligence on the part of BBL. In these
circumstances it is neither appropriate nor desirable that BBL should advance a
claim on their behalf.
For these
reasons the decision in St Martins does not support BBL’s claim to
recover the damages sustained by the syndicate banks.
Clause 21
BBL contend
that if the effects of syndication have to be taken into account when assessing
damages, the court must have regard to the effect of all the terms of the loan
agreement that govern syndication, including clause 21. Clause 21 requires BBL
to share with the syndicate banks any recovery made from John D Wood Commercial
Ltd. It follows that, until John D Wood Commercial Ltd have paid to BBL the
whole of the loss sustained indemnity, John D Wood Commercial Ltd do not accept
that the sharing obligation in clause 21 applies to damages recovered from
them. I thus have to resolve a short but important point of construction.
In my
judgment, the sharing obligation in clause 21 has no application to such
damages as may be recovered by BBL in this action. Clause 21 applies only to
payments received in respect of the contractual obligations owed to all
syndicate banks by the borrower under the loan agreement. This conclusion is
based primarily on the natural meaning of the provision of clause 21. Thus:
(i) The clause applies to payments or
satisfaction of participation in the advance or sums payable under the loan
agreement. Damages paid by John D Wood Commercial Ltd to BBL will not
constitute such a payment.
(ii) The comparison with ‘the aggregate received
by other Banks in proportion to such other Banks’ participation’ underlines the
fact that the clause is dealing with common payment obligations owed to all
syndicate members.
(iii) The provisions of clause 21(A)(ii) and (iii)
make it plain that the clause is dealing with payments of sums due to all the
syndicate banks, not payments due to an individual bank in respect of a right
not shared by the other banks.
(iv) The provisions of clause 21(A)(iv) and (v)
and of clause 21(C) make it plain that the payments in question are payments
which
Commercial Ltd will not be made in discharge of the borrower’s obligations.
The natural
meaning of the provisions of clause 21 make sound commercial sense. Mr
Goldsmith was constrained to submit that any sum received by a syndicate bank
in its own right in respect of loss flowing from the loan transaction had to be
shared under clause 21. Thus, if a syndicate bank had taken out personal insurance
against loss, the recovery under the policy would have to be shared with the
other banks. Such a result would be commercially absurd.
For these
reasons I reject BBL’s contention that damages fall to be assessed on the
premise that BBL is contractually obliged to share recoveries with the other
syndicate banks under clause 21. The fact that BBL may have agreed to share
such recoveries with the other banks under the settlement agreement with Eagle
Star dated January 22 1993 is of no relevance. So far as the other banks are
concerned that agreement plainly does fall within the principle of res inter
alios acta.
Recovery
from Eagle Star
In the course
of the trial and in an attempt to restrict the issues I ruled that BBL did not
have to give credit, when damages came to be assessed, for any recoveries made
from Eagle Star under the MIGs. Such recoveries fell fairly and squarely within
the doctrine of res inter alios acta. Notwithstanding this rule, Mr
Symons sought to advance the following argument. Recovery of sums already paid
to BBL by Eagle Star will be made on behalf of Eagle Star, who will be entitled
to them under rights of subrogation. Eagle Star were not liable under the MIGs
to pay compensation in respect of loss attributable to negligent overvaluation.
It follows that payments made by Eagle Star were in respect of loss
attributable to the collapse of the property market. John D Wood Commercial Ltd
are not liable for such loss.
In my
judgment, this argument also runs foul of the doctrine of res inter alios
acta. Dealings between BBL and Eagle Star are of no relevance in the
context of the assessment of BBL’s damages.
Collapse
of the property market
In the case of
each transaction BBL made a loan to an SPV, which had no assets. The loan
agreement required that the loan should be used exclusively for the purchase of
the property which would secure it, together with the incidental costs of the
transaction. BBL’s witnesses made it clear that they did not expect any part of
the loan to be retained by the SPV so as to be available for repayment on the
maturity of the loan. BBL relied exclusively upon the property to provide the
source of repayment of the loan — whether as a result of the sale of the
property or the use of the property as security to refinance the loan. So far
as BBL were concerned the commercial viability of the transactions depended
upon two fundamental assumptions. First, that John D Wood Commercial Ltd’s
valuations would be within 10% of the true market values of the properties at
the time that the loans were made; second, that the properties would at least
retain their values up to the time when the loans fell to be repaid. Losses
were sustained because both these assumptions proved to be ill founded. John D
Wood Commercial Ltd had grossly overvalued the properties and such values as
the properties had were sharply reduced as a result of the collapse in the
property market that occurred shortly after the loan transactions.
BBL contend
that they are entitled to be compensated in full for the adverse consequences
of entering into the loan transactions, regardless of the fact that a major
cause of those consequences was the collapse of the property market.
It is John D
Wood Commercial Ltd’s submission that neither justice nor the law requires them
to bear that part of BBL’s loss which is attributable to the fall in the
property market.
At the outset
of his argument in relation to this aspect of the case Mr Symons cited the
following observation of Denning LJ in Roe v Minister of Health
[1954] 2 QB 66 at p85:
. . . the
three questions, duty, causation and remoteness, run continually into one
another. It seems to me that they are simply three different ways of looking at
one and the same problem . . .
Instead of
asking three questions I should have thought that in many cases it would be
simpler and better to ask the one question: is the consequence within the
risk? And to answer it by applying
ordinary, plain common sense.
Mr Symons submitted
that, on the facts of this case:
(1) John D Wood Commercial Ltd owed no duty to
protect BBL against loss caused by a fall in the market.
(2) John D Wood Commercial Ltd’s negligence did
not cause that part of the loss which was attributable to the fall in the
property market.
(3) That part of the loss which is attributable
to the fall in the property market is too remote to be recoverable.
So far as duty
is concerned, Mr Symons argued that BBL deliberately assumed the risk that they
might suffer loss as a result of a fall in the property market. They did not
rely upon John D Wood Commercial Ltd’s valuation to protect them against that
risk. In these circumstances John D Wood Commercial Ltd owed no duty to protect
BBL from this type of loss. So far as causation is concerned. Mr Symons argued
that the fall in the property market was a novus actus interveniens,
which broke the chain of causation. So far as remoteness is concerned, Mr
Symons’ argument was essentially one of policy. It was not just that the valuer
should be liable for this head of loss. The fall in the property market gave
rise to a loss out of all proportion to the valuer’s culpability.
Did BBL rely
upon John D Wood Commercial Ltd’s valuations to protect them against a fall in
the property market?
Mr Goldsmith
argued that, to a limited extent, John D Wood Commercial Ltd’s valuations
should have provided protection against a fall in the property market. This was
because BBL advanced only 90% of the valuations. Thus, after making provision for
repayment of the loans, there remained a cushion of 10% to protect against a
fall in the property market.
Mr Symons
argued that, on the facts of this case, BBL were not relying on the valuations
to protect them against a fall in the property market. The 10% margin did no
more than allow for the fact that a competent valuation might none the less
have a 10% margin of error. In any event there were other contingencies, such
as the costs of realising the securities and loss of interest during any delay
in so doing which might equally well be said to be the subject-matter of any
protection provided by the cushion.
I accept that
submission. The reason why BBL were prepared to risk the loss consequent upon a
fall in the property market was that they believed that they had obtained 100%
cover against this risk from Eagle Star, but I do not believe that the
involvement of Eagle Star affects the position. Whether the risk of a fall in
the property market was borne by BBL, borne by Eagle Star or shared between them,
it was not a risk in respect of which they were placing reliance on John D Wood
Commercial Ltd’s valuations. Looking at the picture broadly, the transactions
in this case were, as Mr Buxton and other witnesses confirmed, founded on a
belief that the property market was rising and would continue to rise. They
represented an attempt to share in the profits that the property companies were
making from this movement and, in doing so, they involved an assumption of risk
that the market movement might be reversed. I do not believe that the 10%
margin reflected any apprehension in relation to that risk. Mr Goldsmith’s
written submissions effectively conceded this point, for he argued:
In the case
of an ordinary loan where the lender has advanced 70% without any sort of
insurance on the security of the property he is intending that cushion to
protect him against the fall in the market value.
If this were a
case of ‘an ordinary loan’ it would be necessary when assessing damages to have
regard to the loss of the cushion against the fall in value of the security. On
the facts of this case, however, BBL did not rely upon John D Wood Commercial
Ltd’s valuations to provide any cushion against a fall in the property market.
The 10% margin was no more than reasonable to cater for the margin of error to
which a competent valuation might be subject.
Basic
principle
In Philips
v Ward [1956] 1 WLR 471, a case where a claim was brought against a
negligent surveyor, Morris LJ said at p475 that the damages to be assessed
were:
. . . such as
could fairly and reasonably be considered as resulting naturally from the
failure of the defendant to report as he should have done.
I find this a
compelling statement of the basic principle that should be adopted in a case
such as the present. If it is open to me to apply it, BBL will not recover as
damages that part of their loss which is attributable to the collapse of the
property market. It does not seem to me that such loss can fairly and
reasonably be considered as resulting naturally from John D Wood Commercial
Ltd’s failure to report as they should have done. Where a party is
contemplating a commercial venture that involves a number of heads of risk and
obtains professional advice in respect of one head of risk before embarking on
the adventure, I do not see why negligent advice in respect of that head of
risk should, in effect, make the adviser the underwriter of the entire
adventure. More particularly, where the negligent advice relates to the
existence or amount of some security against risk in the adventure, I do not
see why the adviser should be liable for all the consequences of the adventure,
whether or not the security in question would have protected against them.
It is Mr
Goldsmith’s submission, however, that once BBL have established that John D
Wood Commercial Ltd’s negligence caused them to enter into a loan transaction,
it follows as a matter of law that the negligence constitutes at least a
contributory cause of all the adverse consequences of that loan transaction.
More particularly he submits that there is no principle of law which permits
John D Wood Commercial Ltd to escape liability for the consequences of the
effect of the collapse of the property market in this case and a number of
principles which prevent them from so doing.
(1) If a test of foreseeability is applied, the
possibility of a fall in the property market was plainly foreseeable.
(2) In any event the damages are of a type
foreseeable and it matters not if their extent was not foreseeable: Hughes
v Lord Advocate [1963] AC 837; Re Polenis & Furness Withy &
Co [1921] 3 KB 560; Smith v Leech Brain & Co [1962] 2 QB
405.
(3) The fall in the property market and the
overvaluation were concurrent causes of the loss and a tortfeasor cannot rely
upon the existence of a concurrent cause to avoid liability: Heskell v Continental
Express Ltd [1950] 1 All ER 1033 at p1047.
Some of Mr
Goldsmith’s submissions on causation echo submissions which were accepted by
Steyn J and by the Court of Appeal, but rejected by the House of Lords in Skandia*,
a case which merits detailed consideration.
*Editor’s
note: Banque Keyser Ullmann v Skandia (UK) Insurance Co [1991] 2 AC 249.
