Property development — Bank lending money on basis of valuation — Residual value method — Valuation given as “open market value for mortgage purposes” — Developer going bankrupt and bank losing on loan — Whether surveyor negligent — Whether valuation basis appropriate — Judgment for surveyors
A property developer, K, sought a loan from the plaintiff bank for a development at Rackheath Hall, Rackheath, Norwich. It had once been described as one of the prime estates in the country but by 1988, it had not been completely occupied since the 1950s. K’s intention was to convert the property into 10 apartments and build a new wing of eight houses and three flats. The price agreed was £535,000. He applied to the bank for finance and supplied them with a valuation report which K had commissioned from the defendants.
The report stated that the “open market value of the property for mortgage purposes” was £595,000. With grant of planning permission and listed building consent for conversion it would have a value of £950,000. The report concluded that on completion of the project it would realise £2,535,000. The bank agreed to lend £370,000, which was just under 70% of the purchase price of £530,000. The loan was not made subject to the condition that planning permission was granted. Completion took place in September 1988. K became bankrupt after the market went into free-fall and in 1991 the property was sold for £220,000. The bank claimed, inter alia, that the valuation was negligent.
Held Judgment for the surveyors.
1. Although the bank had not instructed the surveyors as to the method of valuation, the defendants knew that the report would be relied upon in deciding whether to lend and if so how much. In those circumstances the defendants owed a duty of care to the bank for the valuation contained in the report.
2. The method of valuation represented the residual value method, whereby the property’s value was derived by taking the estimated sales proceeds on development completion and deduction of all other fees, leaving a residue. The figure of £595,000 therefore took into account the prospect of planning permission being granted.
3. In the court’s judgment the open market value of freehold property had necessarily to include such additional amount (if any) as, in an open market, prospective purchasers would pay for the property on account of the prospect of obtaining planning permission for development over and above that which would be paid if there was no hope of planning permission.
4. Having analysed the RICS Guidance Notes for valuation, the court concluded that the defendants were entitled to have regard to the prospect of planning permission and to include such amount properly thought attributable to such prospect.
5. It was a valid approach provided that the prospect of obtaining planning permission was sufficiently good — as in the present case — for a developer to purchase without knowing that he would be bound to get it.
6. The report produced what it claimed to produce, viz an open market value for mortgage purposes on a basis acceptable to the profession.
Marion Smith (instructed by Freeman Pollard) appeared for the plaintiff bank; Stephen Worthington (instructed by Barlow Lyde & Gilbert) appeared for the defendant surveyors.
