Proposed redevelopment of retail property — Valuation of property — Whether valuation negligent — High Court holding lender contributorily negligent — Lender failing to mitigate loss – Judgment for defendant valuers
In 1988 introducing brokers applied to the plaintiff bank on behalf of H for a loan to finance a proposed redevelopment of office and retail property which H owned in London NW5. The plaintiff instructed the defendants to value the property which they duly did at £410,000. In January 1989, in reliance on that valuation, the plaintiff advanced £340,000 to H. The advance was secured by a charge over the property and guaranteed by H’s prime mover and by its company secretary. Although H fell into substantial arrears almost immediately, the plaintiff did not increase its interest rate until October 1989 and did not make formal demand on H and the guarantors until December 1989. The property was eventually sold in February 1991 by private sale for £210,000 although it was resold for £280,000 and £315,000 on the same day.
The plaintiff accepted £15,000 in full and final settlement under the guarantees and issued proceedings against the defendants to recover its shortfall. The plaintiff claimed that: it had made the advance in reliance on the defendants’ negligently high valuation; if the valuation had been carried out carefully it would have refused the loan; and accordingly it was entitled to recover the whole shortfall. The defendants denied negligence and in the alternative alleged that the plaintiff was contributorily negligent and had failed to mitigate its loss.
Held Judgment for the defendants.
1. To establish that a valuation had been negligent a plaintiff had to show that the valuer expressed an opinion that the land was worth more than any careful and competent valuer would have advised: see Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 1 EGLR 129.
2. As valuation was more an art than a science, a valuer had to stand back and look at his residual valuation calculation and ask himself if it was about right. A valuer could be “15% out, or possibly a little more, either way, without being negligent”. All the sale and valuation evidence, both before and after, supported the defendants’ valuation and they were not negligent.
3. If the defendants had been negligent, there was no reason in principle why the provisions of the Law Reform (Contributory Negligence) Act 1945 should not apply to a lender who failed to investigate the borrower or take proper care to protect the loan: see Kendall Wilson Securities Ltd v Barraclough [1986] 1 NZLR 576.
4. In any lending transaction the primary concern of the lender must be with the borrower, the security was of secondary importance and guarantors came third.
5. The plaintiff had failed to mitigate its loss. If the account had been monitored properly action would have been taken much earlier. In a falling property market the plaintiff might have been expected to show some degree of anxiety as to the adequacy of its security. Even when the property was sold it was not a genuine arm’s length sale. If it had been necessary the court would have made a total reduction of £75,000 for failure to mitigate.
James Townend QC and Anthony Horspool (instructed by Stewarts) appeared for the plaintiff; Benjamin Browne and Bruce Gardiner (instructed by Browne Jacobson, of Nottingham) appeared for the defendants.