In Skandia
claims were advanced by syndicates of banks in relation to loans made to a
fraudster, Ballestero, who made off with the money. In making the loans the
banks had relied upon cover which they believed had been placed under credit
insurance policies. At the time that the loans were made full cover had not
been obtained. The banks were induced to make the loans none the less because
their insurance broker fraudulently misrepresented to them that full cover had
been obtained. The credit insurance policies were subject to a fraud exemption
which left the risk of loss caused by fraud upon the banks. The banks conceded
that the terms of the policies did not cover their loss because it was caused
by the fraud of Ballestero. The banks contended, however, that the fraud of
Ballestero was only one cause of their loss. There was a concurrent cause — the
breach of duty of the underwriters who issued the credit insurance cover. They
were aware of the broker’s fraudulent conduct. They owed a duty to disclose
this to the banks. They failed to do so. Had they disclosed the broker’s fraud
the banks would never have made the loans and thus would never have suffered
the losses. Steyn J summarised the issue on causation as follows [1990] 1 QB
665 at p717A:
Mr
Ballestero’s fraud was a cause of the plaintiffs’ losses. But for his fraud no
loan transactions would have taken place. On the other hand, as I have found,
the defendants ought to have disclosed Mr Lee’s dishonesty, and if they had
done so the plaintiffs would not have suffered losses. The defendants’ breach
of duty was therefore also a cause of the plaintiffs’ losses. The question is
whether it affords the defendants a defence to say that Mr Ballestero’s fraud
was also a cause of the plaintiffs’ losses.
He then went
on to cite Heskell v Continental Express and concluded as
follows:
The
correctness of this conclusion of Devlin J was not challenged. In my respectful
judgment Devlin J’s analysis is plainly correct, and I adopt it. In the present
case one is, in my judgment, dealing with two causes of equal efficacy; Mr
Ballestero’s fraud and the defendants’ breach of duty. The fact that the breach
of duty, based on the uberrima fides principle or the tort of negligence, is
one of two causes of equal efficacy is sufficient to sustain the plaintiffs’
case on this aspect.
The Court of
Appeal approved the reasoning of Steyn J. They described the issue as follows
at p763F:
Is the type
of loss, which must be shown to have been reasonably foreseeable in this case,
to be defined as loss resulting from the fraud of Mr Ballestero, who was the
insured and the borrower from the bank, or in some wider terms, such as loss
resulting from entering into a transaction of loan induced by fraud?
They then went
on to resolve the issue as follows [at p767E]:
We cannot
accept the submission that, in the case of economic loss resulting from the act
of an independent third party, there is to be introduced into the concept of
reasonable foreseeability of damage a requirement of foresight of the manner
and means by which the particular loss was caused or of the extent of the loss
suffered. When the judge considers whether reasonable foresight of the relevant
kind of loss has been proved, he is entitled and required to consider all the
circumstances of the case. We can, however, find in Lord Pearce’s speech in Hughes
v Lord Advocate [1963] AC 837, 851-858 no support for the submission
that, where reasonable foresight of the relevant kind of loss is proved, the
court is required further to be satisfied that there was reasonable foresight
of the manner in which the loss was suffered or the extent of it . . .
— and at p768D
—
The judge
held, as we think rightly, that the fraud of Mr Ballestero was not foreseeable.
The banks however submitted to Steyn J, and repeated the submission in this
court, that the kind of damage suffered by them was financial loss caused by Mr
Lee’s dishonesty, in particular loss caused by being induced by the fraud of Mr
Lee to enter into a transaction of loan into which, but for that dishonesty,
they would not have entered. It seems to us that that is an accurate
description of the kind of loss suffered by the banks.
This reasoning
was rejected by Lord Templeman in the leading speech in the House of Lords —
[1991] 2 AC 249 at p279:
The banks argue
that they would not have advanced SF10,750,000 on 2 September 1980 if Mr
Dungate had disclosed the earlier fraud of Mr Lee and therefore they lost
SF10,750,000 because of the silence of Mr Dungate. My Lords, this argument
confuses the cause of the advance and the cause of the loss of the advance. The
cause of the advance was the fraud of Mr Lee. That fraud was foreseeable by Mr
Dungate who is liable (if at all) for the consequences of that fraud. The
consequence of Mr Lee’s fraud was that the advance was uninsured. Mr Dungate is
liable (if at all) for the fact that the advance was uninsured. The advance
would have been lost whether the advance was insured or not because the banks
had accepted and paid a premium for insurance which contained a fraud exemption
clause. The fraud of Mr Ballestero which caused the loss of the advance and the
rejection of the claims under the insurance policies was, as the judge found,
not foreseeable. The fraud of Mr Lee which caused the advance to be made did
not affect the rights of the banks to recover their loss and therefore did not
cause the loss of the advance. The policies of insurance did not or would
not have protected the banks against the fraud of Mr Ballestero and his fraud
was causative of the loss of the advance. Accordingly, the failure by Mr
Dungate to inform the banks of the fraud of Mr Lee was not causative of the
banks’ loss.
(Emphasis
supplied.)
I have cited
from this decision at length because, despite the submissions to the contrary
of Mr Mark Cran QC, for Eagle Star, I consider it to be highly relevant in the
present context. In Skandia the plaintiff banks were induced by the
defendants’ breach of duty to enter into a loan transaction on the premise that
they had insurance cover in relation to the risk when they did not. But had the
cover been in place it would not have protected them against the loss which
resulted from the loan transaction. For this reason, the House of Lords held
that the breach of duty was not causative of the loss. A two-stage approach was
adopted. Did the breach of duty induce the loan? If so, did the breach of duty cause the loss
of the sum loaned? Because there was no
causal nexus between the breach of duty and the loss of the loan the
plaintiffs’ claim failed.
In Skandia
the cause of the loss of the loan — the fraud of Ballestero — was not
reasonably foreseeable, but I do not consider that fact to have been essential
to the result. As I read the speech of Lord Templeman, had the insurance
policies not been subject to the fraud exception, causation of (at least some)
loss would have been established, albeit that the fraud of Ballestero would
have been no more foreseeable. Whether the cause of the loss of an advance is
clearly foreseen or not reasonably foreseeable I do not see how the negligent
adviser can fairly be said to have caused that loss unless his advice has been
relied upon as providing protection against the risk of that loss. In my
judgment, the decision in Skandia lends strong support to the submission
that John D Wood Commercial Ltd’s negligence did not cause that part of BBL’s
loss which resulted from the collapse of the property market. It is necessary,
however, to consider the other authorities in the field to see whether they
preclude me from accepting this submission.
The most
recent, and most important, authoritative decision in this field is Swingcastle
Ltd v Alastair Gibson (a firm) [1991] 2 AC 223. In his speech, with
which the other members of the House agreed, Lord Lowry at p237 referred with
approval to some general observations of Oliver J in an earlier case:
There is as
Neill LJ perceived, no cut and dried solution to calculating the amount of
damages in cases of this kind. It depends on the evidence. Mr Toulson, who
presented the defendant’s case to your Lordships both clearly and persuasively,
illustrated that point by reference to certain observations of Oliver J, as my
noble and learned friend Lord Oliver of Aylmerton then was, in Radford v
De Froberville [1977] 1 WLR 1262. That was a different kind of case, but
the points made in the following passages are most apposite.
(1) At p1268:
‘As to
principle, I take my starting point from what, I think, is the universal
starting point in any inquiry of this nature — that is to say, the well known
statement of Parke B in Robinson v Harman (1848) 1 Exch 850, 855
which is in these terms: ‘The rule of common law is, that where a party
sustains a loss by reason of a breach of contract, he is, so far as money can
do it, to be placed in the same situation, with respect to damages, as if the
contract had been performed’.’
(2) At pp1269-1270:
‘One of the
difficulties about any question of damages is that there are so few general
principles and that such as there are have, at times, been expressed in
ambiguous and even contradictory terms. The matter was well expressed by
Viscount Haldane LC in British Westinghouse Electric & Manufacturing Co
Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673,
688, where he says: ‘In some of the cases there are expressions as to the
principles governing the measure of general damages which at first sight seem
difficult to harmonize. The apparent discrepancies are, however, mainly due to
the varying nature of the particular questions submitted for decision. The
quantum of damage is a question of fact, and the only guidance the law can give
is to lay down general principles which afford at times but scanty assistance
in dealing with particular cases. The judges who give guidance to juries in
these cases have necessarily to look at their special character, and to mould,
for the purposes of different kinds of claim, the expression of the general
principles which apply to them, and this is apt to give rise to an appearance
of ambiguity. Subject to these observations, I think that there are certain
broad principles which are quite well settled. The first is that, as far as
possible, he who has proved a breach of a bargain to supply what he contracted
to get is to be placed, as far as money can do it, in as good a situation as if
the contract had been performed. The fundamental basis is thus compensation for
pecuniary loss naturally flowing from the breach: but this first principle is
qualified by a second, which imposes on a plaintiff the duty of taking all
reasonable steps to mitigate the loss consequent on the breach, and debars him
from claiming any part of the damage which is due to his neglect to take such
steps’.’
(3) At p1270:
‘There is, I
think, a danger in elevating into general principles what are in truth mere
applications to particular facts or situations of the overriding general
principle as enunciated by Parke B; and on more than one occasion attention has
been drawn to the undesirability of the application in this area of rigid rules
or practices: see, for instance, the speech of Viscount Dunedin in The
Susquehanna [1926] AC 655, 661 and that of Lord Sumner in The Chekiang
[1926] AC 637, 643, 644.’
(4) At p1271:
‘As it was
put by Denning J in Duke of Westminster v Swinton [1948] 1 KB
524, 534: ‘The real question in each case is: what damage has the plaintiff
really suffered from the breach?”
Radford v De Froberville was a contract case, whereas the present
action is founded on tort, but the principles to which I have just drawn
attention apply equally (see Admiralty Commissioners v SS Susquehanna
[1926] AC 655 and Admiralty Commissioners v SS Chekiang [1926] AC
637) and the statement of Parke B in Robinson v Harman 1 Exch
850, 855 is entirely consistent with that of Lord Blackburn in Livingstone
v Rawyards Coal Co 5 AppCas 25 and leads to the same result. Of course a
different standard of remoteness may apply (though not necessarily with
different results) in contract and tort, but I need not develop the point here.
These
observations are as apposite in the present case as they were in Swingcastle.
When considering the cases in this field it is important to determine how far
they are merely adaption of the basic principles of the law of damages to the
particular facts and how far, if at all, they lay down principles which must be
applied regardless of the particular facts.
The starting
point must be the oft-cited statement by Lord Blackburn in Livingstone v
Rawyards Coal Co (1880) 5 App Cas 25 at p39:
. . . where
any injury is to be compensated by damages, in settling the sum of money to be
given for reparation of damages you should as nearly as possible get at that
sum of money which will put the party who has been injured, or who has
suffered, in the same position as he would have been in if he had not sustained
the wrong for which he is now getting his compensation or reparation.
