Company purchasing property – Bank advancing loan secured by way of mortgage – Company wishing to increase loan facility – Defendant valuing property for bank – Bank increasing loan facility on basis of valuation – Property sold for considerably less that valuation – Whether defendant negligent – Whether bank should have questioned valuation – Judgment for the bank – Damages reduced for contributory negligence
In 1988 the Prime Group made an offer of £1m for a property at Colsterworth, Lincolnshire. Surveyors on behalf of the plaintiff bank valued the property at £1.126m and the plaintiff lent Prime £900,000 for the purchase of the property secured by way of a mortgage. Prime also had an overdraft, a medium term loan and other arrangements with the bank. Towards the end of 1989 Prime wanted an increase in the loan arrangements with the bank. In December 1989 the bank instructed the defendant to carry out a valuation of the property. The letter of instruction did not mention that the property had been purchased earlier in the year. The defendant valued the property at £2.4m to £2.3m. Despite the bank’s surprise that the valuation was so much higher than the purchase price, it did not question the valuation. Prime then agreed to increase the loan arrangements. It was proposed that the arrangements be restructured and thereby increased. The arrangements continued to be secured by cross guarantee debentures, the assignment of insurance policies and of a trade indemnity policy, and the mortgage on the property. The bank believed the security fully covered the advances. The advance on the security of the mortgage was 75% of the defendant’s lower valuation.
Despite the restructuring of the arrangements the Prime’s financial state deteriorated. In September 1990, in the light of an accountants’ report, the bank decided to withdraw its support and administrative receivers were appointed. The defendant then valued the property at £1.85. King & Co and Weatherall Green & Smith valued the property at £900,000 and £1m, respectively. The property was sold in April 1993 for £575,000. Prime remained in debt to the bank in the sum of £1.9m. The bank issued proceedings and claimed that the defendant’s valuation in December 1989 had been made negligently and the property had been worth no more than £1.25.
Held Judgment for the plaintiff.
1. The defendant should have enquired about the previous sale prices and if it had done so it would have discovered that the property had been purchased earlier in the year for £1m. The sale had been an arm’s length open market transaction therefore the sale price had been important evidence of value which the defendant should have considered.
2. Taking the sale price and planning potential into account, a proper valuation in December 1989 would have been £1.75m. The defendant’s valuation was more than 15% over that figure. Therefore it fell outside the bracket of a reasonably competent valuation and accordingly the defendant had been negligent.
3. The loss attributable to the inaccuracy of the defendant’s information was limited to the difference between the defendant’s actual valuation and the valuation which should have been given. If the bank had received a valuation of £1.75m the bank would have advanced £1.3 on the security of the property rather than £1.7m . Therefore, subject to contributory negligence, the bank was entitled to damages of £400,000.
4. The plaintiff was at fault for relying on the defendant’s valuation without questioning it when it was known that it was vastly different to the purchase price and the valuation which had been obtained at the time of the purchase. The extent of that contribution was assessed at 25%. Accordingly the bank were entitled to damages of £300,000.
Thomas Keith (instructed by Lovell White Durrant) appeared for the plaintiff; Neil Mendoza (instructed by Fishburn Boxer) appeared for the defendant.