Negligence — Valuation for ‘non-status’ mortgage — Whether valuations negligent — Whether loan to value ratio cushion negligent — Whether contributory negligence — Whether failure to mitigate loss — Determination of damages following South Australia case
On October 10 1990 the plaintiff mortgage
lender lent to H £1.05m secured on H’s home in Edgbaston, Birmingham, by way of
a ‘non-status’ loan. H, who had purchased the property two years before for
£375,000, defaulted, the plaintiffs obtained possession and sold the property
for £435,000. They claimed that they relied on the valuations of two
unconnected valuers, each in the sum of £1.5m, and based their loan on 70% of
these valuations. In proceedings for negligence against the defendant firms,
the defendants denied negligence, denied that their valuations were relied on
by the plaintiffs, and contended that the plaintiffs contributed to their loss,
partly because ‘non-status’ loans were inherently imprudent because the lender
is risking not making a profit, or failed to adequately mitigate the loss.
the sum of £585,723.22. (1) The contribution of contributory negligence of the
plaintiff was 20%. A ‘non-status’ loan is not necessarily inherently imprudent;
the lender owes no duty to anyone to make a profit, his profits are of no
relevance to the valuation. However the plaintiffs did contribute to their
loss; a 70% loan to value ratio (leaving a cushion of 30%) was not a prudent
amount in the case of a loan as big as £1m. The plaintiffs were contributorily
negligent in allowing the mortgage to go ahead, without requiring the
application made by H for the loan to be completed in accordance with their
form to give the date and amount of the original house purchase. (2) Valuation
is an art and not a science, but it is not astrology. The valuers were star
struck by what they saw and did not have their feet on the ground. The correct
valuation was £1m. (3) The plaintiff relied on the valuations. (4) On a
valuation of £1m the loan would not have been made. (5) There was a failure by
the plaintiffs to mitigate their loss in the sum of £40,000 in failing to
enforce certain covenants against H concerning damp proofing works. (6) The
ceiling of loss provided by South Australia Asset Management Corporation
v York Montague Ltd [1996] 27 EG 125 was the difference between the
correct value and the negligent valuation plus interest at the statutory rate
less 20% for contributory negligence. However the plaintiffs were entitled to
their actual loss, taking into account the original loan, the interest the
plaintiffs had to pay over the period H had the loan, the costs of the sale,
the payments made by H, the sale proceeds and the £40,000 deduction for failure
to mitigate; the actual loss was £611,000. This figure had to be adjusted to
reflect the contributory negligence and statutory interest.
The following cases are referred to in
this report.
Hypo-Mortgage Services Ltd v David Parry & Co
[1996] EGCS 39
South Australia Asset Management
Corporation v
York Montague Ltd [1996] 3 WLR 87; [1996] 3 All ER 365; [1996] 2 EGLR 93;
[1996] 27 EG 125, HL
This was a claim by the plaintiff,
Platform Home Loans Ltd, against the defendants, Oyston Shipways Ltd, Bernard
Thorpe (a firm), David Browning Allen and Steven John Kitchen (partners in Bernard
Thorpe) for damages for negligence.
Nicholas Patten QC and Andrew Walker
(instructed by Rosling King) appeared for the plaintiffs; Nigel Pitt
(instructed by William Davies Meltzer) represented the first defendants;
Michael Pooles (instructed by Dibb Lupton Broomhead) represented the second and
fourth defendants; the third defendant did not appear and was not represented.
Giving judgment, Jacob J said: The plaintiffs are
now called Platform Home Loans Ltd. In 1990 they were a mortgage lender and
were called Bear Stearns Home Loans Ltd. On October 10 1990 they lent by way of
mortgage a sum of £1.05m to a Mr Hussain. The mortgage was on Mr Hussain’s
home, 9 Carpenter Road, Edgbaston, Birmingham. In 1993 Mr Hussain defaulted and
the plaintiffs obtained possession. They arranged a sale of the property and
obtained £435,000. They are considerably out of pocket. The sum, including
arrears, claimed in the statement of claim is over £600,000. The action is
against two unconnected valuers, each of whom had valued 9 Carpenter Road in
August of 1990 at £1.5m. The loan was at 70% of that valuation. The plaintiffs
say they relied upon the valuations and that both valuers were negligent.
The first defendants are Oyston Shipways
Ltd. Their valuer was a Mr Christopher Moss [arics].
The second defendants are a former firm called Bernard Thorpe and two of its
partners are named as third and fourth defendants. Their valuer was a Mr John
Arthur [frics]. The defendants
each deny negligence. Reliance on the valuations is denied. Further, the
defendants each contend that the plaintiffs contributed to their loss and it is
alternatively said that the plaintiffs failed adequately to mitigate their
loss.
