Negligence — Turnover valuation of restaurant premises for loan purposes — Whether valuer negligent in relying on figures and variables used in valuation
In December
1989 and May 1990 the plaintiff bank advanced £500,000 and £100,000
respectively to T Ltd, the owner of a destination restaurant in a manor house
at Kingsdown, Kent. The loans were secured as a second charge on the property.
In making the loans the plaintiffs had copies of the audited and management
accounts of T Ltd and a valuation made in September 1989 by the defendant firm
of valuers in the sum of £5.25m. The property consisted of the main restaurant
of 145 ‘covers’, outbuildings, a gatehouse cottage, swimming pool and grounds.
The valuation report recorded that he turnover for 1989 was likely to be in excess
of £1m and net profitability of £330,000. The valuer, in making his going
concern valuation, arrived at an estimation of turnover an efficient operator
would achieve of £1.55m and a net profitability of 35%; taking 8 YP, he arrived
at £4.34m to which he added the values of the other parts of the property. The
restaurant later closed, T Ltd was wound up and the property was sold for
£475,000, the plaintiffs losing the sum advanced and interest. The plaintiffs
claimed the sum of £650,000 plus interest alleging that they relied on the
defendants’ valuation which was said to be negligent. The defendants
counterclaimed, alleging contributory negligence.
valuer should have used as a basis for his valuation the guidance notes on the
valuation of assets prepared by the assets valuation standards committee of the
RICS, as amended in September 1989. Where the property to be valued is to be
used as security for a loan, the guidance notes are explicit that the basis of
valuation is to be open market value. The open market value basis assumes that
values will remain static. The valuer does not have to take into account a
possible collapse of property prices after his valuation; that risk falls on anyone
who lends or buys on the basis of the valuation. The ‘margin of error’ approach
to valuing depends upon evidence that there is such a margin and upon some
notional ‘right’ figure; there was no such evidence in this case. The valuation
of the defendants was one which a competent valuer, using proper skill and
care, could properly have reached. The plaintiffs knew that the valuation
depended upon current turnover and profitability and they relied directly on
the management accounts; there was no negligence in failing to take steps to
substantiate the figures for turnover. The defendants had not been negligent.
Had negligence been established, and the defendants’ claim in contributory
negligence been considered, it may be said that, where a valuation has been
given to a person and that person has, and he knows he has, more information
affecting the valuation than the valuer had, he is very likely to find himself
at least partly at fault if he seeks to act in reliance on the valuation
without first giving the valuer that information for comment.
The following
cases are referred to in this report.
Bolam v Friern Hospital Management Committee [1957] 1 WLR 582;
[1957] 2 All ER 118
Corisand
Investments Ltd v Druce & Co [1978] EGD
769; (1978) 248 EG 315, 407, 504
Mount
Banking Corporation Ltd v Brian Cooper & Co
[1992] 2 EGLR 142; [1992] 35 EG 123
Singer
& Friedlander Ltd v John D Wood & Co
[1977] EGD 569; (1977) 243 EG 212 & 295, [1977] 2 EGLR 84
This was a
claim by the plaintiffs, Craneheath Securities Ltd, against the defendants,
York Montague Ltd, for damages arising out of an alleged negligent valuation.
Jonathan
Simpkiss (instructed by Allison & Humphreys) appeared for the plaintiffs;
Richard Lynagh (instructed by Cameron Markby Hewitt) represented the defendants.
Giving
judgment, JACOB J said: A manor house stands on the cliff overlooking
the sea at the picture-postcard village of Kingsdown, Kent. It was built in
1820. By 1989 its ground floor was a large restaurant called Don Medi. Don Medi
was the nickname of a Mr Medi Siadatan. He ran the business and lived on the
first floor with four wives. Using the terminology of this case I shall call
the manor house and its ancillary properties ‘Kingsdown’. Kingsdown and the
business was owned by a company called Traylodge Ltd (‘Traylodge’). Traylodge
was ultimately partly owned by a Mr Richard White, a chartered accountant based
in Yorkshire and by Mr Siadatan. Mr White was the key financial figure in
Traylodge.
The
parties
The
plaintiffs, Craneheath Securities Ltd (‘Craneheath’), were, in 1989, a
secondary bank and a subsidiary of Berisford International plc. Shortly before
the events concerning this case, Craneheath had recruited from Lloyds Bank an
experienced manager with a view to increasing their loan book substantially. It
had until then been static for a number of years. The manager they recruited
was Mr Christopher Stone and it was he who played a principal part in the two
loans with which this case is concerned. He had a superior, Mr John Rule, who
was an experienced accountant on secondment from Arthur Andersen, the large
firm of accountants. Both of these men were witnesses before me, though neither
is with Craneheath any more. Craneheath in 1991 called in all its loans and
ceased further banking activity.
The
defendants, York Montague Ltd (‘YM’), are chartered surveyors. They were newly
formed in mid-1989 but Mr Anthony Crabtree [FRICS IRRV], their managing
director, was a man of very great experience, particularly in valuations in the
hotel, leisure and restaurant industry. He had been with the well-known firm of
Druce & Co for over 28 years. Also with YM was a Mr Derek Ames [FRICS
FSVA]. He, also experienced in this field but less so than Mr Crabtree, had
also come from Druce & Co. He was an old colleague of Mr
day), but Mr Ames did not.
