Professional negligence – Valuation – Loss – Claim by lender against defendant for negligent over-valuation of property in connection with mortgage loan – Borrowers defaulting on loan and property sold at a loss – Whether lender’s claim in tort against defendant time-barred – Date when cause of action accruing – Correct approach to valuation of security and borrowers’ covenant for purpose of ascertaining date when loss first suffered – Claim dismissed
In 2006, a lender made a loan of £428,891.36 by way of interest-only mortgage to the owners of a property in Brighton who were in the process of building a house on the property. The defendant had provided the lender with a property valuation in connection with that transaction and had valued the property at £500,000. The lender had earlier obtained a valuation of £475,000 from another valuer.
The borrowers paid the monthly instalments on the mortgage by direct debit until January 2007, when they missed a payment. Thereafter, some further payments were made by debit card but no payment was received after January 2008.
The borrowers voluntarily surrendered possession of the property to the lender in August 2008 and were subsequently adjudged bankrupt. After trying and failing to sell the property at auction, the lender eventually found a purchaser to whom it sold the property for £305,000 in May 2009. The purchaser’s solicitor discovered that the property was subject to a right of way which had not previously been noticed.
In October 2013, the lender brought proceedings against the defendant for professional negligence in over-valuing the property; its cause of action was later assigned to the claimant. Since the limitation period for the lender’s contractual claim against the defendant had expired, the claim relied on a cause of action in tort. The defendant admitted that it had negligently over-valued the property but contended that any claim in tort was also time-barred since the lender had first suffered measurable loss, and the cause of action had therefore arisen, more than six years previously. The court assumed for limitation purposes that the lender would not have entered into the transaction but for the defendant’s negligence. It was agreed that the value of the property at the date of the mortgage advance was £430,000 ignoring the right of way or £397,000 taking it into account.
Held: The claim was dismissed.
(1) There could be only one date on which the claimant’s cause of action accrued. The burden was on the claimant to establish a prima facie case that the cause of action had accrued on a date within the limitation period; if it did so, then the burden shifted to the defendant to show that it accrued outside that period: Cartledge v E Jopling & Sons Ltd [1963] AC 758 considered.
(2) The basic comparison to be made for the purpose of deciding when the lender had first suffered measurable loss required the court first to value both the security and the borrower’s covenant and then to see whether, and if so when, their combined worth became less than the amount outstanding from time to time under the mortgage: Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627; [1998] 1 EGLR 99 applied.
(3) The basic comparison required the court to ascertain the actual value of the security, including all factors which affected its value at the relevant time, whether or not they were known to the parties. The basic comparison was designed to establish the total direct loss which would not have been suffered but for the negligence. It was equivalent to the measure of damages for fraud, which included loss which would not have been suffered but for the fraud even if such loss was caused by some other event outside the knowledge of the parties: Smith New Court Securities Ltd v Citibank NA [1997] AC 254 applied. While unexpected facts or events subsequent to the transaction in question should be left out of account, it was permissible to take into account subsequent events which confirmed or threw light on trends or risks that were apparent at the relevant date. In the instant case, the most important subsequent events which should be taken into account related to the financial affairs of the borrowers: South Australia Asset Management Corporation v York Mantague Ltd (SAAMCO) [1997] AC 197; [1996] 2 EGLR 93 applied.
(4) The existence of the right of way should be taken into account in valuing the lender’s security because it was a fact which objectively affected the value of the security at the relevant date and its subsequent discovery was an example of hindsight which confirmed, rather than altered, the previous position. While a hidden defect, which would not have been reasonably discoverable on a hypothetical sale at the relevant date, might not have affected the market value of the security, the right of way which was in fact discovered by the ultimate purchaser had to be taken into account since there was no reason to conclude that it was not reasonably discoverable in 2005/2006.
(5) The costs of repossession and sale could also be taken into account. The value of the security, as distinct from the value of the property itself, depended on repossession and sale. While actual costs which were unexpectedly large because of some unforeseen supervening event had to be left out of account, actual costs which merely confirmed the anticipated costs could be taken into account. In the instant case, the actual costs of repossession were, if anything, low because the borrowers had given up possession voluntarily. The actual costs were the only evidence of the likely costs on a notional realisation of the security at an earlier date. That being so, the lender’s security should be valued at £385,818 as at March 2006, as the value of the property after making a deduction for the right of way and deducting a further 3% for the costs of sale.
(6) When valuing the borrowers’ covenant, the easiest starting point was to compare the value of the security with the amount outstanding from time to time and to ask, wherever there was a shortfall, whether the value of the covenant was sufficient to bridge the gap. Since the increasing value of the property tended to reduce the gap, while the increase in the amount outstanding on the mortgage tended to increase the gap, the valuation of the covenant from time to time was critical. The covenant had to be valued in the light of all admissible evidence. The court should not infer from a single delay in payment that the covenant was worthless, since a single hiccup might be readily explainable in some cases. Nonetheless, a simple test was needed, at least at the initial stage of asking whether the lender had established a prima facie case that loss first accrued within the limitation period. For the purposes of the instant case, the appropriate test was whether the covenant appeared good and whether interest payments were being duly made. Applying that test, the cause of action did not accrue from the outset of the loan since, prima facie, the borrower’s covenant was sufficient at first to bridge the gap between the loan amount and the actual value of the security; however, the position changed when the first direct debit payment was missed in February 2007. While that did not automatically make the covenant worthless, it was a significant matter since, from that time onwards, interest payments ceased to be duly made. As at February 2007, the gap which needed to be bridged was £18,550. The lender had not produced prima facie evidence that the borrowers’ covenant was worth at least that amount at that date. It had therefore failed to advance a prima facie case that the loss had not accrued by February 2007. It followed that the cause of action had arisen at that date and was now time-barred.
Per curiam: Had the claim not been time-barred, it would still have failed in the absence of any evidence that the lender had relied on the defendant’s valuation as opposed to the other earlier valuation.
Peter de Verneuil Smith (instructed by Rosling King LLP) appeared for the claimant; Jamie Carpenter (instructed by Hill Dickinson LLP) appeared for the defendant.
Sally Dobson, barrister
Click here to read transcript: Canada Square Operations v Kinleigh Folkard & Hayward
