Negligence — Mortgage valuation — Limitation Act 1980 — Whether loss accrued more than six years before writ — Whether period of limitation extended by section 14A of 1980 Act — Whether plaintiff had material that suggested negligent valuation more than three years before writ
On 30 April 1990 the defendant valuers provided a
report for the plaintiff mortgagee valuing a property at £250,000. The
plaintiff claimed that in reliance on that valuation it lent to the property
owners on 25 June 1990 the sum of £176,631.73,
secured on the property by way of a non-status loan. The plaintiff also
claimed that the true value of the property, at that time, was only £150,000.
From the inception and throughout the history of the mortgage, the owners
remained in substantial arrears on the instalments; they made the first payment
only on 4 October 1990. In March 1996 the plaintiff repossessed the property
and in August 1996 it was sold for £100,000. In the proceedings, commenced by
the plaintiff by writ on 15 October 1996, the defendants denied negligence.
They also alleged that the plaintiff’s claim was barred by the Limitation Act
1980 upon the ground that the plaintiff first suffered loss prior to 15 October
1990 as, prior to that date, the value of the owners’ covenant to pay
instalments was worthless, and the plaintiff was not entitled to rely on
section 14A of the Limitation Act 1980 as it had received valuation reports,
prior to the three years ending with the issue of the writ, that ought to have
caused it to question the defendants’ valuation. The trial of a preliminary
issue as to whether the claims in contract and tort were statute-barred was
ordered.
of the first default, at least until 4
to pay instalments was, in all probability, valueless, or if it had any value
at all it was certainly not shown to be sufficient to make up the shortfall
between the amount lent and the true value of the property. It followed that in
accordance with Nykredit Mortgage Bank plc v Edward Erdman Group Ltd
(No 2) [1998] 1 EGLR 99, the plaintiff’s loss first accrued more than six
years prior to the date of the writ. For the purposes of applying section 14A
of the Limitation Act 1980 to extend the period of limitation, and in
particular section 14A(10), the plaintiff was in receipt of estimated values of
the property prior to the three years before the issue of the writ. However,
the reports contained estimates by unqualified persons obtained for purposes
other than valuation, and they did not amount to material that ought of itself
to have caused the plaintiff to question the defendants’ original valuation.
Accordingly the plaintiff’s claim was not statute-barred.
This was the hearing of a preliminary issue in
proceedings by the plaintiff, Mortgage Corporation, in a claim for damages
against the defendants, Lambert & Co and Thomas Alan Stanbury.
Timothy Harry (instructed by Sprecher Grier
Halbertam) appeared for the plaintiff; Andrew Neish (instructed by Park Nelson)
represented the defendants.
Giving his judgment, MR DAVID OLIVER QC said: In this action the plaintiff,
Mortgage Corporation (TMC), sues the defendant surveyors for negligence, both
in contract and in tort, in respect of a valuation for mortgage purposes dated
30 April 1990 of premises known as ‘West Field’, North Parade, Parkgate,
Wirrell, Merseyside (the property). The valuation was carried out by the second
defendant, Mr Stanbury, on behalf of Lambert & Co, the firm in which he was
a partner. It is alleged in the statement of claim that in reliance upon that
valuation, at a figure of £250,000 for the property in its then current
condition, TMC advanced to a Mr and Mrs Dowd, then the owners of the property,
the sum of £176,631.73, on 25 June 1990, upon the security of a first legal
charge over the property. It is further alleged that at the material time the
property in its then current condition was worth only in the region of
£150,000. The mortgage was an endowment mortgage of a type marketed by TMC as
Equity Gold Level Headstart, the terms of which represented a form of
non-status lending.
The writ in the action was issued on 15 October
1996, over six years after the date of the advance. From the very commencement
of the mortgage term, Mr and Mrs
due under the mortgage upon the due dates, although they did make sporadic
payments of sums on account of arrears due, the first of which, in the sum of
£2,000, was made on 5 October 1990. Throughout the history of the mortgage, Mr
and Mrs Dowd remained in substantial arrears on the instalments due, against a
background of proceedings for possession, orders for possession and eviction
notices. But they continued to make sporadic although sometimes relatively
substantial payments in reduction of the arrears, the last payment being made
on 5 June 1995. The property was ultimately repossessed on 19 March 1996 and on
9 August 1996 was sold for £100,000. The total of the sums actually paid by Mr
and Mrs Dowd over the period June 1990 to June 1995 was £104,343.77.