As Dr Harvey
McGregor observes in his book on McGregor on Damages 15th ed, this rule:
is however
only a starting point, for upon it a number of important limits are engrafted
which may result in the plaintiff recovering less than the amount which would
put him in the position he would have been in had the tort or breach of
contract never been committed. Rigorously to insist upon such full compensation
would be too harsh upon defendants. The loss for which the plaintiff will be
compensated is cut down by a variety of factors: thus he cannot recover damages
for that part of the loss due to his contributory negligence, nor for such loss
of which the defendant’s conduct is not the cause, nor for such loss which is
not within the scope of the protection of the particular tort or contract, nor
for loss which he should have avoided, nor for loss which is too uncertain, nor
for some past and prospective losses.
Mr Symons
seeks in this case to restrict the damages that will be recoverable if Lord
Blackburn’s rule is literally applied by the application of the principles of
causation and remoteness to which it is subject.
I must refer
briefly to the most recent relevant decision in this field. In HIT Finance
Ltd v Lewis & Tucker Ltd July 31 1991*. the plaintiffs advanced
a loan of £1,645,000 to fund the purchase of a property valued by the
defendants at £2.2m. The loan was 74.77% of the valuation, but a ‘top slice’
MIG was issued by Eagle Star in respect of 4.77%, or £105,000. The property was
negligently overvalued by the defendants. Its true value was only £1.35m. When
the security was ultimately sold, it realised only £563,640, demonstrating a
substantial fall in value as a result of the collapse of the property market.
Wright J
proceeded. In those circumstances counsel for the defendants conceded that, on
the authority of Baxter v F W Gapp & Co Ltd [1939] 2 All ER
752 the measure of damages would be the difference between the sum advanced and
the sum recovered on the sale of the property plus any consequential loss and
expenses, and Wright J (p16) held that the concession was rightly made. The
plaintiffs for their part conceded that they should give credit for the
recovery made from Eagle Star under the top-slice MIG — the basis for this
concession is not apparent.
*Editor’s
note: Reported at [1993] 2 EGLR 231.
Apart from
this decision, where the point was not argued, the question of the effect on
damages of a fall in the property market in a case such as this, important
though it is, does not appear to have been considered in any English case. Mr
Symons invites me to adopt the approach of the Canadian courts, following the
decision of the Supreme Court of Canada in Lowenburg, Harris & Co v Wolley
(1895) 25 SCR 51. That case raised the question of the measure of damage where
a loan had been advanced on the basis of a negligent overvaluation of the
property mortgaged to secure it. In the judgment of the majority of the court
Sir Henry Strong CJ said:
. . . the
judgment entered by Mr Justice Walkem upon the findings of the jury did not
pronounce for any definite sum to be recovered by way of damages, but ordered
the appellants to repay to the respondent the full amount of his advance with
interest at eight and a half per cent from 28th October 1891, (the first year’s
interest having been paid to the respondent by the mortgagor) until judgment,
and it further directed that upon payment of this sum the respondent should
assign the mortgage to the appellants. I am of opinion that this was not a
correct disposition of the case. The effect of this judgment would be to make
the appellants not only responsible for such damages as were caused by the
negligent performance of their duty as the respondent’s agents, in over-valuing
the mortgaged property, but also for any depreciation (if any there has been)
in the actual value of the property subsequent to the loan. It is manifest that
any loss in this respect should be borne by the respondent himself inasmuch as
it cannot be attributed to the neglect of the appellants. All that the
appellants can possibly be liable for is the loss occasioned by the
over-valuation adopted and acted on by them.
The
observation that damages in such a case should not include loss attributable to
a drop in the market has received a degree of approval in a number of recent
Canadian cases: Avco Financial Services v Holstein (1980) 109 DLR
(3d) 128; Raylon Investment Ltd v Bear Realty Ltd (1981) 20 RPR
288; Seeway Mortgage Investment Corporation v First Citizens
Financial Corporation (1983) 45 BCLR 87.
The first
relevant English authority is Scholes v Brook (1891) 64 LT 674.
In this case the plaintiff mortgagee was induced to make a loan on the strength
of a negligent overvaluation of the mortgaged property by the defendant
valuers. The major issue in the case was whether the defendants were in
contractual relationship with the plaintiffs. The material facts relating to
damages cannot clearly be deduced from the short report of the proceedings in
the Court of Appeal.
The security
turned out greatly insufficient, and ultimately the plaintiff entered into
possession of it and sold it by auction for a very trifling sum.
Romer J
awarded damages to the plaintiff ‘representing the whole loss he had sustained
through the deficiency of the security’. Counsel for the defendants argued:
that the
measure of damages (if any) ought to be the difference between the value of the
estate as stated by the valuers and the real value at that time.
The Court of
Appeal upheld Romer J’s award, observing that:
there was no
evidence that the plaintiff had acted otherwise in respect to the premises than
an ordinary mortgagee was entitled to do.
Nothing in
this report suggested that the court did other than award that loss which
appeared to result naturally from the failure of the defendants to report as
they should have done.
In Baxter
v F W Gapp & Co Ltd [1938] 4 All ER 457; [1939] 2 All ER 752 the
facts were as follows. The defendant valuers negligently overvalued a proposed
mortgage security at £1,800. The plaintiff advanced a total of £1,350 on the
strength of this valuation. On default of the borrower the plaintiff entered
into possession of the property. Two years elapsed before he succeeded in
selling the property for £850. He claimed as damages a total of £743, which
included the costs of upkeep of the property pending sale, the costs of
attempting to sell the property and of the ultimate sale and of unpaid interest
on the sum advanced at the contractual rate. Goddard LJ, sitting at first
instance, allowed the claim in full. The possibility that the plaintiff might have
proceeded with the loan transaction at a lower level was not, apparently,
considered relevant — see p465. The judge held that the damages recoverable
were those sustained as a result of entering into the transaction. As he had
done all that he could be expected to do in disposing of the property, he was
entitled to make a full recovery.
The report of
the case in the Court of Appeal records at p753 that counsel for the defendants
argued that:
the measure
of damage in a case of this sort is the difference between the valuation made
by the defendant and the actual value at the time.
This is
puzzling, for one expert witness had valued the property at £900 at the time of
the loan, the highest estimate of value was £1,150, and the Court of Appeal
proceeded on the basis that the ultimate sale price of £850 was evidence of the
value at the time of the loan — see p755. Thus, the argument advanced would
have been of little, if any, avail to the defendants. At all events, the Court
of Appeal rejected the attack on the judges’s award, following Scholes v
Brook and, in the case of MacKinnon LJ purporting to follow Lowenburg
v Wolley, which he misunderstood.
The decision
of the Court of Appeal to permit the plaintiff to recover contractual interest
was held in Swingcastle to be wrong in principle. Having regard to this
and to subsequent developments in this field of law, I do not consider that Baxter
v Gapp can any longer be relied upon as governing the principles to be
applied to the assessment of damages in a case such as this. At the same time,
contractual interest apart, the losses suffered by the plaintiff were losses
against which he would reasonably have relied upon the value of the security to
protect him and they could naturally be considered as resulting from the
negligent valuation. I can see no reason to question the inclusion of those
losses in the damages awarded.
London
& South of England Building Society v Stone
[1983] 1 WLR 1242 was a case of unusual and difficult facts. In 1976 the
plaintiffs lent to a couple the sum of £11,880 secured by a mortgage on the
house they were buying, which had been valued by the defendant at £14,850. The
defendant had negligently overlooked a structural defect in the property and the
plaintiffs decided that, in order to protect their security, they would carry
out the necessary repairs. They issued proceedings in August 1978, claiming the
estimated cost of putting the property into good repair of some £9,500. Repairs
cost much more than property. Under the terms of the loan agreement they were
entitled to claim reimbursement from the borrowers, but they decided to waive
any claim against them. In the event the borrowers sold the property for
£26,500 and repaid the whole of the advance. The plaintiffs amended their case
to claim the whole of the sum advanced of £11,880, on the basis that they had
lost the whole of this because the property securing it was worthless.
The issue was
whether the plaintiffs had to credit for the claim that they could have made,
but chose not to make, against the borrowers under their personal covenant. The
plaintiffs relied upon Baxter v Gapp, but the defendant argued
that the court was not bound by the decision in that case because MacKinnon LJ
had misunderstood the effect of Lowenburg. O’Connor LJ rejected this
argument. He said [at p1255H]:
But the whole
point of the decision in Baxter v FW Gapp & Co Ltd is that
the Court of Appeal rejected the submission that damages were limited to the
difference between the sum loaned and the true value of the property at the
date of the transaction. It would seem from a passage in Goddard LJ’s
judgment at first instance [1938] 4 All ER 457, that the value of the house at
the time of the loan was about £1,000.
I am quite unable
to say that the decision of the Court of Appeal was reached per incuriam
and it is binding upon us.
If O’Connor LJ
correctly described the appellant’s submission in Baxter v Gapp
the report of that case cannot be accurate.
O’Connor LJ
then went on to consider the cases of Singer & Friedlander Ltd v John
D Wood & Co (1977) 243 EG 212, [1977] 2 EGLR 84 and Corisand
Investments Ltd v Druce & Co (1978) 248 EG 315 and remarked [at
p1256E]:
I do not
think that any help is to be derived from these property boom and collapse
cases; in each case the lender would have suffered loss on the sums which the
court found he would have lent against a proper valuation and it was
appropriate to assess that loss as the difference between the sum lent and that
which would have been lent. It is not a formula to govern all cases where money
is lent on the faith of a negligent valuation.
The decision
of the majority of the court appears in this further short passage in the
judgment of O’Connor LJ:
The truth is
that however one looks at this case the lenders have lost the whole of their
advance at the very least. This loss has been caused by the negligence of the
valuer, for it is quite certain that but for the negligent valuation the
lenders would not have embarked on the transaction at all; they would have lent
nothing. That loss has not been diminished by the small repayment of capital.
I can see no
justification for the suggestion that the lenders were under any duty to the
valuer to mitigate this loss by trying to extract money from the borrowers.
The majority
of the Court of Appeal held that in the circumstances of the case it was
reasonable for the plaintiffs not to enforce the personal covenant, so that its
value did not need to be considered when assessing damages. On that premise the
plaintiffs’ loss plainly resulted naturally from the defendant’s failure to
report as he should have done. I do not see that this decision bears upon the
issues that arise in the present case.
I now return
to Swingcastle v Gibson. The facts of that case were as follows.
The defendant negligently overvalued a property at £18,000 and thereby induced
the plaintiffs to make a loan of £10,000 which they would not otherwise have
made. Under the loan agreement interest was payable at 36.51% pa, increasing to
45.619% on default. The borrowers defaulted and the property was sold for
£12,000. This covered repayment of the principal outstanding, but not a
substantial amount of contractual interest that had accrued. The Court of
Appeal held that they were bound by the decision in Baxter v Gapp
to award this interest as damages, notwithstanding that to do so conflicted
with basic principle. In the course of his judgment Sir John Megaw said [1990]
1 WLR 1223 at p 1236:
In the absence
of authority to the contrary, I should regard the correct principle of damages
as being that the claim for damages arises when the loss is incurred. The loss
is incurred if and when the lender, validly under the loan contract, realises
the security, and the amount realised is less than the amount due under the
loan contract, including expenses properly incurred, and allowing for all
payments made by the borrower. There is one important qualification. The valuer
should not be liable for a greater amount than the amount of his original
overestimate of the value compared with the true market value as at the date of
the valuation. Any shortfall in the proceeds of the realisation above that
amount should not be regarded as being caused by the negligent valuation.