Loans
On December 22
1989 Craneheath loaned £0.55m to Traylodge, secured by way of a second charge
on Kingsdown. There was already a first charge in the sum of £2.4m in favour of
Kreditforeningen Denmark Bank (‘KD’) who had loaned £3.15m altogether. On May
22 1990 Craneheath loaned a further £0.1m also subject to the second charge.
Claim
On September
19 1990 joint administrators of Traylodge were appointed and on April 15 1991 a
compulsory winding-up order was made. Kingsdown was eventually sold at auction
on May 6 1992 for £0.475m. Craneheath lost all their money and KD most of
theirs. Craneheath say that their two loans were made in reliance upon a
evaluation of Kingsdown made by YM (and in particular by Mr Crabtree) in the
sum of £5.25m. They say that valuation was negligent in a number of ways which
I have to consider in due course. They add that, but for that valuation, they
would not have made the loan at all. So they claim as their damage stemming
from the negligence the sum of £0.65m plus interest — about £1m in all. YM say
that the valuation was not negligent (or at least is not shown to be), and that
even if it was, Craneheath are either wholly or partially the authors of their
misfortune, if the latter that there should be a diminution of damages for
contributory negligence.
Circumstances
leading to the valuation and first loan
Mr Stone first
met Mr White in 1988. He found him a very good prospective client — not only an
FCA, but also a man with a variety of business interests outside Traylodge. Mr
Stone learned that Mr White needed more finance for Traylodge. In the summer of
1989 Mr Stone himself went down four or five times to Kingsdown. He ate at the
restaurant and saw over the premises. He was undoubtably very impressed with
the operation, the state of decor of the restaurant and everything else about
it. In a letter dated October 12 1989 to Mr White he eulogised:
You have now
shown me the site at Kingsdown, near Deal in Kent, which is most impressive and
you and Medi are to be congratulated on developing such a magnificent concept,
which really has to be seen to be believed.
The restaurant
was extremely busy, with queues on occasions and people travelled a long way to
it. It was a ‘destination’ restaurant, having also the ‘advantage’ (in terms of
a large customer source) of a large permanent ‘mobile’ home park nearby. Mr
Stone set out his assessment of Mr White in a letter dated October 11 1989 to
his superior, Mr Rule. After identifying a number of other substantial assets
owned by Mr White, Mr Stone said:
The balance
sheets (of Traylodge) are enclosed which do not reflect the latest valuations of
the Kingsdown and Canterbury sites, which exceed £10 million. Borrowing of £3.2
million to (KD) is the only long-term liability.
We are
dealing with a highly successful professional man who has substantial locked-in
assets, who, despite funds due from the sale of his land in Scalby, finds
himself in need of temporary bridging assistance. While this represents a very
significant proportion of our lending book, I have no hesitation in
recommending our approval, subject to the normal strict conditions, which will
provide us with significant fee income and solid interest contribution over a
relatively short exposure period.
There are
numerous other propositions in line next year and I wish us to demonstrate our
support to this blue chip client.
The reference
to the Canterbury site is a reference to another Don Medi restaurant in
Canterbury which had opened in about February that year. Mr White had told Mr
Stone that the intention was to develop quickly a chain of Don Medi restaurants
(either owned or franchised) in Kent and nearby. Kingsdown was to be the
headquarters, providing training and facilities for these. The idea was, once
these had been set up, to sell the lot as a going concern to a major brewing or
hotel group. Mr White said he needed a further £0.55m for this purpose and for
renovating a recent addition to the Kingsdown property called the Gatehouse
Cottage. So the proposed loan was envisaged to be for a short term only.
There are a
couple of other matters about this letter. First there is the reference to the
latest valuations of the Kingsdown and Canterbury sites, ‘which exceed £10
million’. This was inaccurate. While Kingsdown was valued at £5.25m there never
was a valuation of Canterbury taking the total above £10m. I can think only
that Mr Stone, in his enthusiasm to persuade his superior, inflated the value
somewhat.
Second, the
letter refers to balance sheets. On the evidence these were draft accounts of
Traylodge to March 31 1989. They were prepared by Moore Stephens and had been
sent to Mr Stone by fax on October 9. It is common ground that Mr Crabtree
never saw these accounts until much later. The accounts show the following:
(i) that the turnover was just over £700,000
(this included only a small contribution from Canterbury, which had only just
opened before the end of the accounting year);
(ii) that there were hire purchase payments for
equipment;
(iii) that the property valuation (of both
Kingsdown and Canterbury) was £5.425m;
(iv) that there was a loss for the year of
£336,079.
Moore Stephens
qualified these draft accounts in respect of one substantial item of about
£1.25m in respect of building/restaurant renovations and furnishings. They
could not independently confirm this expenditure, saying there was no system of
control over it.