The defendants deny negligence and, in any event,
claim that the plaintiff’s claim is barred by the Limitation Act 1980 upon the
ground that the plaintiff first suffered loss prior to 15 October 1990. In this
connection, they rely upon the decision of the House of Lords in Nykredit
Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR
1627*, to which I shall have to return. The plaintiff, in reply, acknowledges
that the primary limitation period in contract had expired before the issue of
the writ but denies that that in tort had done so, and further alleges that,
even if it had, it is open to it to avoid the normal consequence of this
through the invocation of section 14A of the Limitation Act 1980.
By summons dated 4 June 1997 and amended on
16
upon the issue of limitation. This was eventually directed by Deputy Master
Wall on 5
that the following preliminary issue be tried in
this action before the trial of the action, namely whether in respect of the
claims made by the Plaintiff against the Defendants on the face of the
Statement of Claim and Reply the claims made in contract and/or in tort are
time barred by operation of the Limitation Act 1980.
It is this preliminary issue with which I have to
deal. It divides conveniently into two parts — first, whether, quite apart from
the provisions of section 14A of the Act, the plaintiff’s claim in negligence
is statute-barred (the primary limitation issue), and, second, if it is,
whether the plaintiff is none the less saved by the application of section 14A
(the section 14A issue).
Primary limitation issue
In order properly to understand the parties’
respective contentions on this issue, it is convenient to refer first to the
decision in the Nykredit case itself. There the defendant valuers
negligently overvalued a property for mortgage purposes at £3.5m. The judge
found at the trial that the true value of the property at the time was £2m or,
at most, £2.375m. The plaintiffs advanced £2.45m to their borrower upon the
strength of the valuation, which they would not have done had they known the
true value of the property. The borrower defaulted at once, the plaintiffs took
possession, and the property was eventually sold for £345,000, the market
having fallen in the interim.
Having held on appeal that the damages recoverable
should be limited to the difference between the defendant’s valuation and the
true value of the property at the date of the valuation, the House of Lords
then had to consider the date from which an award of interest pursuant to
section 35A(1) of the Supreme Court Act 1981 should run and, for that purpose,
to determine when the plaintiffs’ cause of action arose. This inevitably, in
the context of a tortious claim for damages for negligence, translated itself
into a question of when the plaintiff first suffered loss.
In Nykredit only two members of the House,
Lords Nicholls and Hoffmann, delivered reasoned speeches. The remainder of
their lordships agreed with both. Lord Nicholls, in analysing the position,
said at p1631B:
More difficult is the case where, as a result of
negligent advice, property is acquired as security. In one sense the lender
undoubtedly suffers detriment when the loan transaction is completed. He parts
with his money, which he would not have done had he been properly advised. In
another sense he may suffer no loss at that stage because often there will be no
certainty he will actually lose any of his money: the borrower may not default.
Financial loss is possible, but not certain. Indeed, it may not even be likely.
Further, in some cases, and depending on the facts, even if the borrower does
default the overvalued security may still be sufficient.
When, then, does the lender first sustain
measurable, relevant loss? The first step in answering this question is to
identify the relevant measure of loss. It is axiomatic that in assessing loss
caused by the defendant’s negligence the basic measure is the comparison
between (a) what the plaintiff’s position would have been if the defendant had
fulfilled his duty of care and (b) the plaintiff’s actual position. Frequently,
but not always, the plaintiff would not have entered into the relevant
transaction had the defendant fulfilled his duty of care and advised the
plaintiff, for instance, of the true value of the property. When this is so, a
professional negligence claim calls for a comparison between the plaintiff’s
position had he not entered into the transaction in question and his position
under the transaction. That is the basic comparison. Thus, typically in the
case of a negligent valuation of an intended loan security, the basic
comparison called for is between (a) the amount of money lent by the plaintiff,
which he would still have had in the absence of the loan transaction, plus
interest at a proper rate, and (b) the value of the rights acquired, namely the
borrower’s covenant and the true value of the overvalued property.
At p1632B Lord Nicholls continued:
The basic comparison gives rise to issues of fact.