Subject,
possibly, to that qualification, which did not arise in Baxter v FW
Gapp & Co Ltd [1939] 2 KB 271, it appears to me that the principle
which I have suggested above is wholly in accord with that case.
In the House
of Lords the decision of the Court of Appeal was reversed. Their lordships held
that Baxter v Gapp had erred in principle in permitting the
plaintiffs to recover as damages interest at the contractual rate. A plaintiff
who is induced to make a loan by a negligent valuation to a borrower who
defaults on his obligations thereby loses the use of the money loaned. Interest
to compensate for that loss should be assessed at a rate that reflects the
alternative use the plaintiff would have made of the money, not at the rate
provided for by the loan agreement. As, however, the plaintiffs had not proved
either what alternative use they would have made of the money loaned or that
they had acted reasonably in taking as long as eight months to realise the
security, the appeal was allowed to the extent of rejecting their claim in its
entirety.
In Swingcastle
the defendants accepted that they were liable for all the consequences to the
plaintiffs of making the loan. The assumed value of the security upon which the
plaintiffs were relying would have been adequate to protect them against loss
of the use of their money consequent upon any delay in realising the security
and no question arose of any of the consequences of entering into the loan
transaction falling outside the responsibility of the defendants. In my
judgment, Swingcastle leaves it open to John D Wood Commercial Ltd to
argue in this case that the drop in value of the security consequent upon the
collapse of the property market is not a consequence of their negligence for
which they should be held liable.
This analysis
of the authorities leaves me persuaded that I am not constrained to award to
BBL that part of their loss which was caused by the collapse of the property
market. For the reasons that I have given I do not consider that John D Wood
Commercial Ltd should be held liable for that loss. In the case of Trevelyan
House I find that the loss attributable to the collapse of the property market
was £7.5m, being the difference between the value of the property at the time
of valuation, £27.5m, and the agreed value as at the date of assessment of
damages of £20m. In the case of Cambridge Circus I find that the loss
attributable to the collapse of the property market was £34.75m, being the
difference between the value of the property at the time of valuation, £75m,
and the ultimate realisation, £40.25m. These sums must be deducted when
calculating the loss of the capital advanced attributable to John D Wood
Commercial Ltd’s negligence.
Mr Symons
referred me to an article by Professor Dugdale in the June 1991 edition of Professional
Negligence. In commenting on Swingcastle in the Court of Appeal he
observed at p82:
The
surveyor’s duty to the lender is to take reasonable care in valuing the
property on which the loan is to be secured. It is true that the object of
valuing the property is to ensure adequate security for the loan contract and
thus, the security and the terms of the contract are connected. But it is the
surveyor’s duty to take care in assessing the security and not the risks of the
loan. A negligent overestimation of the value of the security will result in
the lender being undersecured. Where the borrower defaults on the whole of the
loan, the loss resulting from the undersecurity will be the full amount of the
overestimation. Where the lender’s default is partial, the loss may be less.
But the loss attributable to the surveyor’s negligence cannot be more than the
extent of the overestimation of value. He cannot fairly be held responsible for
additional losses which result from the nature of the loan contract.
At p85 he
added by way of commentary on the decision of the House of Lords:
The
difficulty in the ‘no loan’ case stems from the assumption that as the valuer’s
negligence was a factual cause of the loan, he must take responsibility for the
loss of the use of the money lent and for any loss of the capital. That
approach equates factual causation with legal responsibility. But the valuer’s
responsibility is for the inadequate nature of the security and not the fate of
the capital loaned. It is submitted that the approach of Sir John Megaw is
correct. The extent of the valuer’s liability should be limited to the amount
of the over-valuation of the security. He should not be regarded as causally
responsible for losses going beyond this amount.
I sympathise
with the author’s reasoning and the capping of damages proposed would not have
led to a different result in most of the decided cases. But Mr Symons did not
invite me to introduce into the law the general principle advanced by Professor
Dugdale and it is questionable on the current state of the authorities whether
it would be open to me to do so. Mr Symons’ submissions were based upon the
particular facts of this case and it is those facts which have driven me to the
conclusion that I have reached.
Interest
In Swingcastle
v Gibson the security, though overvalued, was more than adequate to
ensure repayment of the capital sum advanced. It was not, however, adequate to
cover interest on the capital advanced between the date of the advance and the
date of realisation of the security. The House of Lords held that the
plaintiffs were entitled to recover, by way of damages, not contractual
interest but interest at such rate as was appropriate to compensate them for
the loss of use of their money from the date of the advance to the date when
the security should have been realised. As the plaintiffs had proved neither
the appropriate rate nor the date when the security should have been realised
they recovered nothing.
In the present
case BBL have based their claim to interest on the approach in Swingcastle,
although their pleadings do not expressly recognise the distinction between
interest recoverable as damages and interest recoverable under statute.
Trevelyan
House is, by agreement, deemed to have been sold on March 31 1993 and Cambridge
Circus was sold on December 22 1992. It has not been suggested that BBL acted
unreasonably in failing to sell the properties before those dates. BBL have
claimed interest as damages at base rate +1% on the entirety of the advances
down to the dates of sale. Thereafter, they have claimed interest under section
35A of the Supreme Court Act 1981 at the same rate on the damages that I have
awarded for loss of capital, so that after the sale dates interest is not
claimed on those parts of BBL’s losses that I have held to be attributable to
the collapse of the property market.
Until the
receipt in draft of my judgment dealing with the issues other than entitlement
to interest the only issues raised by John D Wood Commercial Ltd in relation to
BBL’s claim to interest were: (i) the appropriate rate of interest; and (ii)
the manner of computation of the credit to be given for contractual interest
and agency fees received.
John D Wood
Commercial Ltd now contend that BBL should not be compensated for the loss of
use of all the moneys advanced down to the date of the realisation, or assumed
realisation, of the properties. They contend that BBL’s recovery of interest by
way of damages should not include interest on that part of the capital advanced
that was lost to BBL as a result of the collapse of the property market. They
suggest that I should proceed on the premise that the diminution in value of
each property as a result of the collapse of the property market followed a
straight line from date of advance to date of sale. This entirely unrealistic
suggestion highlights the fact that it is far too late for John D Wood
Commercial Ltd to suggest that BBL’s losses, or any part of them, crystallised
on dates other than the dates when the properties were, or were assumed to be,
sold. It follows that BBL are entitled to recover damages by way of interest on
the premise that John D Wood Commercial Ltd’s negligence caused them to lose
the use of the whole of the sums that they advanced from the dates of the
advances to the dates when the properties securing the loans were sold.
Rate of
interest
It is common
ground that the rate of that part of the interest which is awarded under the
Supreme Court Act 1981 should be Barclays base rate +1%. John D Wood Commercial
Ltd contend, however, that the award for the earlier period of interest as
damages should be at the special account rate — that being the rate approved by
the House of Lords in Swingcastle. In the Commercial Court, in the
absence of evidence to the contrary, the court proceeds on the presumption that
base rate +1% fairly compensates a plaintiff for being deprived of the use of
money: see Shearson Lehman Hutton Inc v Maclaine Watson & Co Ltd
(No 2) [1990] 3 All ER 723 at pp732-3. For that reason, I rule that both
interest as damages and interest pursuant to statute should be assessed at the
rate of base rate +1%.
How should
credit be given for receipts?
BBL received
income under the loan agreements in a variety of forms — contractual interest,
agency fees and rental income from the properties securing the loans. BBL have
given credit for this income simply by totalling it without regard to when it
was received and setting the total against the total of the damages recoverable
for loss of use of the loans advanced, calculated at base rate +1% on a simple
interest basis. In the case of Trevelyan House this has produced a surplus of
£524,134.90, which BBL have off-set against their capital loss. In the case of
Cambridge Circus this has produced a loss of £13,995,411.73, which has been
added to the capital loss.
Mr Symons
argued that credit should have been given for receipts as and when received on
a running account basis, so that early receipts would have reduced, to some
extent, the capital sums outstanding. Mr Goldsmith justified BBL’s approach by
referring me to Swingcastle where a similar approach had been adopted. He also
submitted that BBL had been generous in giving credit against their claim for
capital loss in the case of Trevelyan House for the income surplus, which might
more fairly have been treated, in whole or in part, as compensation for running
the risk of the collapse of the property market, which had caused unrecovered
loss of £7.5m to the syndicates.
Mr Symons’
submission might have been well founded had BBL been claiming interest by way
of damages on a compound basis. As, however, they have limited themselves to
claiming simple interest I consider that the manner in which they have given
credit for receipts is appropriate and fair.
Mr Goldsmith’s
point in relation to Trevelyan House has some attraction, but it introduces an
excessive degree of finesse to what he himself submitted is a robust assessment
exercise.
In my
judgment, justice will be done by adopting the schedules of damages put forward
by BBL, which are agreed as figures. I shall set out the summary of these
schedules after I have considered the issue of contributory negligence. First,
however, I have to resolve one further minor bone of contention in relation to
damages.
Expenses
of the rent review of Trevelyan House
BBL have given
credit for rent received from Trevelyan House, but have deducted from this all
fees incurred in relation to the rent review that took place in 1991. Part of
those fees related to resolving disputes as to the true construction of the
lease at the time of the rent review. John D Wood Commercial Ltd claim that
they should be excluded from the computation of damages because they were not
foreseeable and therefore too remote. In my judgment, those fees properly fall
to be taken into account. They were typical of the type of expenditure that can
be foreseen as an incident of a rent review and BBL’s share of those expenses
were reasonably incurred by BBL in mitigating their loss.
Contributory
negligence
Law
The Law Reform
(Contributory Negligence) Act 1945 provides as follows at section 1:
(1) 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: . .
.
and at section
4:
The following
expressions have the meanings hereby respectively assigned to them, that is to
say —
‘fault’ means
negligence, breach of statutory duty or other act or omission which gives rise
to a liability in tort or would, apart from this Act, give rise to the defence
of contributory negligence.
In order to
apply these provisions it is first necessary to resolve certain issues of
principle which arise on the facts of this case.
Fault and
the relevance of the MIGs
Contributory
negligence does not involve breach of a duty owed by the plaintiff to the
defendant, but the failure by the plaintiff to use reasonable care to protect
its own interests — see eg Clerk and
4th ed, vol 34, para 70.