Third, at the
time of the letter, Mr Stone did have at least one version of the YM valuation,
addressed either to Craneheath or to KD or both. There are two versions, one
addressed to KD (who were originally possibly going to make the loan) and one
to Craneheath. Both are dated the same day, September 26 1989. Mr Crabtree said
that both were done at the same time and that his firm would not backdate a
valuation. Mr Stone (and the contemporaneous documents) suggest that the
Craneheath version came into existence later. I do not think that this conflict
matters, save potentially in relation to the reliability of Mr Crabtree’s
evidence. My own view is that the Craneheath version probably came into
existence later, and that Mr Crabtree was mistaken. I do not think the mistake
reflects generally on his evidence. The word processing of a fresh version for
Craneheath (so they could rely upon it) would have been a matter of mere
administration at the time. There was to be no further fee for it. There was no
question of Mr Crabtree being asked to consider whether his valuation in fact
made in September was still valid at a later date and particularly before the
loan was made in December. The date of September was, of course, actually the
appropriate date of the valuation, even if the document addressed to Craneheath
was provided later.
Before the
first loan was made, Craneheath adopted an internal policy under which Mr Stone
was authorised to make loans of up to £0.25m on his own and that loans of above
£0.5m required in addition to Mr Stone, Mr Rule or another Berisford board
member. The projected loan fell within the latter class. On November 21
Traylodge, by a letter from Mr White, formally requested the loan. Mr Rule’s
copy of that letter contains his handwritten note ‘– current financial data’.
The evidence was clearly to the effect that Craneheath wanted such data before
giving the loan. They already had the accounts to March 1989. I find that they
did indeed get such data in the form of management accounts and that those
accounts included up-to-date trading information (including in particular
information as to turnover and profitability) and also, probably, future
projections. Mr Stone said, and I accept, that the data was analysed in detail
by his assistants. Only after this had been done was Craneheath prepared to
make the loan. They also required that the YM valuation should be addressed to
them (if indeed they had already not got such a copy). The requirement for
management accounts appears to be explicit in a letter of November 30. It was
suggested that there was a muddle in collating (so the requirement was in fact
attached to a letter relating to a different matter). I do not think that this
matters. Mr Stone said
have been no loan, just as Mr Rule had required in his handwritten note.
After the
legal formalities had been completed, Craneheath arranged for the money, to be
credited to Traylodge’s account by a letter dated December 21. They did not
check to see that the arrangement fee of £5,500 had been paid before draw down,
as the terms of the loan required. It was never paid. That fee was originally
claimed as damages in this action, but it is conceded that to that extent the
claim must fail since it should have been paid before the advance was made.
The upshot of
the foregoing is that, at the time the loan was made, Craneheath had in their
possession (and had read):
(i) Mr Crabtree’s valuation made in September;
(ii) the Moore Stephens draft audited accounts to
end of March 1989; and
(iii) the management accounts, giving current
financial data.
Unaccountably
item (iii) went missing before discovery was due. So also, according to Mr
Stone, have several other discoverable documents. This may be because
Craneheath moved premises, but it is difficult to imagine how just some
documents went astray. I do not think this matters in relation to this item,
for I have enough evidence of what was in it.
Second
loan
All did not go
well and by March 1990 Traylodge were asking for a further £0.25m. This arose
because the National Westminster Bank (‘NatWest’) had a charge on the
Canterbury property and were threatening to realise their security in that sum.
Traylodge asked Mr Stone to buy NatWest out. Eventually a loan of £0.1m was
made. Probably it did not have Mr Rule’s authority as it should have done.
Moreover at the time Traylodge had not paid the £5,500 arrangement fee nor an
interest payment due to Craneheath and another to KD. Mr Robert Dibben,
Craneheath’s experienced and reliable banking expert, called the loan
‘imprudent’ and I so find. I reject the suggestion that it was made in
continued reliance upon the YM valuation which, by this time, was six months
old. It was done out of panic in the hope of salvaging the situation.
What
happened thereafter
Things went
from bad to worse. There were some structural problems and Messrs White and
Siadatan fell out, Mr Siadatan at one point even obtaining a Mareva
injunction against Mr White, which was subsequently discharged. The restaurant
was closed suddenly in midseason and stayed closed for some time. The details
of this do not matter. It re-opened at one point and closed again. Naturally
this must have harmed its reputation, generating ‘badwill’. After Traylodge was
wound up the liquidator’s sale produced, as I have said, £0.475m. But this was
in 1992 when the economy was very different. People were no longer willing to
drive distances to destination restaurants or to pay the same amounts on
anything like the scale they were in 1989.
Valuation:
RICS guidance notes
I now turn to
the valuation and the principles upon which it was made. It is common ground
that Mr Crabtree ought to have been working in preparing his valuation on the
basis of the guidance notes on the valuation of assets prepared by the assets
valuation standards committee of the Royal Institution of Chartered Surveyors
as it had been amended by September 1989. The valuation is explicit as to Mr Crabtree’s
terms of reference:
Our
instructions are to prepare a valuation of the Freehold interest in the
property described, on an open market basis, as at today’s date, on a going
concern basis, including the benefit of goodwill, trade fixtures, fittings and
contents used in connection with the business.
We have
provided our Valuation on an open market basis, and strictly in accordance with
the Guidance Notes relating to the valuation of Property Assets published by
the Royal Institution of Chartered Surveyors
He added
‘bearing in mind that the property will be offered for an advance secured by
way of first mortgage’. It was in fact, so far as Craneheath were concerned, a
second mortgage. Mr Crabtree said he thought at the time that there was to be a
first mortgage, but nothing turns on this. For the method of valuation would be
the same whether it was a first, second or nth mortgage, or indeed not a
mortgage at all. The basis of valuation was, as Mr Crabtree said ‘an open
market basis’.