The moment at which the comparison first reveals a loss will depend on the
facts of each case. Such difficulties as there may be are evidential and
practical difficulties, not difficulties in principle.
Ascribing a value to the borrower’s covenant
should not be unduly troublesome. A comparable exercise regarding lessees’
covenants is a routine matter when valuing property. Sometimes the comparison
will reveal a loss from the inception of the loan transaction. The borrower may
be a company with no other assets, its sole business may comprise redeveloping
and reselling the property, and for repayment the lender may be looking solely
to his security. In such a case, if the property is worth less than the amount
of the loan, relevant and measurable loss will be sustained at once. In other
cases the borrower’s covenant may have value, and until there is default the
lender may presently sustain no loss even though the security is worth less
than the amount of the loan. Conversely, in some cases there may be no loss
even when the borrower defaults. A borrower may default after a while but when
he does so, despite the overvaluation, the security may still be adequate.
It should be acknowledged at once that, to
greater or lesser extent, quantification of the lender’s loss is bound to be
less certain, and therefore less satisfactory, if the quantification exercise is
carried out before, rather than after, the security is ultimately sold. This
consideration weighed heavily with the High Court of Australia in Wardley
Australia Ltd v State of Western Australia (1992) 175 CLR 514. But
the difficulties of assessment at the earlier stage do not seem to me to lead
to the conclusion that at the earlier stage the lender has suffered no
measurable loss and has no cause of action, and that it is only when the
assessment becomes more straightforward or final that loss first arises and
with it the cause of action.
Then again at p1633G he continues:
I recognise that in practice the basic comparison
may well not reveal a loss so long as the borrower’s covenant is performing
satisfactorily. For this reason there is little risk of a lender finding his
action statute-barred before he needs to resort to the deficient security. But
it would be unwise to elevate this practical consideration into a rigid
proposition of law.
Then dealing with the facts of that particular
case at p1635A he concluded:
In the present case the borrower’s covenant was
worthless. The borrower defaulted at once, and the amount lent (£2.45m) at all
times exceeded the true value of the property (£2.1m). Thus the cause of action
arose at the time of the transaction (12 March 1990) or thereabouts. By
December 1990 the bank had sustained its full allowable loss of £1.4m.
Lord Hoffmann, agreeing with Lord Nicholls, said
at p1638H:
Proof of loss attributable to a breach of the
relevant duty of care is an essential element in a cause of action for the tort
of negligence. Given that there has been negligence, the cause of action will
therefore arise when the plaintiff has suffered loss in respect of which the
duty was owed. It follows that in the present case such loss will be suffered
when the lender can show that he is worse off than he would have been if the
security had been worth the sum advised by the valuer. The comparison is
between the lender’s actual position and what it would have been if the
valuation had been correct.
There may be cases in which it is possible to
demonstrate that such loss is suffered immediately upon the loan being made.
The lender may be able to show that the rights which he has acquired as lender
are worth less in the open market than they would have been if the security had
not been overvalued. But I think that this would be difficult to prove in a
case in which the lender’s personal covenant still appears good and interest
payments are being duly made. On the other hand, loss will easily be demonstrable
if the borrower has defaulted, so that the lender’s recovery has become
dependent upon the realisation of his security and that security is inadequate.
On the other hand, I do not accept Mr Berry’s submission that no loss can be
shown until the security has actually been realised. Relevant loss is suffered
when the lender is financially worse off by reason of a breach of the duty of
care than he would otherwise have been.
Applying these principles to the present case, the
essential question is whether TMC had suffered loss by 15 October 1990 in
circumstances where the property was undoubtedly worth less than the advance,
whether one takes the plaintiff’s pleaded value of £150,000 or the value
suggested by their expert of £165,000. This resolves itself into a question of
whether any and, if so, what value is to be ascribed to Mr and Mrs Dowd’s
covenant under the mortgage to pay the sums falling due on the due dates. Mr
Andrew Neish, for the defendants, contends that no value is to be ascribed to
that covenant at least after the first default, which was well prior to
15
a positive value until their last payment off the arrears in June 1995.
