Hotel – Valuation — Negligent misstatement — Defendant valuer making errors in method of valuation — Whether defendant reaching valuation within permissible bracket of error — Whether defendant liable in negligence — Claim dismissed
The claimant special purchase vehicles, which were set up by a Danish company (S) to buy four hotels in England, engaged the defendant valuer to value the hotels. Each property was leased to a hotel operator. In place of a rent review clause, the leases set out an arrangement by which a higher rent would become payable assessed by reference to turnover. In addition, it was provided that any shortfalls in turnover would be taken into account, which meant that the rent might not increase for some years. The defendant prepared valuations that referred to the shortfall provision, although its forecasts for when the rents would increase under the arrangement did not take account of the provision.
The claimants claimed that the defendant, in valuing the properties, had been negligent or had breached its contract in that the valuations had been too high.
Two methods were used to calculate damages. First, the claimants compared the defendant’s valuation (which for eight hotels, including the four concerned in the instant proceedings, totalled £39.47m) with the non-negligent net valuation of the hotels (totalling £34.35m). That gave rise to a shortfall of £5.12m, to which was added £2,397,805 in respect of wasted purchase costs, making a total claim of £7,517,805.
The second method compared the price paid for each hotel (totalling £41,039,800) with the non-negligent valuation/true valuation figure (£34.35m), resulting in total damages of £6,689,800. That method highlighted the actual price paid by the claimants for the hotels, consisting of the sum paid to the seller and an additional figure of 8% of the purchase price paid that was to a property location agent.
The claimants argued that: (i) the defendant owed, and was in breach of, a duty to take reasonable care not to misstate in its valuation reports any matter that it might have considered when undertaking the valuation exercise, including the operation of the shortfall provision; (ii) failures in the defendant’s method of valuation rendered it liable in negligence, regardless of whether its valuations came within a permissible bracket, and (iii) in any event, the defendant’s valuations were outside that bracket.
Held: The claim was dismissed.
The defendant owed a duty of care. It would be artificial to suggest that a valuer owed a duty in respect of the valuation but not in respect of any other statement in its report that might be both significant and erroneous. Moreover, the defendant had acted in breach of that duty in giving its forecasts as to when the hotels might generate surplus rent because it had ignored the effect of the shortfall provision.
However, although a negligent misstatement in respect of rental growth had been made in respect of three of the four hotels, that had no causative effect because S had been advised and knew that the shortfall provision would not produce any medium-term rental growth and no reliance had been placed on the defendant’s misstatements. S had been given correctly advised as to the effect of the shortfall provision and understood it. It could not therefore be argued that the defendant’s error was the cause of the loss claimed.
Although a valuer could be in breach of duty by falling below the standard of a reasonable valuer in his methodology, he would not be liable in negligence if it could be shown that, notwithstanding the error, the valuation figure produced was within a permissible bracket: Merivale Moore plc v Strutt & Parker [1999] 2 EGLR 171 followed; Goldstein v Levy Gee (a firm) [2003] EWHC 1574 (Ch); [2003] PNLR 35 applied.
In the instant case, the correct yield percentage for each hotel was 6.6%, which included an increase to reflect the unusual and tenant-friendly rental arrangement. The permissible bracket was considered by reference to the overall valuation rather than to the yield percentage. Taking the yield into account would give rise to a risk of artificiality because the claimants were most concerned about the valuation, not the yield. It did not reflect the process of valuation adopted by the defendant but was a figure produced by the valuation of each hotel, rather than an element of the valuation process.
Further, small adjustments to the yield gave rise to large differences in value and it could therefore be misleading to calculate the bracket by reference to the yield. There were a number of reasons for this: limited comparables, the immature investment market in hotels and the improving market at the material time, which created particular difficulties for valuers. Taking those factors into account, and although justified criticisms could be made of the way in which the defendant carried out the valuation exercise, its valuation figures were within a 10% margin of error. Accordingly, liability in tort had not been made out and the claim for negligent valuation failed: Singer & Friedlander Ltd v John D Wood & Co [1977] 2 EGLR 84; (1977) 243 EG 212 applied.
Anthony Speaight QC (instructed by Stockler Brunton) appeared for the claimants; Patrick Lawrence QC and Sian Mirchandani (instructed by Reynolds Porter Chamberlain LLP) appeared for the defendant.
Eileen O’Grady, barrister
