Defendant overvaluing property – Plaintiff lender relying on valuation – Plaintiff disposing of loan at a loss – Plaintiff seeking to recover loss from defendant – Scope of defendant’s duty of care – Plaintiff’s claim failed
On the basis of a valuation prepared by the defendant, the plaintiff agreed to advance £1m as a loan to B, secured on Chatmohr House, Hampshire. The plaintiff ceased to be active in the residential mortgage market and, in July 1997, its large loan portfolio, which included Chatmohr House, was sold to LBS. One aspect of the agreement was an increase of £530,000 in the discount attributable to the loan on Chatmohr House. That discount resulted in a loss of £456,703.83 on the transaction. The plaintiff sought to recover that loss from the defendant on the ground that the defendant had negligently overvalued the property.
It was found that the plaintiff would not have entered into the loan transaction had it not been for the overvaluation. The issue was the extent of the defendant’s liability. The plaintiff submitted that its loss was to be calculated by comparing its position had it not entered into the transaction with its position as it stood under the transaction, namely the sale by the plaintiff of its loan portfolio, rather than repossession and sale of the security. The defendant submitted that the scope of the valuer’s duty extended to loss caused by the inadequacy of the security and did not extend to loss that was merely a reflection of the value that the lender or third party placed on the loan in the context of its disposal.
Held: The plaintiff’s claim failed.
The defendant was instructed to provide an estimate of the open market value of Chatmohr House, as a guide to how much, at current values, the plaintiff was likely to recover if it had to resort to its security. The plaintiff did not have to resort to its security, nor was the loss one that it suffered as the result of any shortfall between the open market value of the property and the amount outstanding on the loan account. The defendant’s duty of care only extended to a loss represented by a shortfall in the value of the security, that is, any difference between the amount outstanding under the loan and the open market value of the property. At the time when the plaintiff disposed of its interest in the loan and the security, there was no such shortfall. Accordingly, the loss suffered was not one for which the defendant was liable: South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 and Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] AC 1627 considered.
Nicholas Stewart QC and Neil Mendoza (instructed by Llewelyn Zietman) appeared for the plaintiff; Christopher Moger QC and Paul Rees (instructed by Berryman Lace Mawer) appeared for the defendant.
Sarah Addenbrooke, barrister
