A judge has rejected a claim that CBRE negligently overvalued a Reading development site at £17.5m in 2007 that was later sold for only £3.75m following the financial crisis.
Judge Klein at the High Court ruled that, while the true market value of the site in April 2007 was only £16.2m, CBRE’s valuation fell within the “appropriate bracket” for a margin of error of plus or minus 15%, and so was not negligent.
Although he found there were “clearly flaws in CBRE’s approach”, he said that that meant the claim, made by Dunfermline Building Society (DBS) (which is in administration) must be dismissed.
DBS claimed the site, 42 Kenavon Drive, Reading – which is adjacent to the main Reading-to-London train line and had outline planning permission for 535 residential units, additional retail and leisure space and a medical centre – was worth only £15m at the valuation date, and so had been overvalued by £3.25m.
It said that, in reliance on the valuation, it loaned more than £8.7m to Kenavon Drive (Jersey) Ltd (KDJ) – a special-purpose vehicle formed by AIG and Kenmore Homes – towards the company’s purchase of the site. Further sums loaned by the Royal Bank of Scotland took KDJ’s overall lending beyond £17m.
However, in the wake of the global financial crisis, it was found that the costs of developing the site had increased by £21m and it was “potentially loss producing”. KDJ defaulted on the loan from DBS, receivers were appointed and the property was sold in February 2010 for £3.75m.
DBS, which only recovered £1.77m from the sale, had sought to recover its losses, capped at £2.5m, and argued that the appropriate margin of error – a key issue in valuation negligence claims –was only plus or minus 5%.
Judge Klein said: “That the bracket is important is highlighted by this case. It is to be remembered that CBRE reported the property’s market value on the valuation date at £17.5m; £1.25m more than the value attributed by the expert on whose evidence CBRE relies.”
But he said that in the circumstances of the case, including that the development and the property is “somewhat unique”, the appropriate bracket should be plus or minus 15%.
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