These respective contentions were reinforced by
expert evidence adduced on each side, from Mr Bridge for TMC and Mr Warren for
the defendants, both of whom have extensive experience in the field of secured
lending. Mr Bridge gave evidence that, in his opinion, the Dowds’ covenant had
a value throughout the period when they were still making payments off the
arrears and that that value was the total of the payments so made. Mr Warren
stuck tenaciously to the view that the covenant was worthless from the outset,
being a covenant to pay certain sums on certain dates which was never, in fact,
adhered to and that payments off the arrears were irrelevant.
In my judgment, both these positions are in their
different ways too extreme. What the court is faced with doing, in carrying out
Lord Nicholls’ basic comparison, is of necessity carrying out that comparison
at a particular date or over a specific period, namely, in this case, the
period between the date of inception of the mortgage and 15 October 1990. Over
that period, after the date of the first payment due, the Dowds were
consistently in arrears, and until a payment was actually received on
5
might never pay anything. Thus, on 4
forgiven, absent further evidence leading to a contrary conclusion, for
believing that their covenant was valueless. On the other hand, I would accept
Mr Bridge’s proposition that when a payment is made on 5 October some value is
restored to the covenant.
This does not, however, to my mind, result in the
covenant always having, or always having had, that value. Hindsight is, in my
judgment, of only limited assistance in deciding what, if any, value the
borrower’s covenant may have. A simple example will illustrate this. Suppose a
borrower, like the Dowds, who goes into immediate default on his covenant,
continues in that mode for a substantial period without any serious prospect of
remedying the position; over that period it would be right, in my judgment, to
say that the covenant was valueless. If, however, the borrower subsequently
receives an unexpected and valuable inheritance and uses this to bring himself
up to date with his payments, and continues the payments thereafter, value is,
on the face of it, restored to the covenant; but this is not because the
covenant has never been valueless; it is because a change of circumstance has
rendered that which was previously valueless more valuable.
If this approach is applied to the facts of the
present case, TMC, in order to escape the consequences of the Limitation Act,
would have to demonstrate on the balance of probabilities that there was
sufficient value in the Dowds’ covenant throughout the period from inception of
the mortgage to 15 October 1990, were it not, at that stage, to have suffered
any loss from the valuation. In my judgment, it has not done so. From the date
of the first default at least until 4 October 1990 the covenant was, in all
probability, valueless or, if it had any value at all, it has certainly not
been shown to be sufficient to make up the shortfall between the amount lent by
TMC and the true value of the property, whether that is taken at £150,000 or at
£165,000.
Accordingly, in my judgment, unless TMC can avail
itself of the provisions of section 14A of the Limitation Act 1980, its claim
is statute-barred since its loss first accrued more than six years prior to the
date of issue of the writ.
Section 14A issue
Section 14A of the Limitation Act 1980 was
inserted into that Act by virtue of the provisions to section 1 of the Latent
Damage Act 1986. The section provides as follows:
(1) This section applies to any action for
damages for negligence, other than one to which section 11 of this Act applies,
where the starting date for reckoning the period of limitation under subsection
(4)(b) below falls after the date on which the cause of action accrued.
I pass over subsection (2). Subsection (3):
(3) An action to which this section applies shall
not be brought after the expiration of the period applicable in accordance with
subsection (4) below.
(4) That period is either —
(a) six years from the date on which the cause of
action accrued; or
(b) three years from the starting date as defined
by subsection (5) below, if that period expires later than the period mentioned
in paragraph 1 (a) above.
(5) For the purposes of this section, the
starting date for reckoning the period of limitation under subsection (4)(b)
above is the earliest date on which the plaintiff or any person in whom the
cause of action was vested before him first had both the knowledge required for
bringing an action for damages in respect of the relevant damage and a right to
bring such an action.
(6) In subsection (5) above ‘the knowledge
required for bringing an action for damages in respect of the relevant damage’
means knowledge both —
(a) of the material facts about the damage in
respect of which damages are claimed; and
(b) of the other facts relevant to the current
action mentioned in subsection (8) below.
(7) For the purposes of subsection (6)(a) above,
the material facts about the damage are such facts about the damage as would
lead a reasonable person who had suffered such damage to consider it
sufficiently serious to justify his instituting proceedings for damages against
a defendant who did not dispute liability and was able to satisfy a judgment.