It is to what
the RICS guidance notes say about such a basis that I must now therefore turn.
Guidance note
GN 18 (revised January 1986) is headed:
Valuations of
Assets for Investment Purposes and as Security for Loans
It contains
the following paragraphs:
4. When a
property is valued as security for a loan by way of mortgage or debenture, the
basis of valuation should be open market value. It would be usual for the
valuer to be asked to express an opinion as to the suitability of the property
as security for a loan. It is, however, a matter for the lender to assess the
risk involved and express his assessment in fixing the terms of the loan, such
as the percentage of value to be advanced, the provision for repayment of the
capital and the interest rate. The valuer should refer in his Valuation
Certificate or in his detailed report where one is to be provided, to all
matters which are within his knowledge and which may assist the lender in his
assessment of the risk.
5. It is not
normally appropriate to value property to be used as security for a loan at
forced sale value. Where, however, the Bank or other lending institution
requires the valuer to report forced sale value, either in addition to or in
place of open market value, the valuer should ascertain from the client as a condition
of providing such a valuation the period of time in which a sale is desired and
whether or not such period is to include completion of the legal formalities.
The note is
completely explicit therefore as to the basis of valuation when the property is
to be used as a security. It is the ‘open market value’. I find this somewhat
surprising at least where, as here, the valuation is heavily dependent on the
turnover or profitability of the business conducted from the property. If he
has to resort to his security, the lender is unlikely in practice to be trying
to realise it when the business is running smoothly. It is much more likely
that the business has collapsed wholly or partially. So the obvious
implications of this method of valuation for a lender is that realisation of
the security will not reach the valuation. However, that is what the guidance
notes provide. There is no doubt that in this case at least the valuation was
being given to an experienced and sophisticated lender who knew what the basis was.
I turn to the
basis upon which the ‘open market value’ is determined. This is set out in
guidance note GN 22 (revised January 1989):
1.1 ‘Open Market Value’ means the best price at
which an interest in the property might reasonably be expected to be sold at
the date of the valuation assuming:
(a) a willing seller;
(b) a reasonable period in which to negotiate the
sale taking into account the nature of the property and the state of the
market;
(c) that values will remain static during that
period;
(d) that the property will be freely exposed to
the open market; and
(e) that no account will be taken of any
additional bid by a purchaser with a special interest.
This basis
itself contains an important assumption from the point of view of this case — the
assumption that values will remain static. The valuer does not have to take
into account a possible collapse of property prices after his valuation. The
risk of that falls entirely on anyone who lends or buys on the basis of the
valuation.
GN 22 also provides
for a ‘forced sale value’, which is the same as for the ‘open market value’
save that there is an assumed time-limit for sale. Even that would not
correspond well with what might be obtained when some kinds of business have
collapsed. Take, for instance, a restaurant. Suppose the business collapses
without explanation and the premises become idle. One would expect old
customers to be wary of any re-opened restaurant on the same site — there would
be a kind of ‘badwill’ to be overcome.
The RICS give further
guidance as to open market valuations having regard to trading potential. This
is contained in Background Paper no BP7 (page revised January 1986). The
relevant paragraphs provide:
2. It has
always been recognised that there are certain types of property designed or
adapted for particular uses, which invariably change hands in the open market
at prices based directly on trading potential for a strictly limited use.
Examples of such properties which normally are sold as fully operational
business units include hotels, public houses, cinemas, theatres, bingo clubs,
gamin, clubs, petrol filling stations, betting shops, specialised leisure and
sporting facilities.
3. Open
market transactions which involve the sale of properties which come within this
category, as opposed to those involving the sale of companies which own such
properties, can provide evidence of value for use when valuing this type of
property for balance sheet purposes. When analysing the prices paid for
comparable properties and preparing a valuation of the subject property, the
Valuer will normally have regard to the trading accounts for previous years,
where these are available, and form an opinion as to the future trading
potential and level of turnover likely to be achieved.
4. The example
of hotels is typical of the type of property where these circumstances can
apply, as they are usually sold as a fully operational business including
fixtures, fittings, furniture and stock. The new owner will normally engage the
existing staff and sometimes the management and would, of course, expect to
take over the benefit of future bookings which are an important feature of the
continuing operation.
. . .
6. When
problems are encountered in differentiating between the value of the trading
potential which runs with the properly and the value of goodwill which has been
created in the business by the present owner and which may be transferable to
other properties in the event of the subject properly being sold, it is
recommended that the Valuer when assessing future trading potential should
exclude any turnover which would only be available to the present owner or
management, but he should reflect any trading potential that might be realised
in the hands of a more efficient operator.
. . .
11. (a)
Advice on the suitability of the property as security for a loan
This is
generally covered by Guidance Note GN 18, but in the case of properties valued
by reference to Trading Potential in addition to stating his opinion as to the
suitability of the property as security for a loan at the date of valuation,
the valuer should extend his advice to cover possible future fluctuations in
the status of the property as security.