It is agreed that the questions I have to
decide at this stage are as follows: (1) were the defendants negligent; (2) if
so, what was the correct value of the property in August 1990; (3) given that
value, would a loan of 70% of that value have been made or not; (4)(a) were the
plaintiffs contributorily negligent in one or more respects; (b) if so, what
percentage deduction should be applied; (5)(a) did the plaintiffs fail to
mitigate their loss; (b) if so, what amount did they fail to realise from their
security as a result, if anything?
Although the question of negligence comes
first, it is more convenient to begin with how the loans came to be made and
the question of contributory negligence in relation to this.
Bear Stearns’ lending policy
In 1990 Bear Stearns operated along with
a number of other banks and some building societies a system of ‘non-status’
loans. The general idea was to lend essentially against the security of the
subject property and without making substantial investigations into the status
of the borrower. The theory was that provided one did not lend too high a proportion
of the value then the loan would be recoverable out of the proceeds of sale if
the borrower defaulted. Thus, given enough ‘cushion’, (ie low enough loan to
value ratio, ‘LTV’), the ability of the borrower to service the loan was much
less significant than was the case with a standard mortgage. If the borrower
paid then the lender would make his profit. If he did not then the vendor would
get his money back by repossession and sale. Some non-status loans had some
modest inquiries made of the borrower but these seldom required verification.
This was called self-certification. The policy was the same however. The real
security was meant to be the property itself protected by the cushion.
It is alleged that this type of loan is
inherently imprudent because the lender is risking not making a profit when he
does not investigate the status of the borrower. I do not agree. The lender
owes no duty to anyone to make a profit for itself. His profits are of no
relevance to the valuation which is intended to secure the capital which is
lent. If right the argument would apply even to a 10% LTV. I therefore reject a
general attack on this type of loan.
Bear Stearns called their non-status
loans ‘top status’. The maximum LTV was 70% compared with higher ratios for status
loans, ie those loans in relation to which substantial inquiries about the
borrower, in particular his ability to service the mortgage, were made. On
their standard published terms Bear Stearns indicated that the
that larger loans would be available ‘by negotiation’. On the standard terms
the maximum LTV for status loans fell from 92% for a loan of £150,000 to 72%
for a loan between £500,000 and £750,000. Bear Stearns increased the cushion
for these loans depending on the size of the loan. The reason for this is not
hard to see. The larger loans are on more substantial properties. These are,
compared with the run of the mill properties, rare birds. That inherently makes
them harder to value with a reliable degree of accuracy. Bear Stearns’ Mr
Tweedy, who at the time held the position of manager of product
development/financial analysis, recognised this when he told me why a second
valuation report was required for loans in excess of £250,000. Bear Stearns
would lend on the lower of two valuations.
It seems to me that if the need for two
valuers kicks in at loans of £250,000, which corresponds to property values of
about £360,000, something more by way of prudence is needed when one gets to a
loan of £1m involving property with a value of about £1.5m. Such properties are
rarer birds than properties at £360,000. Bear Stearns’ formal practice
indicated that loans above £750,000 were subject to negotiation. Mr Tweedy said
that this requirement related to minor matters such as an entitlement to use
Bear Stearns’ own solicitors. But here was an excellent opportunity to take
into account the extra risk involved, a risk that I think Bear Stearns’ own
general policies of lowering LTV even in the case of status loans recognised. I
think it was not prudent to take that opportunity.
The lending experts disagreed about the
need for more prudence at higher value loans. Both were experienced lenders. Mr
Denman for Bear Stearns, was of the opinion that 70% of the LTV was acceptable
whatever the size of the loan. His reasoning was that size did not matter: the
larger the size the bigger the cushion. But this assumes there really is a
cushion. That in turn depends upon the valuations being reliable. However, one
would know that they are inherently not so reliable on higher value properties
and it is rather taking a chance to work simply on the lower of two numbers,
both of which one knows cannot be particularly accurate. Mr Paul Reed, the
defendant’s leading expert, was of the view that more caution was needed on
loans above £500,000. An attempt was made to make his view look arbitrary and
of course in a sense it is, but that does not make the point he was making
invalid.
Nor do I think it was established on the
evidence that there was a responsible body of opinion in the lending industry
to the effect that loans of £1m could with prudence be lent on virtually no
questions asked and relying simply on two valuations at an LTV of 70%. Whether
further prudence should consist of lowering the maximum LTV or more inquiries
about the status of the borrower would be a commercial matter which I do not
have to consider.
Before passing from the general question
of the risks involved in a non-status loan I should also refer to what Sir John
Vinelott said in Hypo-Mortgage Services Ltd v David Parry & Co.