(8) The other facts referred to in subsection
(6)(b) above are —
(a) that the damage was attributable in whole or
in part to the act or omission which is alleged to constitute negligence; and
(b) the identity of the defendant; and
(c) if it is alleged that the act or omission was
that of a person other than the defendant, the identity of that person and the
additional facts supporting the bringing of an action against the defendant.
(9) Knowledge that any acts or omissions did or
did not, as a matter of law, involve negligence is irrelevant for the purposes
of subsection (5) above.
(10) For the purposes of this section a person’s
knowledge includes knowledge which he might reasonably have been expected to
acquire
(a) from facts observable or ascertainable by
him; or
(b) from facts ascertainable by him with the help
of appropriate expert advice which it is reasonable for him to seek; but a
person shall not be taken by virtue of this subsection to have knowledge of a
fact ascertainable only with the help of expert advice so long as he has taken
all reasonable steps to obtain (and, where appropriate, to act on) that advice.
In the present case, the central issue between the
parties concerning the availability to TMC of section 14A arises under section
14A(10) and turns on whether there was any material that ought to have led TMC
to obtain a retrospective valuation of the property at any time prior to three
years before the issue of the writ. It is to be noted that the burden of proof
in this regard is on the defendants: see Nash v Eli Lilly & Co
[1993] 1 WLR 782, at p796 per Purchas W, and Finance for Mortgages
v Farley, a decision of Maurice Kay J dated 14 February 1996 which is
unreported*.
* Editor’s note: Reported at [1996] EGCS 35
The defendants say that TMC was in receipt of
estimated values of the property as a result of visits carried out on its
behalf by Debt Services Ltd and Management & Collection Services Ltd in
January, June and November 1992 and in June 1993. On each occasion the
respective visitor was expressly asked to provide TMC with the estimated value
of the property. Although on the first occasion a value of £275,000 was
attributed to the property, the estimated values in June 1992, November 1992
and June 1993 were respectively £180,000, £150,000 to £175,000 and £150,000.
The defendants say that each of those valuations was at a level that, to use
the formulation used by Maurice Kay J in the Farley case, ought to have
caused the plaintiffs to question the original valuation by the defendants.
The consequence ought to have been, on the
defendants’ case, that shortly after June 1992 and, on any view, no later than
mid-September 1992, TMC ought to have commissioned a retrospective valuation as
at April 1990. The defendants contend that such a retrospective valuation
would, on the plaintiff’s case on valuation, have put it in the same position
of knowledge prior to three years before the issue of the writ that it was put
in when, after obtaining physical possession of the property in March 1996, it
did, in fact, obtain retrospective valuations.
TMC’s position in this regard is that there is no
basis upon which it can be criticised for not obtaining a retrospective
valuation at any time prior to six weeks after regaining possession in March
1996, and that it cannot be fixed with knowledge under subsection (10) of
section 14A prior to that date.
In the course of his evidence, Mr Blackburn, the
former manager of TMC’s collections and litigation department, stated that each
of these reports was produced by debt collection agents at the request of his
department in the context of possession proceedings taken by TMC against the Dowds,
and the information provided in them would be logged into TMC’s computer
system. He also confirmed that his department had no role in the instruction of
valuers. Mr
reports in question were not valuations at all but merely estimates inserted in
reports by debt collection agents; second, that given the state of the property
market in 1992 there was nothing sufficient to cause TMC to think that it might
have a negligence action against the defendants; and, third, there was nothing
sufficient to cause TMC, at the relevant date, to consider that it had suffered
loss in circumstances where knowledge, for these purposes, must include not
only knowledge by the plaintiff that the valuation was overstated, but also
knowledge that the combined value of the security and the borrower’s covenant
was less than the amount advanced, and where Mr and Mrs Dowd were still making
irregular payments off the arrears under the mortgage.
While the issue has caused me some hesitation, in
my judgment, the reports in question, which contained estimates by unqualified
persons, or at least by persons not known to be qualified and whom TMC could
not expect to be qualified as valuers, and which were obtained for purposes other
than valuation, do not amount to material that ought of itself to have caused
TMC to question the defendants’ original valuation, particularly given the
state of the property market at the relevant time. Accordingly, on this issue I
hold in favour of TMC. I will hear counsel upon the form of the order that I
should make.