The insurance
cover granted by Eagle Star was a vital factor in persuading BBL to accept the
risks inherent in making the loans. The authority given to the London branch
under the envelope was without precedent. That authority was given in respect
of loans secured by commercial property, notwithstanding that it was contrary
to the general policy of the head office in Brussels to engage in this class of
business. But for reliance on the protection apparently afforded by the MIGs
Brussels would not have authorised any of the transactions on an individual
basis, let alone granted a general authority to enter into them. The top-slice
insurance cover was particularly significant. The evidence was that most banks
would not consider it prudent to advance a property backed loan in an amount
greater than 70% of the value of the property securing the loan. Reliance on
the top-slice cover resulted in BBL granting facilities in respect of 90% of
valuation when they would not otherwise have countenanced the transactions at
all.
Mr Goldsmith
argued that it was material, when considering contributory negligence, to have
regard to the fact that BBL believed that they enjoyed the benefit of 100%
insurance cover under the MIGs. When considering contributory negligence it was
necessary to consider all the circumstances which had a bearing on the conduct
complained of by the defendant: see Billings (AC) & Sons Ltd v Riden
[1958] AC 240 at pp265-6. There was no warrant in the authorities for
approaching issues of contributory negligence on a hypothetical basis. In Skandia
[1990] 1 QB 665 both Styen J at pp721-2, and the Court of Appeal, at pp815-6,
held that the plaintiff banks were not contributory negligent because, inter
alia, they reasonable believed that the relevant loans were backed by 100%
credit insurance. Mr Symons submitted that to have regard to the existence of
insurance when considering contributory negligence would violate the principle
that, in the field of damages, the law considers insurance to be res inter
alios acta.
In the course
of the trial I held that, because insurance was res inter alios acta,
the valuers could not claim credit, when BBL’s damages fell to be assessed, for
recoveries made from Eagle Star under the MIGs. There is a remarkable paradox
in BBL claiming to pray in aid, none the less, the existence of insurance cover
as an answer to the plea of contributory negligence. If a plaintiff must be
considered as if uninsured when his loss is assessed, he cannot logically rely
upon the existence of insurance to argue that he was not negligent in incurring
the loss. Insurance transfers the risk from the plaintiff to his insurer, who
acquires rights of subrogation when he indemnifies the plaintiff. The insurer
then stands in the shoes of the plaintiff. If the risk is one that it was
negligent to incur, the fact that the plaintiff has transferred it to the
insurer should not redound to the insurer’s benefit.
In my
judgment, the principle of res inter alios acta requires me to ignore
the existence of the MIGs when considering the issue of contributory
negligence.
It is right
that in Skandia regard was had to the existence of insurance when
considering contributory negligence. The report suggests, however, that the
defendants must have conceded that this was a relevant factor. In those
circumstances I do not consider that I am precluded by that case from the
decision that I have reached on this issue. For reasons which will shortly
become apparent, however, this issue has no significant effect on my approach
to the assessment of damages.
Mr Goldsmith
advanced another argument in relation to Eagle Star’s involvement. He contended
that, when considering contributory negligence, it was right to have regard to
BBL’s belief that Eagle Star would independently investigate the merits of the
proposed transaction. This is a discrete point and one that is not precluded by
the principle that insurance is res inter alios acta. I shall consider
it in due course.
Causation
In order to
constitute contributory negligence the plaintiff’s fault must be causative of
the damage in respect of which the plaintiff claims. Fault which is not
causative of the damage is irrelevant for the purposes of contributory
negligence.
There is an
obvious inter-relationship between the issues of causation that I have
considered in relation to BBL’s claim and causation in contributory negligence.
Had the consideration of causation stopped short in each transaction at the
making by BBL of the loan, so that John D Wood Commercial Ltd were liable for
the whole of the loss suffered by BBL, it would have been necessary to ask the
broad question — did BBL fail to use reasonable care to protect their own interests
when entering into the transaction. This would have involved considering all
aspects of each transaction in order to weigh its commercial prudence. I have
held, however, that John D Wood Commercial Ltd were not responsible for that
part of BBL’s loss which was attributable to the collapse of the property
market. The consequence of this is that I do not have to consider whether and
to what extent BBL were at fault in taking the risk that the property market
would fall. This greatly simplifies the task of considering contributory
negligence. I can approach each transaction on the footing that the risk of a
fall in the property market could be discounted. As BBL were themselves
discounting this risk because they believed that it was covered by the MIGs, I find
myself approaching the transactions from very much the same viewpoint as BBL.
Basis of
apportionment
If there is
fault which is causative of the damage, the extent to which it is just and
equitable to reduce the damages recoverable by the plaintiff will depend upon
the plaintiff’s share in the responsibility for the damage. This involves a
consideration of the blameworthiness of each party and the causative potency of
the relevant conduct: see Davies v Swan Motor Co (Swansea) Ltd
[1949] 2 KB 291. This may be relatively easy to assess in the case of a tort
causing personal injury or physical damage — it is more difficult in a case
such as the present where what has to be considered is the assessment of
commercial risks.
Standard
of care
In Saif Ali
v Sydney Mitchell & Co [1980] AC 198 at p220 Lord Diplock said:
No matter
what profession it may be, the common law does not impose on those who practice
it any liability for damage resulting from what in the result turn out to have
been errors of judgment, unless the error was such as no reasonably
well-informed and competent member of that profession could have made.
Mr Goldsmith
submits that this principle applies equally to contributory negligence, a
submission which I accept. The conduct of BBL has to be judged against the
standard of a reasonably competent merchant bank at the time. Both BBL and John
D Wood Commercial Ltd called an expert witness on banking practice. I found
Miss Craighead, who was called by BBL, a more impressive witness than Mr Clark,
who was called on behalf of John D Wood Commercial Ltd. Miss Craighead had made
a realistic appraisal of the particular nature of the transactions with which I
am involved. Mr Clark seemed to me to be applying standards which may have been
appropriate to orthodox property-backed lending, but which were not helpful
when considering the transactions in this case. Typical of this approach was
his evidence that it was important not to lend more than could be serviced by
current rent from the properties securing the loans — a principle that would
effectively have precluded a bank from any participation in property-backed
lending at the material time and which ignored the particular structure of the
transactions with which this action is concerned.
Approach
to assessment
Most of John D
Wood Commercial Ltd’s allegations of contributory negligence relate to the
manner in which BBL entered into the transactions. Some of these allegations
bear on the question of whether BBL were at fault in failing to appreciate or
heed unsatisfactory features of the loan transactions. Some may be material
when assessing the degree of blameworthiness of relevant shortcomings on the
part of BBL. In order to evaluate the allegations it is first necessary to
identify whether there were features of the transactions which should have led
a reasonably prudent merchant bank, if aware of them, to decline to grant the
facilities.
Size of
the loans in relation to the actual values of the properties
A highly
unsatisfactory feature of both the Trevelyan House and the Cambridge Circus
transactions was that the loans greatly exceeded the values of the properties
which secured them. It is common ground that no prudent bank would have entered
into these transactions if aware of that feature.
Size of
the loan in relation to the perceived values of the properties
In the case of
each transaction BBL lent 90% of the valuation of the property. It is common
ground that this was a greater proportion than was prudent if the risk of a
fall in the market value of the property is a relevant consideration. The issue
that I have to consider is whether it was imprudent to lend as much as 90% of
valuation on the premise that the risk of a fall in the value of the security
could be discounted. In essence the question is whether the 10% margin appeared
adequate to guard against the risk that the valuation, though competent, might
be excessive, the cost of realising the security and any losses consequent upon
delay in so doing.
In the case of
each transaction substantial delay has occurred in realising the property
securing the transaction. John D Wood Commercial Ltd have not suggested that
this delay represents any failure on the part of BBL to mitigate their damage.
I do not consider, however, that BBL should have foreseen and guarded against
the risk of such delay. At the time that the transactions were entered into an
orderly disposal of commercial property could be effected in a period of some
three months. Each of the properties in question was generating rental income.
In my judgment, John D Wood Commercial Ltd have not established that 10% was an
unreasonably slender margin to protect against, inter alia, delay in
selling the properties. Accordingly, once the risk of a fall in market value is
discounted, I do not find that it was imprudent to lend 90% of a competent
valuation.
Servicing
of rental income
Miss Craighead
commented in her report that the structure of the transactions was designed to
result in a very low level of risk of non-payment of interest so that in the
case of each transaction the most significant risk was that the principal of
the loan would not be repaid when it matured. I endorse that comment. In my
judgment, neither the Trevelyan House nor the Cambridge Circus transactions
were open to the criticism that the loan was imprudent because there was not
adequate provision against the risk of non-payment of interest. In the case of
Trevelyan House the term of the loan was three years. Under the loan agreement
the borrowers, by making a deposit and providing an interest rate cap, secured
the payment of interest from the closing date of April 24 1989 to June 21 1991.
At that date the rent was subject to review. At the time of closing the rent
being paid for Trevelyan House was, viewed conservatively, well under half the
current rental value.
BBL would be
able to review the position as the rent review approached and the provisions in
the loan agreement to which I have referred gave them a variety of options in
the event of the new rent proving inadequate to service the loan. I do not
consider that BBL were imprudent in not requiring cover for payment of interest
beyond June 1991. In the event only a small part of BBL’s claim relates to loss
of interest between June 1991 and April 1992.
In the case of
Cambridge Circus, the deposit and interest rate cap covered the full 12-month
period of the loan. No possible criticism can be made of imprudence in respect
of the security of interest payments in relation to this loan.
Standing
of the sponsors LPT
LPT were the
sponsors in the case of Trevelyan House. They were initially the sponsors in
relation to Cambridge Circus, but subsequently shared that role 50/50 with Mr
Markovits. Only limited evidence has been given in relation to the nature and
standing of LPT, but sufficient to establish that it was a substantial property
company. John D Wood Commercial Ltd have not alleged that LPT was an unsuitable
sponsor for the transactions with which it was involved.
Mr
Markovits
In
non-recourse transactions the standing of the sponsor is of only limited
significance. It is common ground that a prudent bank will wish to be satisfied
of the integrity of the sponsor. Equally, where the venture involves risk for
the sponsor, the commercial experience and acumen of the sponsor will be material
in reassuring the bank that the venture is sound. Mr Markovits had not been
involved in property transactions as a principal, but had had considerable
experience in the property market as a broker. It does not seem to me that the
introduction of Mr Markovits into the Cambridge Circus transaction as a partner
with LPT should properly have been seen by BBL as an adverse feature which
rendered the transaction imprudent.
Absence of
cash injection
In each of the
six transactions with which this action was originally concerned BBL loaned
very substantially more than the vendors of the property were receiving. At its
lowest this removed all risk from the sponsors. In fact, in at least the
majority of the cases, it enabled the sponsors to take an immediate profit out
of the transaction. It is common ground that this was so in the case of
Trevelyan House. In the case of Cambridge Circus the loan of £92.7m allowed a
substantial surplus to be taken out after payment of the £73m purchase price to
Norwich Union and the other expenses of the transaction. In this context it is
appropriate, in my judgment, to disregard the intermediate sale which was not,
as any prudent bank should have appreciated, an arm’s length transaction. The
absence of cash injection was a material feature of the transactions. Where a
sponsor is making a significant net injection into the transaction the bank can
be confident that the sponsor is persuaded that the transaction is financially
sound. In the case of these transactions the sponsor was not at risk. The bank
was providing shelf companies with the finance necessary to provide the sponsor
with an immediate profit. All the risk was being taken by BBL. This factor did
not, of itself, mean that the transactions were necessarily commercially
imprudent. What it should have done is underlined the necessity of subjecting
the transactions to the most scrupulous analysis, a matter to which I shall
revert.