The valuer
should state clearly the source and basis of the trading figures (actual and/or
projected) and other trading information and assumptions upon which he has
relied in arriving at his valuation. He should then add a rider to the effect
that in the event of a future change in the trading potential or actual level
of trade from that indicated by such information and assumptions, the open
market value for existing use could also vary, in view of the importance the
market for such properties attaches to trading figures actually achieved.
As indicated
in GN18 it is in any case a matter for the lender to assess the degree of risk
involved and to reflect his assessment in fixing the terms of the loan
including the percentage of open market value to be advised, the rate of
interest to be charged and the provision for capital repayment.
Applicable
legal principles
It was common
ground that YM owed Craneheath a duty of care — that is why the valuation was
addressed to them. The pleadings suggested a qualification to that duty, namely
that it related only to a first mortgage. Wisely Mr Richard Lynagh [counsel for
the defendants] abandoned that point at the outset.
A number of
authorities concerning negligence claims against valuers were cited to me. They
were all helpful in their way, for they show how the courts have approached the
problem in the past. The most difficult area is in assessing what amounts to
negligence. There is a danger in unquestioningly taking an approach adopted on
the basis of the facts in an earlier case as though that itself is a legal
principle. For instance, in Singer & Friedlander Ltd v John D
Wood & Co (1977) 243 EG 212, [1977] 2 EGLR 84, Watkins J had evidence
that there was a permissible margin of error of +/-10% of a figure which could
be said to be the right figure. This ‘margin of error’ approach depends upon
evidence that there is such a margin. It also seems to depend upon some
notional ‘right’ figure, though one could not ascertain this in many cases. The
margin of error approach may well make sense when the property being valued has
a number of good comparables (eg houses on an estate, forestry or farmland).
Then one can in effect take an ‘average’ as the ‘right’ figure and look at the
deviation from it. That is one of the standard techniques in scientific
measurement. In those circumstances one would expect different valuers to
settle fairly closely upon the same sort of figure. But, as I say, the approach
depends on evidence. I had no evidence before me which would begin to support a
permissible ‘margin of error’ for a property such as Kingsdown. The nearest I
had was some evidence about possible margins of error in relation to certain of
the factors (such as net profitability) adopted by Mr Crabtree, to which I
shall return.
It is also of
course vital, where it is said that a man has fallen short of a particular
standard, to identify the standard concerned. In this case the plaintiffs
placed much reliance on what was said by Gibson J in Corisand Investments
Ltd v Druce & Co (1978) 248 EG 315. The case was decided in 1978
when, it seems, there were no RICS guidelines as to valuation. Then, of course,
the court was driven to standards of valuation as set forth in the evidence in
that case. Thus, Gibson J had evidence that the going concern basis was
inappropriate for a mortgage. He said:
In a
valuation for mortgage purposes it is again common ground that the valuer
cannot take the open market going concern valuation. The valuer cannot, in
short, include in his valuation for this purpose any valuable part of the going
concern valuation which would not or might well not be there when the mortgagee
attempts to realise his security.
By contrast in
this case the standard of valuation was indeed to be ‘going concern’, even
though it was for a mortgage. From time to time Mr Crabtree’s cross-examination
included questions based on the express premise that he ought to have been
‘cautious’ because the valuation was for mortgage purposes. While he ought to
have exercised all proper skills in carrying out his valuation I reject the
suggestion that he should have arrived at a lower figure simply because the
valuation was for mortgage purposes. The practical effect of the RICS
guidelines is to put any need to take extra caution where the property is to be
a security upon the lender, not the valuer. In some cases this might well lead
to a misunderstanding, but not in this case. Mr Stone knew very well what a
going concern valuation involved.
The key test,
as it seems to me, is simply stated. It is this: was the valuation that which a
competent valuer, using proper skill and care, could properly have reached: see
Mount Banking Corporation Ltd v Brian Cooper & Co [1992] 2
EGLR 142. In answering this question the court should bear in mind what Watkins
J said at p 213 in Singer & Friedlander, namely:
The valuation
of land by trained competent and careful professional men is a task which
rarely, if ever, admits of precise conclusion. Often beyond certain
well-founded facts so many imponderables confront the valuer that he is obliged
to proceed on the basis of assumptions. Therefore he cannot be faulted for
achieving a result which does not admit of some decree of error. Thus two able
and experienced men, each confronted with same task, might come to different
conclusions without any one being justified in saying that either of them has
lacked competence and reasonable care, still less integrity, in doing his work.
As Gibson J
noted there are parallels with medical negligence. For it is possible for
different doctors properly and without negligence to adopt different
treatments. One will not be negligent unless he has failed to act in accordance
with a practice accepted as proper by a responsible body of competent
professional opinion, Bolam v Friern Hospital Management Committee
[1957] 1 WLR 582.
Watkins J said
in Corisand that a valuer should disregard any ‘speculative element’. By this
he meant he should ignore the possibility of a purchase by someone who was
willing to pay more because the market might rise and he could sell at a quick
profit. I think that is probably built into the RICS guideline requirement that
the market (ie ‘values’) will remain static. In any event there is no
suggestion of a speculative element in this case.
One further
qualification appears to me to be self-evident. Where a valuation is made by
means of a written report, the lender can
valuation is not a guarantee of the figure reached — a ‘suable document’ (to
use Mr Rule’s phrase) irrespective of what further or other information the
lender may have. This is a matter of particular importance if the lender has
significant further information which might well affect the valuation, as
opposed to information which merely affects the creditworthiness of the lender.