He considered obiter the question of contributory negligence in relation
to non-status loans. He said at pp41–42 in the unreported judgment dated
February 23 1996*:
*Editor’s note: Reported at [1996] EGCS
39
There are fields in which the evidence of
the conduct of others is material when considering whether a defendant was
guilty of a breach of duty of care. So, to take the obvious example, it would
be exceptional to find that a professional man was guilty of a breach of his
duty of care in his professional capacity if his conduct accorded with the
practice of the generality of those practising that profession. He cannot be
expected to be wiser than his fellows. The practice of the generality of those
engaged in the same profession is admissible and would normally be conclusive
of the question whether the defendant fell short of the standard of care he
should have observed. However, evidence of the way in which other businesses
are conducted is not a reliable guide to the question whether a business was
conducted prudently — that is whether those conducting the business took
reasonable care to protect themselves against the risk of injury or loss. There
may be good commercial reasons which lead those engaged in a business
enterprise to take risks, pressure of competition or a desire to break into a
new market. That is what happened in this case. During the period from 1985 to
1989 the market for residential properties seemed set for an almost indefinite
rise. Interest rates were high. A new type of lender, the centralised lender
with no high street presence and with ready access to finance, was attracted to
the field. To establish a position in the market the centralised lender was
willing to lend money on a non-status mortgage — that is to rely to an
excessive extent on the value of the security and, as regards the personal
covenant, to rely on self-certification. That was, in my judgment, a risky
course.
Of course the degree of risk depends upon
the size of the cushion. For the reason I have given I think a 70% cushion was
not a prudent amount in the case of loans as big as £1m.
I therefore propose to hold the
plaintiffs themselves contributed to the loss that they claim was caused by the
valuers. By how much it is difficult to say but a judge must come to a figure.
I propose to do so on an overall basis. I think Bear Stearns were negligent in
one further regard in making the advance. But the major cause of contributory
negligence is the lending of money on the basis of two valuations which Bear
Stearns’ own policies must have recognised had a considerable degree of
uncertainty about them.
Making of the loan to Mr Hussain
Mr Hussain had an existing mortgage with
the Halifax. At the time of the loan the outstanding sum was about £627,000.
There was also a charge on the property in favour of a loan by the Midland Bank
in the sum of £36,000. Since it was necessary to pay these off before the
plaintiffs could grant a remortgage it is clear that the remortgage would have
to involve a reasonable amount above the existing indebtedness of £663,000 in
all. Given the policy of lending up to 70% the valuation would have to equal
£947,000 just to break even exclusive of transaction costs. In practice it
would have to exceed that sum by quite a bit for the remortgage exercise to be
worthwhile. It is far from easy to say how much the valuation would have to be
before Mr Hussain would have felt it worthwhile going through the exercise. I
have no information whatever on his financial position at the time. All I know
is that on the application form he originally sought as much as £1.125m. It
seems unlikely, however, that he would remortgage unless he could raise a
reasonably large sum, say £100,000. This would have required a valuation of
£1.1m.
Mr Hussain applied for the loan through a
well known intermediary, LAS. The plaintiffs’ standard form was used. This
required only certain portions which were shaded to be completed by a top
status applicant. In fact Mr Hussain did complete two unshaded portions dealing
with financial details and mortgage history. The form appears to have been partly
filled out by Mr Hussain and partly by LAS. The loan applied for was £1.05m
against which is written 70%. This overwrites the originally sought amount of
£1.125m. Mr Hussain gave the estimated value of his house at £1.5m.
There were a number of things about the
completion of the form and the plaintiffs’ conduct in relation thereto which
were said to amount to contributory negligence. I can deal with all but one
briefly. It is said the plaintiffs were negligent in the way they dealt with
the income details section of the form. All that was required to be completed,
that is to say the shaded part, was a figure for total income. The remainder of
the income details was unshaded and related to status loans. What Mr Hussain
did was to put an X in the shaded part and provide a letter from some
accountants. This gave more information than was called for by the form. It
named three companies and a business in which Mr Hussain was interested and
stated that his overall income for 1990 would be of the order of £400,000 from
all sources. It is said that if company searches had been done on the named
companies they would not have supported the figure of £400,000. I am by no
means satisfied this is so, but in any event it is to my mind irrelevant.
Certified income was not relevant to a non-status loan. Provided the lender
gave himself enough cushion he was not imprudent in making the loan. The reason
that the question was asked on the form was given to me by Mr Tweedy. He said
it operated as a kind of control. If the answer given apparently revealed an
inability to service the loan then more questions would be asked. I mention
this because I think the same sort of point
The next point taken is that the
accountant’s letter is dated a couple of months earlier than the date of the
form and is addressed ‘To Whom it May Concern’. It is said that this ought to
have put the plaintiffs on inquiry. I do not see why. Nor does it show that if
any inquiries had been made any different result would have emerged. There is
nothing in this point.
