In order to establish when a lender has suffered loss as a result of a loan, and to calculate whether a claim in tort against a negligent valuer is statute barred, the court must value the strength of the borrower’s covenant and the security taken to see when their combined values became worth less than the amount outstanding under the mortgage: Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627.
The county court decision in Canada Square Operations Limited v Kinleigh Folkard & Hayward Ltd [17 September 2015] – in which the valuer admitted that it had negligently assessed the value of a property at £500,000 – illustrates how the court will set about this task.
Following receipt of the negligent valuation, the lender loaned its borrowers £427,500 and, when the borrowers defaulted, sold the land for £305,000. The lender made the loan in March 2006 and sold the property in 2009, but did not issue proceedings until October 2013, when the contractual limitation period had expired. Consequently, the lender had to pursue a claim in tort and the court had to decide when the cause of action had arisen. This depended on when the lender had first suffered measurable relevant loss. The valuer argued that the cause of action had arisen more than six years previously – ie before October 2007 – and that the claim was statute barred.
The judge began by considering the strength of the borrowers’ covenant without reference to any expert evidence as to its value. He rejected the valuer’s argument that a single delay in payment signified that the borrowers’ covenant was worthless. One hiccup might be explainable. However, the judge agreed that, if mortgage payments become erratic, the value of a borrower’s covenant may be in doubt long before a loan is formally treated as being in default.
The borrowers first missed paying an instalment due under the mortgage in February 2007. In the period that followed, the borrowers delayed or missed further payments and stopped paying the mortgage altogether in February 2008, before being declared bankrupt. The judge accepted that the recurring history of default confirmed that the borrowers had been overstretched and ruled that the lender’s cause of action had arisen before October 2007 – ie more than six years before the lender issued proceedings against the valuer. Consequently, the claim was statute-barred.
The judge went on to consider the expert evidence, just in case this was wrong. He noted that assessing the strength of a borrower’s covenant is, in practice, very difficult and was prepared to accept evidence from a chartered accountant as to its value, even though the accountant was not an expert on mortgage lending. Such evidence, based on the borrowers’ incomes, assets and liabilities, indicated that their covenant had not, in fact, been strong enough to cover the difference between the value of the property and the amount due under the mortgage at the very outset. Therefore, although the borrowers had initially made regular and punctual mortgage payments, the lender had, in fact, suffered a loss as soon as the loan was made.
Valuers will welcome the decision and may find it a useful point of reference, should they ever have to face a similar claim.
To read a transcript of the case, click here.
Allyson Colby is a property law consultant