Level of
fees paid to Mr Markovits
Mr Markovits
had agreed with BBL that he would be paid a proportion of BBL’s margin and
arrangement fee, out of which he would discharge insurance premiums. This left
Mr Markovits with something over 1% of the gross amount of the transaction. Mr
Markovits was also receiving fees or commission from Eagle Star and Allied
Dunbar. John D Wood Commercial Ltd have not alleged in terms that the level of
fees received by Mr Markovits rendered the transactions imprudent. They simply
allege that had BBL given proper consideration to the level of fees that they
were paying to Mr Markovits this should have caused them to inquire as to what
other fees he was receiving, a train of inquiry which ‘might well have led BBL
to decline to make these loans’. BBL were in no doubt as to the nature of Mr
Markovits’ interest in the transactions. This was part of the overall picture
which BBL should have borne in mind when scrutinising the transactions. As an
individual factor I cannot see that the level of Mr Markovits’ fees and commission
was a factor which made the transactions imprudent.
In summary, if
the risk of the fall in the market value of the property is discounted, there
was only one adverse feature of each transaction that should have led BBL, had
they known of it, to refuse to grant the facility: the fact that the loan
greatly exceeded the market value of the property which secured it. I now turn
to the question of whether BBL should have appreciated this feature.
Should BBL
have questioned the valuations?
No court will
lightly hold a plaintiff at fault for relying on advice given by a professional
adviser who owes a duty of care to the
addressed to BBL in the expectation that BBL would rely upon them. Precisely
the same degree of skill and care was to be expected from John D Wood
Commercial Ltd as if they were in contractual relationship with BBL. It is
suggested that the manner of John D Wood Commercial Ltd’s selection was, to the
knowledge of BBL, unsatisfactory — a point with which I shall deal shortly.
Apart from this it is not suggested that BBL had any reason to consider that
John D Wood Commercial Ltd lacked the necessary skill and experience to give
sound advice on the value of Trevelyan House and Cambridge Circus. In these
circumstances they were entitled to approach the valuations given by John D
Wood Commercial Ltd on the assumption that they were likely to have been
competently prepared and to be sound. But it does not follow from this that
there is no scope for a finding that BBL were at fault in failing to question
the valuations. Whether they should have done so must depend upon the conduct
to be expected of a reasonably prudent merchant bank in the circumstances
prevailing.
Mr Markovits’
selection system
I am satisfied
on the evidence that it was Mr Markovits’ practice to seek a number of armchair
valuations of a property from different valuers and to persuade BBL to accept a
valuation from the valuer supplying the highest armchair. Although, as BBL
point out, there is not conclusive evidence to this effect, I am satisfied on
balance of probability that he followed this practice in relation to both
Trevelyan House and Cambridge Circus. I find that if BBL were aware of this it
should have raised a question mark over the reliability of John D Wood
Commercial Ltd that should have been reinforced by the disparity between the
purchase price of the property and the valuation in the case of each
transaction. John D Wood Commercial Ltd allege that BBL, through Mr Fraser, had
knowledge of this practice and I turn to consider this allegation.
Mr Fraser
signed a witness statement at the request of Mr Markovits dated November 22
1991 which stated:
Whilst I was
at BBL I was aware of the practice, which Mr Markovits followed, of seeking
informal opinions of value from reputable firms prior to making a formal
presentation to ask for a loan.
Mr Symons
submitted that the contrast between the plural ‘opinions’ and the singular
‘presentation’ constituted an unequivocal admission by Mr Fraser that he was
aware of Mr Markovits’ practice of seeking multiple armchair valuations in
relation to individual transactions. A similar point might have been made in
relation to the following statement which appeared in the next paragraph:
Our reports
to the BBL Credit Committee were always on the basis that the figures put
forward were only armchair opinions which would have to be substantiated for
the transaction to proceed on the figures we were using.
There was,
however, no question of Mr Fraser having put multiple armchair valuations
before the LCC.
When Mr Fraser
gave oral evidence he denied that he became aware, while he was at BBL, that Mr
Markovits sought multiple armchair valuations. His understanding at the time was
that Mr Markovits obtained a single armchair valuation and made his
presentation on the basis of that valuation. That was all that he had intended
to indicate in his statement.
I accept Mr
Fraser’s evidence on this point. He came voluntarily from the United States to
give evidence and I found his testimony refreshingly spontaneous and
convincing. He was prepared, when questioned, to admit without equivocation to
having been guilty of deliberate deception of Eagle Star when he was working
for Mr Markovits. Mr Fraser, was in my opinion, a truthful witness and
accordingly I reject this allegation by John D Wood Commercial Ltd. It is based
on what was no more than loose draftsmanship on the part of the solicitor who
assisted with the preparation of Mr Fraser’s statement.
Mr Symons
alternatively alleged that Mr Fraser should have deduced that Mr Markovits was
obtaining multiple armchair valuations. I can see no basis for making any such
finding.
Failure to
consider the implications of purchase price
On the evidence
in this case, BBL were presented with a total of eight transactions in which it
was represented that the open market value of the properties concerned was
vastly in excess of the prices that were being paid for those properties.
The banking
experts were agreed that in any transaction where the valuation is said greatly
to exceed the purchase price a bank would wish to explore the reason for this
and satisfy itself that there was a plausible explanation. This is not a
proposition which has to be established by the evidence of a banking expert.
One can envisage circumstances in which a purchaser may pay more than the open
market value of a property. That, no doubt, is why many banks will lend only on
the basis of the lower of price and valuation. It is less easy to envisage, if
a property has been exposed to the open market, how a purchaser can succeed in
paying significantly less than the open market value. A competent bank will
naturally wish to scrutinise any transaction where a purchaser alleges that this
is what he has achieved.
Before turning
to the Trevelyan House and Cambridge Circus transactions it is material to
consider the background experience of BBL personnel in relation to disparities
between purchase prices and valuations.
Mr Fraser’s
report to the LCC on the Collingwood/Sandyrent transaction included the
following statement:
Land
Investors purchased this property from Legal and General at circa £11.6MM. We
have been advised that this property was released from the pension fund at a
time that the fund was moving liquid and was offered cash on the table from the
borrower thereby avoiding lengthy tenders, etc hence the attractive price
against today’s valuation. Although this apparent loss of potential profit
seems surprising it is fairly common in the property trading sector that
pension funds dispose for low cash offers. What we do not know is the
requirement for the cash, ie the Legal and General investment on the other
side, which could include for example another property acquisition at attractive
terms.
Mr Fraser was
unable to remember the source of this information. In a subsequent memorandum
Mr Fraser made this comment on Brussels’ reaction:
Brussels
declined to deal on the basis that they could not accept that a pension fund
would sell at below independent market valuation and since we were required to
fund based on valuation rather than cost, we were effectively lending at 100%
of cost.
I consider
that reaction well justified. The explanation that a pension fund had
sacrificed some £4m of a value of about £15m in order to obtain a quick sale is
one that I would not expect a merchant bank to accept as the basis for a
transaction without satisfying itself on detailed evidence that such an event
had occurred.
On the Hill of
Rubislaw transaction Mr Fraser had sought and obtained a detailed explanation
of the urgent liquidity requirement that had led the vendors to sell at
approximately 20% below valuation. In the presentation to Brussels he added
this comment:
BBL London
can recite many examples in the UK market where properties are sold
substantially below their market value in the trading environment that exists
in the UK.
Mr Fraser
explained when he gave evidence that this surprising comment was based on
reports in the Evening Standard and similar newspapers of properties
being bought and sold on after a few months at a profit in the buoyant market.
This was not a satisfactory basis for the comment.
At the time
that the enveloppe was agreed it appears from the evidence of Mr Fraser, Mrs
Andrews and Mrs Swinnen that there was considerable discussion about the
likelihood that purchasers would be acquiring properties at below market value.
Indeed it was Mr Fraser’s and Mrs Andrews’ evidence that it was anticipated
that sponsors would be taking profit out of the transactions.
In her report
Mrs Craighead stated:
A banker is
accustomed to seeing transactions where the cost of acquiring assets is less
than their value. Transactions with this characteristic form the basis of most
sound commercial decisions. A banker expects some difference between the cost
and the valuer’s opinion of value. He also expects some differences between
different valuers’ opinion. The order of the differences in these cases is
higher than he would expect to be attributable to these factors alone. If cost
and value differ significantly and if the banker wishes to have confidence that
he has a margin . . . between his loan amount and the amount which would be
realised by a sale of the properties, he will need to satisfy himself as to
whether there may be a satisfactory explanation of the difference.
In
re-examination Mr Fraser said that in consequence of the general information
that he had received about the likelihood of differences between purchase price
and valuation he did not think that there was any step which BBL could take to
check on a valuation where there was a difference between that and the purchase
price. They placed total reliance on the valuation report.
In my
judgment, neither their past experience nor market information justified BBL in
treating as a normal feature of the property market the disparities between
purchase prices and valuations that existed in this case. A prudent bank would
have required a specific and convincing explanation for the disparity in each
case before relying on the property as the sole source of repayment of a loan
of 90% of the valuation.
Did BBL
receive such explanations?
Trevelyan
House
In his witness
statement Mr Fraser said:
In view of
the fact that there was a difference between the valuation and the price under
the contract of sale by Norwich Union, I also telephoned Mr Markovits and asked
him about the difference between the price in the contract of sale of £25.5m
and John D Wood Commercial Ltd’s valuation of £44.35m. Mr Markovits told me
that he would take instructions from his clients and he later telephoned me to
advise me that the reason for the difference was because Norwich Union were
disposing of a portfolio of properties on which they had already achieved their
targeted return. I then telephoned Mr Browne and asked him whether this
explanation accounted for the difference in value. Mr Browne told me that it
was quite common in such circumstances for insurance companies to sell large
properties quickly at attractive prices, and he made no qualification to his
firm’s valuation. Around this time, although I cannot recall whether it was
specific to this transaction, I also spoke to either Raymond Levy or David
Crowley of Eagle Star by telephone to enquire whether, in Eagle Star’s
experience, it was common for insurance companies to sell portfolios of
properties at prices below the current market price. Eagle Star confirmed that
this was the case for example, for reasons of liquidity.
I did not read
this statement as constituting confirmation from Mr Browne of the explanation
advanced by Mr Markovits. When cross-examined Mr Fraser agreed that his
conversation, not only with Mr Browne but also with Mr Markovits, had been only
in general terms and that no specific explanation had been given to him to
explain the disparity between valuation and purchase price of this property.