For primarily the lender is looking to the security of the property rather than
the lender when he makes a secured loan. This is an important matter in this
case, as will be seen.
Valuation:
how Mr Crabtree arrived at £5.25m
The property
consisted of the main restaurant (with 145 ‘covers’ as valuers call the seating
capacity). In addition there were the upper floors and some outbuildings. The
latter included the gatehouse cottage, recently purchased for £0.235m. The
manor house had substantial first-floor accommodation which had a separate
entrance. There was a swimming pool and grounds.
It was common
ground that the property was unusual and accordingly difficult to value. Most
of Mr Crabtree’s detailed reasoning is to be found in his working notes. He not
only adopted a primary method but sought to cross-check that by a secondary
method.
The primary
method of valuation of the restaurant was to estimate its potential turnover
and profitability. This, of course, started with its actual turnover and
profitability. He said in his valuation:
Although we
have not been supplied with accounts for the restaurant it does, nevertheless,
keep a careful record of all visitors in a Visitors’ Book, and we attach in
Appendix VII in (sic) an extract covering relevant dates during April
through to early June. During our last inspection the attendance figures
between June and September had shown a fairly significant increase on the
earlier months.
Mr Crabtree
said that he verified certain figures already noted by Mr Ames (who had
prepared a valuation in June 1989 while he was with Druce & Co) and checked
the later figures. It was suggested that he had not in fact done this and had
merely taken the Ames figures together with an average figure given by Mr
White. I reject the suggestion. True he did not set out the figures for June,
July and August (though he repeated the earlier Ames figures for March-May) but
his working notes clearly show he must have made some check of the register.
These notes were, he told me, themselves the result of transferring information
from other pieces of paper which were not retained. This is highly likely, for
Mr Crabtree’s working notes are too neat and organised to be original notes for
the whole valuation. Part of the criticism related to his reference to
September when he could not have got those figures, his inspection being at the
end of August. I cannot think this matters. The valuation itself is dated
September 26 and the inspection must obviously have been some time earlier.
Under the
heading ‘Factors affecting Valuation’ Mr Crabtree said:
It is our
understanding that the turnover during 1989 is likely to be slightly in excess
of £1m, and that the net profitability is likely to be in the region of £3m,
due to efficient cost controls.
His working
notes have a figure of £1.1m with the rider ‘figures provided by company
estimated at £1.1–£1.2m’. The first of the conditions of the valuation made it
clear that:
The valuation
is largely based upon the information, data and plans supplied to us. We have
relied upon this information in arriving at our Valuation, which is made on the
condition that there have been no matters undisclosed which could materially
affect our opinion of value’
Mr Crabtree
noted that the restaurant was closed on Sundays (he was told for religious
reasons) and was not open for Saturday lunch. The restaurant sold pasta,
hamburgers, pizzas, salads and the like. The menu range was short and there was
a high turnover of customers. He considered that, given a high turnover, this
is the sort of operation where there would be a net profitability of about 35%
and this is the figure he took. Mr Crabtree considered that any purchaser would
naturally open on Saturday for lunch in the summer and for Sunday all year —
Kingsdown was, after all, a destination restaurant. He also considered that a
price rise of 15% was achievable (the directors had told him of a shortly
planned 15% increase), though he used a figure of 10% in his calculations.
Mr Crabtree
also thought that the upper parts and outbuildings could and would, by an
efficient purchaser, be put to better use with an added effect on turnover for
the restaurant.
Thus, he
arrived at the turnover which in his estimation an efficient operator would
achieve, namely £1.55m. Mr Crabtree considered what the net profitability would
be (as I have said 35%). So he got to an annual net profit of £0.542m. He then,
as is conventional, considered how many years’ purchase would be appropriate.
He took a figure of eight, thus arriving at a valuation of the restaurant
valuation of £4.34m. To this he added values for the upper floors at £0.5m, and
the adjacent cottages at £0.25. He considered that the first and second floors
had a potential for nine bedrooms/suites at £0.06m each giving a figure of
£0.54m which he rounded down to £0.5m and the cottages had a potential of five
letting bedrooms at £.05m each giving a figure of £0.25m. These were the same
as Mr Ames’ June valuation. He added £.235m for the gatehouse cottage, being
the recent cost. The overall amount thus reached was £5.325 which he rounded
down to £5.25m.
His
cross-check method for the ancillary accommodation was to estimate the
potential banqueting/wedding usage and conferencing usage and prices, thereby
arriving at an annual turnover of £0.22m. Again he took 35% net profitability.
He applied a years’ purchase of seven (not eight because this kind of use had
not been established), deducted minor estimated conversion costs and arrived at
£0.529m which he rounded down to £0.5m — the same sum as he had taken in his
primary method and as had been reached by Mr Ames.
He also then
considered the turnover as a whole, namely restaurant £1.55m and
banqueting/conference (upper parts) £0.22m giving a total of £1.77m. Instead of
the using the years’ purchase method he then used another established method,
namely considered the ratio of capital value/turnover. Taking the primary
valuation of £5.325m this gave a figure of £2.68m. He compared this with
‘comparables on restaurants’ which he said ‘vary between 2.75/3.25’.
