It is widely accepted that no one can expect pinpoint accuracy from a valuation. Therefore, valuations within the permissible range will not be negligent even if some aspect of the valuation process can be criticised as having fallen below reasonably competent standards.
Dunfermline Building Society (in building society special administration) v CBRE Ltd [2017] EWHC 2745 (Ch); [2017] PLSCS 204 concerned a 6 acre site in Reading that was sold to a buyer in 2007 with outline planning consent for a development comprising 535 residential units, retail and leisure space and a medical centre. Using the residual method of valuation (because there were no available comparables), CBRE valued the site for the buyer’s lender at £17.5m. Shortly afterwards, the property market crashed and the property was eventually sold for £3.75m.
The lender accepted that CBRE was not liable for losses caused by the downturn in the market, but claimed that the true market value of the property at the valuation date had been £14.25m. Consequently, CBRE had overstated the market value of the site by £3.25m – which fell outside the margin of error permitted to a reasonably competent valuer.
The judge noted that the lender’s executive committee had approved the loan before CBRE had been instructed, but was satisfied that this was an approval only in principle and was subject to CBRE’s valuation. It could not always be said that it is inherently probable that a lender intends to rely on the valuer’s opinion, in deciding whether to lend, simply because it requires a valuer to report on the market value of a property. However, in the judge’s view it was inherently probable that a prospective lender who pays £35,000 for a valuer’s report (as the lender had done in this case) will rely on the report in making its lending decision.
The judge was satisfied that CBRE’s valuation had played a real and substantial part in the lender’s decision to lend and that the loan would not have been made if CBRE had reported a market value of £14.25m. Furthermore, when a market valuation is based on a residual appraisal (which requires a valuer to assess the value of a completed scheme and deduct the development costs and the developer’s profit in order to calculate the underlying land value), a large bracket is often applied in order to recognise the particular sensitivity of a residual appraisal to variables: Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1996] 1 EGLR 119.
The property had previously been marketed for sale in 2005, resulting in three offers of £10m, £17.27m (which was later reduced to £14m) and £17.507m for the site. Could any weight be placed on these offers when considering the market value of the property on the valuation date? The judge decided that the offers were too old to be given any weight at all, especially as the property had remained unsold. However, some weight could be given to the offer price in 2007, which could be used to check on – but not increase – the residual land value of the site.
Taking everything into account, the permissible margin of error in this case was plus or minus 15% and the market value of the property on the valuation date was £16.2m. Consequently, although there were clearly flaws in CBRE’s approach, its valuation was within the permissible bracket and the lender’s claim was dismissed.
Allyson Colby is a property law consultant