Mrs Andrews also spoke of having a general discussion with Mr Browne about the
reasons for differences between prices and valuations of properties. This
evidence tallied with that of Mrs Swinnen who spoke of discussions with Mr
Fraser and in the LCC at which she was told that a number of institutions,
including insurance companies, were realising some profit on their portfolios
in circumstances where part of the portfolios might be sold at lower than the
valuation price. Mr Fraser conceded that not merely was there no rigorous
analysis of the reason for the disparity between purchase price and valuation,
there was no analysis at all — merely a general discussion. Mrs Andrews said
that she never applied her mind to considering whether such a great difference
needed to be further investigated. I find that no specific explanation was
given for the disparity. The general discussion on the subject was not a basis
upon which any competent bank could have felt justified in proceeding with this
transaction. If BBL had been unable to obtain a satisfactory explanation they
should have refused to accept the valuation as satisfactory. I do not, however,
accept that there was nothing that BBL could do to check the valuation. A
second opinion from a competent valuer, informed of their concern about the
difference between the purchase price and valuation, would have demonstrated
that there was no satisfactory explanation and that John D Wood Commercial
Ltd’s valuation was unsound.
A point made
on behalf of BBL in this and other contexts was that they reasonably relied
upon Eagle Star to cross-check that the valuation was satisfactory. On a date
which Mr Buxton thought was in April 1989, but which may have been somewhat
later, he had a meeting with Mr Fraser and Mrs Andrews. I have no doubt that at
this meeting Mr Buxton puffed the expertise of Eagle Star in the field of MIGs.
I believe that he may reasonably have left Mr Fraser and Mrs Andrews with the
impression that Eagle Star would be reviewing each transaction and might be
making use of in-house expertise in the property field in order to do so. None
the less the contract of insurance obliged BBL, in effect, to carry out the
same investigations that they would have done if uninsured. There was no
question of BBL delegating to Eagle Star the performance of their duties as
merchant bankers. Nor, on the evidence, was their discussion with Eagle Star of
such a nature as to provide reassurance as to the reason for the disparity
between the purchase price and the valuation of Trevelyan House.
For the
reasons that I have given I find that BBL were guilty of contributory
negligence in entering into the transaction notwithstanding the absence of a
satisfactory explanation for the difference between John D Wood Commercial
Ltd’s valuation of Trevelyan House and the price at which Norwich Union were
selling that property.
Cambridge
Circus
BBL made no
specific inquiry as to the disparity between the price of £73m for which
Norwich Union were selling Cambridge Circus and John D Wood Commercial Ltd’s
valuation of £103m. This again was a startling disparity. For the reasons that
I have given in relation to Trevelyan House BBL were contributorily negligent
in relation to this transaction.
BBL’s
procedures
In developing
his case on contributory negligence Mr Symons made lengthy submissions as to
what he suggested were procedural shortcomings on the part of BBL. These
submissions reflected allegations originally made by Eagle Star in a different
context. They were relevant to John D Wood Commercial Ltd’s case only in so far
as they helped to establish blameworthiness on the part of BBL in failing to
appreciate or heed adverse features of the transactions. Summarised shortly, Mr
Symons’ submissions were as follows.
Brussels
should never have granted BBL London authority to enter into substantial
property transactions under the enveloppe. BBL London exceeded the authority
that they were granted under the enveloppe. The grant of the enveloppe led BBL
London to abandon their normal procedures, which provided for a detailed
written presentation by the account officer, consideration of the transaction
by a credit analyst, a formal presentation to the LCC and consideration by the
LCC of all relevant aspects of the transaction in committee with the assistance
of the account officer.
Mr Symons
further alleged that BBL were at fault in dealing through Mr Markovits rather
than forming a direct relationship with LPT. Finally, it was alleged that Mr
Fraser should not have been permitted to have any involvement in the
transactions because his relationship with Mr Markovits was such as to give
rise to a conflict of interest.
In my
judgment, there is force in most of these allegations. In granting the
enveloppe Brussels gave approval in principle to the loans. The authority given
to London was subject to a framework of strict conditions: 100% insurance cover
would have to be obtained. The loan had to be based on a valuation provided by
an approved professional valuer. Title and other legal aspects of the
transactions had to be checked by leading London solicitors. It was for London
to
individual transactions were otherwise satisfactory. As Mr Osterrieth put it,
only the London office could judge the quality of a real estate project in
London, the quality of the valuers, the quality of the London market. It was
for the London office to ‘do the due diligence’ with the help of professional
assistance. After the grant of the enveloppe, however, London proceeded on the
basis that the risk analysis had already been done. All that was required was
to ensure that the transactions fell within the structure of the enveloppe and
the financial limits of their authority.
Breach of
the enveloppe
I referred at
an early stage of this judgment to the variation made by Brussels in the authority
granted by the enveloppe. The terms of the variation were by no means clear and
the documentary evidence shows a degree of confusion after the event among BBL
personnel as to the limits of London’s authority. It was John D Wood Commercial
Ltd’s case that, on its true construction, the variation granted by Brussels
simply increased BBL’s own lending limit to £100m, making it co-terminous with
the underwriting limit. If this was the effect of the variation, then BBL
exceeded the limit. The variation of the enveloppe that John D Wood Commercial
Ltd suggest occurred would have been commercially nonsensical. The BBL
witnesses were unanimous in saying that they understood that the effect of the
variation was to increase the London office’s lending limit to £100m and the
overall limit to £200m. I accept this evidence. In any event I indicated on a
number of occasions in the course of the hearing that I could not see the
relevance of this area of dispute and this remains the position. John D Wood
Commercial Ltd made an associated allegation to the effect that the London
office insured more business with Eagle Star than a £50m limit imposed by
Brussels for the exposure of that insurer. On the evidence this allegation was
made out, but again I cannot see the relevance of this. The important issue in
the case of each transaction is whether it was intrinsically prudent and I
cannot see that it matters whether the enveloppe was breached.
Use of the
enveloppe
John D Wood
Commercial Ltd allege that these transactions were never subjected to risk
analysis. As I have said, London treated their task as being largely to check
that the loan fell within the structure of the enveloppe. The proposals were
never submitted for credit analysis and the account officer’s initial consideration
and presentation were perfunctory. There is a clear contrast with the
Collingwood and the Hill of Rubislaw transactions which received a more formal,
and detailed, credit and risk analysis.
BBL witnesses
consistently referred to using the ‘urgent procedure’ in relation to the loan
transactions. In fact the procedure adopted was not the urgent procedure,
although it deviated from the norm. In the case of Trevelyan House Mr Markovits
made his presentation to Mr Fraser on Friday March 10. Mr Fraser prepared his
own presentation on the basis of the information supplied by Mr Markovits on
Monday March 13 and it was endorsed with the approval of Mr Lenotte and Mrs
Swinnen on Tuesday March 14. An offer letter was sent two days later on March
16. Although these facts might suggest that the initial approval was obtained
under the urgent procedure, BBL’s evidence was that there was a meeting of the
LCC to consider the proposal. Certainly there was no question of ratification
having taken place at a subsequent meeting.
In the case of
Cambridge Circus Mr Markovits made a rudimentary written presentation on May 11
1989, on the following day Mr Fraser and Mrs Andrews put before an ad hoc
meeting of the LCC a written presentation based on this. Approval was given and
an offer letter written on the same day. At that stage the proposed borrower
was an SPV wholly owned by LPT.
There was
considerable debate as to whether the offer letters contained binding
contractual offers. In my judgment they did, but the point is of no great
importance. The offers were subject to conditions precedent which would have
permitted the bank to decline to proceed with the facility if any aspect of the
property which was the subject-matter of the loan proved unsatisfactory to the
bank. The acceptance of the proposed facilities by the LCC constituted little
more than a repetition of the decision of principle that had been taken when
Brussels approved the enveloppe. The vital details of the transaction — in
particular the details and the value of the property — remained to be approved.
I do not
consider that the absence of procedural formality had any direct causative
effect in this case. Nor do I consider that the speed of BBL’s initial reaction
was, of itself, blameworthy. They were in a competitive situation and being
pressed for an urgent reaction. After sending the offer letters the opportunity
remained to give proper consideration to the vital elements of the transaction
on which they were entitled to be satisfied if the transaction was to proceed.
Where BBL
London were at fault is that they never applied a rigorous critical analysis to
the transactions once their full details, and in particular the purchase
prices, became known. They treated a disparity between purchase price and
valuation as perfectly normal without giving due regard to the implications of
the size of that disparity. I believe that, like Mr Buxton, BBL London were
swept along by the general euphoria generated by the booming property market.
Property companies were making huge profits and the important thing was to get
a share of the action.
The criticism
of lack of contact with the sponsors, LPT, also has relevance. The crucial
question that BBL should have been asking in the case of each transaction was
how it was that LPT had managed to pay so much less than market value for the
properties that were being purchased. Had LPT been asked about this it should
have become apparent that they were buying the properties on the open market
and that there was no reason to believe that they were paying other than an
open market price. The absence of direct contact with LPT made it all the more
important for BBL to make alternative investigation into the reasons for the
disparities between price and valuation in each transaction.
Mr Symons
criticised BBL for failure to ascertain from the sponsors precisely what they
intended to do with the properties. The difficulty with this point is that I
have no evidence of what BBL would have learned if they had inquired. It may
well be that they would have received entirely satisfactory explanations having
regard to the market conditions then prevailing. There is, I think, force in
the submission that BBL should have satisfied themselves of this, but this
merely underlines BBL’s naivety in accepting John D Wood Commercial Ltd’s
valuations. BBL were relying upon the properties to provide repayment of the
loans, whether as a result of sale or refinancing. It was BBL’s evidence that
they anticipated that the properties could be marketed in the space of about
three months. I have already held that this was a reasonable belief in the
market conditions prevailing at the time. This, however, makes it all the less
credible that institutions should sacrifice large proportions of the values of
their properties in order to dispose of them speedily. BBL’s apparent lack of
concern as to what the sponsors intended to do with the properties could be
justified only if there was certainty that the properties could be marketed at
the levels of John D Wood Commercial Ltd’s valuations.
Mr
Fraser’s conflict of interest
At the time of
his involvement with the transactions Mr Fraser was intending to leave BBL and
go to work for Mr Markovits. The terms of the consultancy agreement under which
he was to do so included entitlement to 1% of the gross profits of Mr
Markovits’ business, which would include profits earned on the transactions in
question. In these circumstances Mr Fraser had a conflict of interest and he
should not have been involved with transactions introduced by Mr Markovits. I
do not, however, believe that this conflict of interest was a relevant factor.
Having heard Mr Fraser I am satisfied that he was not motivated in supporting the
transactions by consideration that he might profit from them himself. He was
keen to support Mr Markovits and he did not give the transactions the rigorous
objective appraisal that he should have done. I do not believe, however, that
this was because he was planning to take up employment as a consultant with
Mr Markovits. It was enthusiasm for Mr Markovits’ qualities that had led Mr
Fraser to decide to work for him rather than vice versa.