It was an
important part of Mr Crabtree’s reasoning that he expected some big players to
be anxious to acquire this kind of property — not only for its restaurant but
for its hotel, conferencing and banqueting potential. He was very close to this
kind of purchaser, he was experienced with the Kent market and I accept his
evidence. No one as experienced as he gave evidence.
Was Mr
Crabtree negligent?
It will be
seen that Mr Crabtree’s calculation was quite detailed and elaborate. Mr
Jonathan Simpkiss [counsel for the plaintiffs], did not attack the principles
he had adopted, although originally there was an attack based on the valuation
of the ancillary accommodation by Mr Clive Lickley [FRICS], Craneheath’s expert
witness. Mr Lickley was not prepared, under cross-examination, to say that no
reasonable valuer would not use the method used by Mr Crabtree.
The attack
began simply setting out other valuations of Kingsdown with the invitation to
say that these made out a prima facie case. These valuations and dates
were:
|
Date |
Valuation |
Valuer |
Basis |
|
29.1.88 |
£1.25m |
Mr Spacey |
Going concern |
|
3.5.58 |
£1.25m |
Edward Symmons |
unstated |
|
16.6.89 |
£4m |
Mr Ames |
Going concern |
|
26.9.89 |
£5.25m |
Mr Crabtree |
Going concern |
|
29.9.89* |
£3.85m |
Mr Crabtree |
Bricks and mortar |
|
2.6.93 |
£3.76m |
Mr Spacey |
Going concern |
|
28.6.93 |
£2m |
Mr Lickley |
Going concern |
* (Actually done by adjustment of September 1989 figure in March
1990 pursuant to a request from Moore)
The last two
valuations were retrospective. They were prepared for this purposes of this
case by Mr John Space [FRICS], YM’s expert, and Mr Lickley.
In the end Mr
Spacey was not called. But since his report was referred to in part, the whole
of it (and some supplementary letters) was before me. Although he reached a
lower valuation (principally because he treated the ancillary accommodation
differently, as had Mr Ames) he did not go so far as to say that Mr Crabtree’s
valuation was such that no competent valuer could have arrived at it. It was
argued that Mr Crabtree’s valuation was not only the highest but was way higher
than the next lower figure, that of Mr Ames, even allowing for the fact that Mr
Ames’ valuation did not include Gatehouse Cottage. Moreover, it was pointed out
that YM did not call a valuer prepared to reach anything like Mr Crabtree’s
figure. This latter point loses some force given that it seems that Cranheath
themselves at an earlier stage in the litigation had engaged some other expert valuer
whose report never saw the light of day.
I do not think
that these figures alone make out a prima facie case of negligence. Mr
Crabtree was, of course, conscious that his valuation was just over £1m higher
than that of Mr Ames (allowing for the gatehouse). He had seen Mr Ames’
valuation before he went down to make his own inspection. He discussed the
matter with Mr Ames on his return. He had no ulterior motive for giving a
higher figure. He told me that his principal reason for differing was in his assessment
of what a major plc would be prepared to pay for the property given the
possible uses of the upper parts. I accept that. If he had simply been lazy and
unprepared to apply his own mind to the problem he could easily have just
copied Mr Ames’ views. He did not. Given that there is a clear and detailed
explanation of how Mr Crabtree reached his conclusion, the question must be
whether in that process Mr Crabtree was in any way negligent. The plaintiffs
recognised this and sought to attack the valuation and the underlying
assumptions.
I put aside
what I regard as the trivial complaint about planning permission and begin with
what lay at the heart of the attack. This was the figure for existing turnover
and profits, which Mr Crabtree’s notes indicate had been given to him. In
opening Mr Simpkiss summarised the allegations as follows:
1. No serious
attempt to substantiate turnover figures.
2. No or no
adequate warning as to inadequate basis for figures those and reliance only on
a director for them; especially since Mr Ames had been told the same thing.
There might be something in that, if Mr Crabtree had not expressly made it
clear that he had seen no accounts. But what makes the plaintiffs’ position
wholly untenable in this regard is the fact that they did have the management
accounts. Moreover, without these (which Mr Stone told me were in accordance
with the figures given to Mr Crabtree) Craneheath would not have gone ahead. Mr
Stone said:
If Mr
Crabtree had obtained these management accounts I would have regarded it as a
sufficient investigation by him. They were sufficiently consistent with Mr
Crabtree’s figures as to cause me no worry.
Lurking behind
the scenes is a suggestion that the accounts were false, though noone ever said
as much. I do not know whether they were. But Craneheath certainly had other
material in their hands which put them on notice that there might be a problem.
The Moore Stephens accounts spoke of a turnover of only £0.76m. They were of
course historical. But, to my mind, if one had both the Moore Stephens accounts
and Mr Crabtree’s valuation one would naturally investigate more. I was not
surprised to hear Mr Dibben to say so. I find it odd that Craneheath did not
send these accounts to Mr Crabtree for comment. They knew the basis of the
valuation was ‘profits’ and here was something which might throw the
calculation out. If they wanted to continue to rely upon the valuation it was
only fair that they should have raised the matter with the valuer. If they had,
not only would the disparity between the turnovers have emerged but also it
would have been seen that what Mr Crabtree was told about fixtures and fittings
(namely that they were fully owned by Traylodge) was inconsistent with payments
of about £18,000 pa by way of hire purchase for equipment.
