Professional negligence – Valuation – Breach of duty – Claimant seeking damages against defendant alleging overvaluation of development site – Whether claimant establishing negligence – Whether defendant in breach of implied contractual term to exercise reasonable skill and care – Claim dismissed
The claimant claimed damages against the defendant alleging that it had negligently overvalued a development site at 42 Kenavon Drive, Reading, resulting in the claimant, together with the bank, lending in excess of £17m (the claimant lending in excess of £8.7m) towards the purchase of the property by a third-party company. The property was on a six-acre site, 0.62 miles east of Reading town centre. It comprised a four-storey office building and a number of industrial buildings adjacent to the main Reading to London railway line and a 45 metre high gas holder and gasworks.
In 2006, the property already had outline planning consent for a mixed-use development. The claimant was asked to provide funding for the purchase of the property and the proposed development. It agreed to provide half of the proposed facility, with the bank taking on the other half. The claimant instructed the defendant to provide a valuation to enable it to determine whether the property would provide suitable and adequate security for the loan. The letter of instruction stated the claimant’s intention to rely on the report for the purpose of evaluating both the customer’s proposal and the security value of the property. The defendant reported that the value of the property on the valuation date was £17.5m. The claimant subsequently granted two facilities to the third party to enable it to purchase the property.
By 2008, the claimant had classed the loan agreement as high risk and gave notice to the third party of events of default under the loan agreement, ie the variation of the third party’s development appraisal and cash flow forecast without the claimants’ prior agreement. Law of Property Act receivers were appointed and the property was sold in 2012 for £3.75m.
The claimant alleged that the defendant had been negligent and in breach of an implied contractual term to exercise reasonable skill and care and had overstated the property’s market value by £3.25m, which was outside the margin of error permitted to a reasonably competent valuer. The market value of the property at the valuation date was £14.25m. The claimant contended that it had relied on the defendant’s report and, but for its negligence and breach of duty, would not have entered into the loan agreement.
Held: The claim was dismissed.
(1) The process of valuing real property had strong subjective elements; it was an art not a science and not every error of judgment amounted to negligence. That led to the concept of “the bracket”, or “the permissible margin of error”. What could properly be expected from a competent valuer using reasonable care and skill was that his valuation fell within that bracket. A valuation that fell outside the permissible margin of error called into question the valuer’s competence and the care with which he carried out his task. To find that his valuation fell outside the bracket was a necessary condition of liability but not in itself sufficient. The claimant normally had to show, not only that the valuer fell in some way below the standards to be expected of a reasonably competent professional, but also that the valuation fell outside the range within which a reasonably competent valuer could have valued the asset. If the valuation was within the range, then the valuation would not be found to have been negligent even if some aspect of the valuation process could be criticised as having fallen below reasonably competent standards. The court had to assess what it regarded as the competent valuation and the size of the permissible range depending on the particular facts of the case. In general, a bracket had to be arrived at and assessed for each variable rather than only for those variables that were alleged, or found, to have been negligently assessed. For a standard residential property, the margin of error might be as low as plus or minus 5%; for a valuation of a one-off property, the margin of error would usually be plus or minus 10%; if there were exceptional features of the property, the margin of error could be plus or minus 15%, or even higher in an appropriate case: Singer & Friedlander Ltd v John D Wood & Co [1977] 2 EGLR 84, Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1996] 1 EGLR 119, Goldstein v Levy Gee (a firm) [2003] EWHC 1574 (Ch); [2003] PNLR 35, Dennard v PricewaterhouseCoopers LLP [2010] EWHC 812 (Ch), K/S Lincoln v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC); [2010] PLSCS 156 and Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas (a firm) [2011] EWHC 2336 (Comm); [2011] PLSCS 225 considered.
(2) Once it was shown that the valuation fell outside the bracket, the claimant had discharged an evidential burden. It was for the defendant to show that, notwithstanding that the valuation was outside the range within which careful and competent valuers might reasonably differ, he had nonetheless exercised the degree of care and skill which was appropriate in the circumstances. In the ordinary valuation case, the valuer’s performance should be judged by reference to the final figure, not the minutiae of how he got there: Legal & General Mortgage Services Ltd v HPC Professional Services [1997] PNLR 567.
(3) In this case, the defendant had been required to report on the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Taking all matters into account, the appropriate bracket was ±15%. The defendant’s market valuation of the property of £17.5m on the valuation date was within 15% of what the court had determined to be the property’s market value on that date. Although on the evidence there were flaws in the defendant’s approach, the claim had to be dismissed.
Mark Cannon QC and Nicholas Broomfield (instructed by Walker Morris LLP) appeared for the claimant; Anneliese Day QC (instructed by Clyde & Co LLP) appeared for the defendant.
Eileen O’Grady, barrister