Apportionment
BBL’s failure
to have regard to the implications of the discrepancy between purchase price
and valuation constituted a serious lapse from the standard of reasonable care
to be expected of a merchant bank in the prosecution of its business. The fault
on the part of John D Wood Commercial Ltd was, however, far more serious. John
D Wood Commercial Ltd held themselves out as professional valuers. Mr Browne’s
disregard of the purchase price of Trevelyan House and Cambridge Circus was a
fundamental error in the exercise of his professional discipline. Furthermore,
had he been justified in ignoring the best evidence of value and proceeding on
the basis of comparables alone, his valuations would still have been above the
level that any competent valuer could have reached. As the professional adviser
who was being paid to provide the valuations which, as he must have known, were
intended to form the basis of transactions Mr Browne must bear the major share
of the responsibility for the losses that occurred. I hold that in relation to
each transaction BBL’s damages are to be reduced by 30% to take account of
their contributory negligence.
Quantum
The total sums
recoverable by BBL, including interest up to today, December 21 1993, in
accordance with the agreed schedules prepared by BBL are as follows:
|
Trevelyan House |
|
|
Principal |
£2,387,345.16 |
|
Net |
( 523,709.76) |
|
Total |
£1,863,635.40 |
|
Less |
559,090.62 |
|
TOTAL |
£1,304,544.78 |
|
Cambridge Circus |
|
|
Principal |
£7,814,946.95 |
|
Net |
5,763,330.80 |
|
Total |
£13,578,277.75 |
|
Less |
4,073,483.00 |
|
TOTAL |
£9,504,794.75 |
BBL are concerned that, should they hereafter be held liable to
other syndicate banks for losses sustained by those banks, they should be free
to seek to recover an indemnity from John D Wood Commercial Ltd on the ground
that such liability is a consequence of the negligence for which I have held
John D Wood Commercial Ltd liable in this action.
For the
avoidance of doubt I declare that nothing in this judgment or any step taken or
not taken in these proceedings shall be a bar to any claim which BBL may make
in the future against John D Wood Commercial Ltd relating to or arising out of
any claim made against BBL by any of the syndicate banks listed in Schedule 1
(or any other bank to which any such bank may have syndicated a participation
in the relevant facility) and relating to one or more of the properties listed
in Schedule 2.
|
SCHEDULE 1 |
||
|
Facility |
Banks |
|
|
1. |
Banco |
|
|
Banco |
||
|
Swiss |
||
|
Credit |
||
|
66 |
||
|
Credito |
||
|
17 |
||
|
Banca |
||
|
Wren |
||
|
Compagnie |
||
|
2. |
The |
|
|
The Bank of East Asia |
||
|
|
||
|
SCHEDULE 2 |
||
|
PROPERTIES |
||
|
(1) Trevelyan House, |
||
|
(2) 84-102 |
||
EAGLE STAR’s CLAIM AGAINST JOHN D WOOD COMMERCIAL LTD
Eagle Star
settled the claim brought by BBL under the Trevelyan House MIGs for the sum of
£7,437,220. That claim was brought by BBL on its own behalf and on behalf of
the other banks on the Trevelyan House syndicate. Eagle Star seeks to recover
that sum from John D Wood on the ground that John D Wood caused Eagle Star to
grant the MIGs by negligently overvaluing Trevelyan House. At issue are duty of
care, reliance, causation and loss.
Duty of
care?
In the case
of Cambridge Circus and Crusader House the MIGs issued by Eagle Star excluded
liability for any loss attributable to (inter alia) the valuation of the
property proving inaccurate. John D Wood contended that, so far as those
involved — ie BBL, Eagle Star and John D Wood, were concerned, the Trevelyan
House MIGs were issued on the same basis. This contention appears to be based
upon a remark made by Mrs Andrews in the course of her evidence that she
thought she had assumed that negligent valuation was excluded from Eagle Star’s
responsibility.
Mrs Andrews’
assumption is not a satisfactory guide to BBL’s belief in the scope of the MIG
cover. In the absence of clear evidence to the contrary I shall proceed on the
assumption that BBL believed that the MIGs afforded cover in accordance with
their terms — that is cover which was wide enough to embrace the consequences
both of negligent valuation and of a fall in the market value of the property.
That both Mr Browne and Mr Fraser so understood would seem to be implicit in
the following letter written by Mr Browne to Mr Fraser on the 25th April 1989:
‘I refer to
our previous correspondence and to our telephone conversation on Monday
afternoon, and confirm that our valuation may be used by Eagle Star Insurance,
who are taking part of the funding in connection with the subject property.’
Mr Browne was
well aware of the role that Eagle Star were playing in the transaction, for he
had received a telephone call from Eagle Star a week earlier informing him that
Eagle Star were ‘doing the top-up guarantee by way of an insurance policy’. I
can see no reason why either Mr Browne or Mr Fraser should have assumed that
Eagle Star would not be liable for the consequences of an overvaluation. As for
Eagle Star, Mr Buxton expressly confirmed when he gave evidence that the risks
that he was covering included the risk of loss caused by negligent or
fraudulent initial value.
Accordingly, I
approach this issue on the basis that BBL, Eagle Star and John D Wood
Commercial Ltd were all aware that the cover to be afforded by the MIGs would
extend to any loss attributable to an overvaluation. The letter of April 25
also makes it plain that Mr Browne was well aware that Eagle Star would be
relying on his
responsibility on the part of John D Wood Commercial Ltd. John D Wood
Commercial Ltd contended that the effect of the letter was restricted by a
disclaimer in the body of the report itself:
The Report is
confidential, to the addressee Bank for the specific purpose to which it refers
and we accept no responsibility to any third party for its use in whole or in
part.
According to
John D Wood Commercial Ltd’s argument, the agreement that Eagle Star should be
able to make use of the valuation was restricted to making use of it for the
purpose of participating in making the loan, but not in providing insurance
cover in respect of the loan. This suggested restriction is nonsensical and I
reject it. I have no doubt that Mr Browne was well aware that Eagle Star would
wish to consider the valuation in order to decide whether to provide cover in
respect of the loan and I find that he expressly agreed that Eagle Star could
do so. In these circumstances the precedents in this difficult area of the law
satisfy me of the existence of the elements of proximity and reliance necessary
to give rise to a duty of care on the part of John D Wood Commercial Ltd
towards Eagle Star: see, in particular, Smith v Eric S Bush (a firm)
[1990] 1 AC 831; Caparo Industries plc v Dickman [1990] 2 AC 605.
Reliance
John D Wood
Commercial Ltd submitted that Eagle Star were not, or assumed they were not, at
risk of loss attributable to overvaluation and, in consequence, were not
relying upon John D Wood Commercial Ltd to protect them against this risk when
they agreed to grant cover. This submission fails for the reasons that I have
already given. So far as Trevelyan House is concerned, I am in no doubt that Mr
Buxton accepted John D Wood Commercial Ltd’s valuation as being a reliable
guide to the value of the property. He stated that prior to the Crusader House
transaction he had seen no reason to call into question the values relied upon
by BBL. I accept that evidence — it is reinforced by Mr Buxton’s reaction when
he appreciated the significance of the disparity between purchase price and
valuation when considering the Crusader House valuation. I find that Mr Buxton
agreed to grant 100% cover in respect of a loan of 90% of John D Wood
Commercial Ltd’s valuation in reliance upon that valuation.
Causation
and measure of damage
Eagle Star
were providing 100% cover for the risks that the syndicate banks were accepting
when making the loan. Once again it is material to distinguish between the risk
that the sum advanced might be based on an overestimate of the value of the
property and the risk that the market value of the property might fall. Eagle
Star were no more relying on John D Wood Commercial Ltd’s valuation when
considering whether to accept the latter risk than were BBL.
Mr Buxton made
this particularly clear is a passage of his cross-examination by Mr Goldsmith.
He said that ‘the whole raison d’etre for doing this business and the
protection we had was that the property market didn’t fall and it generally
rose’. He went on to say that Eagle Star tried to keep close to the market to
detect trends in the market-place and not to check valuations such as those
given by John D Wood Commercial Ltd.
Eagle Star
relied on John D Wood Commercial Ltd to provide an accurate valuation of
Trevelyan House, but they relied on their own valuation of the likelihood of market
movements when deciding whether to risk a fall in value of that property. Their
decision to take that risk was not influenced by the amount of the valuation. I
have no doubt that Eagle Star would have been prepared to provide MIG cover at
a lower level had they received a lower valuation — albeit that the borrowers
would not have wished to proceed at that level.
In those
circumstances precisely the same approach to damages falls to be applied in the
case of Eagle Star’s claim as I have applied in considering BBL’s claim. Eagle
Star are not entitled to recover that part of their loss which is attributable
to the effect on the value of the security of the fall in the property market.
Quantum
The syndicate
banks’ claim against Eagle Star in relation to Trevelyan House was £23,490,091.
Eagle Star settled that claim for £7,437,220, or 31.661095% of the claim. That
proportion of £7,500,000 amounts to £2,374,582. This sum represents, therefore,
that part of the settlement figure which related to loss caused by the collapse
of the property market, and must be deducted from Eagle Star’s claim against
John D Wood Commercial Ltd. In the result John D Wood Commercial Ltd’s
liability to Eagle Star is £5,062,638, together with interest in the sum of
£308,682 pursuant to statute at base rate + 1% from February 5 1993, being the
date on which Eagle Star paid the banks.
Overlap
The question
of what, if any, overlap exists between the damages that I have awarded to BBL
and the damages that I have awarded to Eagle Star is not an easy one. Eagle
Star have undertaken not without further order to execute or attempt to execute
this judgment if and to the extent that John D Wood Commercial Ltd object that
execution would duplicate execution by Banque Bruxelles Lambert SA of the judgment
herein in its favour. In the light of that undertaking there will be no need to
resolve the overlap issue unless and until John D Wood Commercial Ltd consider
that Eagle Star are attempting to recover damages which duplicate damages
already paid to BBL. In that event the overlap issue must be brought back
before me for resolution.
Costs
As between
BBL and John D Wood Commercial Ltd
In my
judgment, it is appropriate to deal separately with each transaction. So far as
each transaction is concerned I see no reason to depart from the normal rule
that costs follow the event, despite the submissions to the contrary made by Mr
Goldsmith.
Accordingly,
John D Wood Commercial Ltd will pay BBL their costs of the Trevelyan House and
Cambridge Circus claims and BBL will pay John D Wood Commercial Ltd their costs
of the Piccadilly and Crusader House claims. BBL’s liability is to be set off
against John D Wood Commercial Ltd’s liability to BBL in costs and damages.
As between
Eagle Star and John D Wood Commercial Ltd
John D Wood
Commercial Ltd will pay Eagle Star their costs of the Trevelyan House claim.
Eagle Star will pay John D Wood Commercial Ltd their costs of the Piccadilly
claim. Eagle Star’s liability is to be set off against John D Wood Commercial
Ltd’s liability to Eagle Star in costs and damages.
As between
John D Wood Commercial Ltd and Lewis & Tucker
Lewis &
Tucker will pay John D Wood Commercial Ltd’s costs of the contribution
proceedings brought by Lewis & Tucker against John D Wood Commercial Ltd in
relation to Crusader House.