I think the
fair conclusion is that Craneheath knew that the valuation depended upon
current turnover and profitability and relied directly on the management
accounts and its own view of Mr White as a ‘blue chip’ client. I do not see that
Mr Crabtree can be faulted in this regard, or that, if he can, it would make
him liable when Craneheath had more information than he had and knew they did.
It was faintly
suggested by Mr Lickley in re-examination that even if Mr Crabtree had been
given management accounts he ought to have gone further. I do not accept this.
I cannot see why a valuer should, given proper management accounts by an
established professional businessman, particularly an FCA, try to go behind
these. A valuer is not an auditor. And what was good enough for Craneheath
would have been good enough for the valuer.
That disposes
of the ‘crunch’ attack. But there were other attacks upon various aspects of
the valuation with which I must deal in turn. Collectively they were what was
called in argument ‘bumping up’.
Saturday/Sunday
opening
The suggestion
was that Mr Crabtree had allowed for an increased turnover without allowing for
an increase in costs due to overtime and a possible need to close on Mondays.
This was not made out on the evidence. Mr Crabtree pointed out how major
companies indeed opened all day on Sunday (eg Harvester) and that there would
not in the circumstances of Kingsdown (with plentiful part-time labour
available) no overtime would be necessary.
35% net
profitability
Mr Lickley
originally said that this was too high. And Mr Crabtree was criticised for
drawing parallels with the ‘Travellers Fare’ operation, the sale of which he
had been concerned with in about 1987. Under cross-examination Mr Lickley was
prepared to go to about 30%. However, this was not for an operation with the
limited menu and large turnover such as Don Medi. He conceded that in those
circumstances profitability might be higher than the kind of pub with large
restaurant which he had been considering. Mr Crabtree pointed out that his
choice of Travellers Fare as a comparable (which ranged from station buffets,
hamburger restaurants, to full restaurants) was based not on a parallel between
the type of restaurant (which was obviously not the same), but on the
profitability achievable where you have a large turnover and limited
cheap-to-produce menu. I cannot see that the figure of 35% was negligent. It
was in accordance with the anticipated price rise and increased usage.
Years’
purchase of 8
Originally
this was attacked by Mr Lickley as too high. He said that a purchaser would be
cautious in the absence of accounts, a false basis since accounts existed. But
when he was cross-examined some ‘comparables’ (necessarily not exact) were put
showing higher figures for YP. In the end Mr Lickley accepted that the YP was a
matter of judgment and was not prepared to say that a YP of 8 was wrong.
3 x
turnover = value
The
value/turnover factor was used by Mr Crabtree as a cross-check. Mr Lickley
accepted that a factor of three was not unusual for a hotel. This property was
not quite a hotel, but it was reasonable to look at hotel-cum-large restaurants
as a comparable.
Average
price per meal £12
It is here
that I found myself unhappy with Mr Crabtree’s approach. What he did was to
examine the menu and produce an average assuming three-course meals and half a
carafe of wine between two. He also based his estimate on his own bill when he
had dined with his family ‘incognito’ a week before his official valuation
visit. This does seem to me to be too rough and ready. However, I do not think
it matters. He already had figures for turnover and profit and this figure
affected only the extra profits from assumed increased turnover. Even if the
right figure is £10 the valuation remains above £5m.
Alleged
failure to take into account VAT
A very hostile
attack was made here. I reject it. Mr Crabtree said
valuations do not normally take VAT into account and that if it is not
mentioned one would assume turnover figures to be less VAT.
I should say
that, in my view, while Mr Lickley was evidently doing his best to help, his
experience was comparatively limited and primarily concerned with public houses
(including of course those with restaurants). Moreover, he had not seen the
upstairs of the premises at all. He did concede that at the time the market was
very buoyant and that there were a number of large operators anxious to buy
substantial restaurant complexes. It is the existence of these (and Mr Crabtree
was very familiar with them and the prices they were willing to pay) which lay
at the heart of the valuation. This is not a ‘speculators price’ of the kind
contemplated in Corisand. These buyers were at the time interested in
acquisition with the purpose of expanding operations and maximising turnover
and profits.
Given the
economic circumstances which emerged shortly after, these buyers simply
disappeared at anything like the late-1989 prices. That is why the later
valuations and the ultimate sale price is really of no great assistance.
Accordingly, I
hold that it is not shown that Mr Crabtree was negligent. It is therefore not
necessary for me to consider the arguments as to contributory negligence and do
not propose to do so, save to say this: that where a valuation has been given
to a man, and that man has, and knows he has, more information affecting the
valuation than the valuer had, he is very likely to find himself at least
partly at fault if he seeks to act in reliance on the valuation without first
giving the valuer that information for comment.
Nor is it
necessary for me to consider Mr Lynagh’s alternative argument to the effect
that if Mr Crabtree had given a value of £4.25m (approximately equal to Mr
Ames’ plus the gatehouse cottage) Craneheath were so anxious to loan that they
would have loaned on that valuation. However, I have to say that I would have
accepted Mr Stone’s evidence, corroborated by a contemporaneous document, that
the loan would not have been made below a £5m valuation.
The action
therefore fails.