In relation to the mortgage history the
amount of the existing mortgage is given as £550,000. It was in fact, as I have
said, £627,000, and that fact emerged during the course of processing the
application as it was bound to do because it was basic to the lending that a
first charge be taken. I cannot see any contributory negligence here in not
following this matter through.
The form also asked about second charges
which the applicant had. It was not a question for a top status applicant and
the question was not answered. It is said that the plaintiffs when they
learned, as they definitely would, about the Midland Bank loan, they ought to
have woken up. I do not see why. It was not expected this part of the form
would be answered. The sum was relatively trivial in relation to the whole
scheme of things. The loan would be paid off in any event. Further, it does not
seem to be a loan to Mr Hussain, who did not himself therefore have the second
charge. There is nothing in the Midland Bank point.
Nor do I think it matters that no
questions about the purpose of the loan were asked. The purpose would be
immaterial for the lender’s risk if it took a prudent cushion. Also, I think
that other complaints relating to failure to ascertain whether Mr Hussain had
given quite the correct address are immaterial too because Mr Hussain was
plainly living at the premises as the plaintiffs well knew at the time of the
loan. I should say that it was part of their policy only to lend to home owners
on their homes, it being thought that people would hang on to their home to the
bitter end if they could.
I think there is substance however in the
final point. The form required even a top status applicant who was remortgaging
to give the date and amount of the original house purchase. That was not
completed by Mr Hussain. Mr Tweedy in evidence, which I cannot really accept,
said the question was irrelevant. At another point in his evidence he said the
form was carefully devised. The question has obvious relevance. It may operate
as a cross-check on the valuations. Here answers would have revealed that Mr
Hussain had only purchased the house two years earlier for £375,000 (at the top
of the market in 1989) and yet he was estimating its current value at £1.5m. It
would surely have raised questions to be asked of the valuers. I think there
was contributory negligence in allowing the mortgage to go ahead without
requiring the plaintiffs’ own form to be completed in this regard.
Mr Nicholas Patten QC, for the
plaintiffs, was not disposed to fight this last point hard. His answer to it
was that on the evidence both the valuers concerned and another valuer, a Mr
Michael Cutler [frics], said that
the information would be irrelevant. I have real difficulty with this. Indeed
the plaintiffs’ own expert valuer, Mr Robert Powell [frics], thought that the answers to these questions would be
relevant to a valuation. I have to use my own sense here. Valuation is not so
arcane a subject that a judge cannot use a certain amount of his own ‘nouse’. I
think the recent price paid for a property may well be a guide to its value. Of
course things may have been done to the property and of course it may not have
been fully marketed when it was sold, although this is not particularly likely
in this case. But to say that the price recently paid is wholly irrelevant is
just silly. I think, notwithstanding their answers to me, in retrospect the
valuers, if told of the recent purchase price, would have reconsidered,
probably lowering their valuations or otherwise have qualified them.
Taking both findings of contributory
negligence together I assess the total contribution at 20%. There remains the
fact that the real determining factor for the level of the loan was the
valuations themselves.
Property and the valuations
9 Carpenter Road was undoubtedly an
exceptional house in 1990. It was a vast nine bedroomed affair complete with
coach house and large garden. Mr Hussain had spent a lot of money. His works
were not to everyone’s taste. Gilt ceilings, marble floors and a four-poster
bathroom were not what one normally expects in a Georgian house as 9 Carpenter
Road was. The house stood in an estate of other Georgian houses in Edgbaston. By
common consent it was one of the best of the houses. The house which by common
consent was the best was Lawnfield, 13 Church Road. Church Road was a noisier
road than Carpenter Road and had some students’ accommodation on the other side
of the road, although quite a way from no 13.
When they came to view the property in
1990 all the valuers and estate agents were immensely impressed by what they
saw. But being impressed is not the same thing as being able to value a
property. Indeed it made the task all the harder for none of the valuers had
experience of anything like it. I need not go into the details. Messrs Moss and
Arthur and Mr Cutler (who had valued the property for Credit Agricole) each
described going over the property and noting its size and state of decoration.
Their reports described it glowingly. But none of these valuers had anything to
go on by way of comparables. They came to their valuation by just coming to a
number. When challenged they said they relied upon their experience as
professional valuers. They thought there would be buyers at £1.5m, probably
from among the Asian community in Birmingham. But why I never understood.
Valuers have to go by their experience, but if they have no experience they are
really in no better position than anybody else and that was the real trouble
with these valuations.
Valuers cannot be expected to be ‘right’
when they are reaching values, and they have guidance from the RICS guidelines,
but necessarily these guidelines are general. An open market value requires
that a property be notionally properly marketed for a reasonable time. But I am
unable to accept that a valuer may legitimately come up with a value as a sound
number when he has no relevant experience to go on. None of the valuers had
enough. Nor did they try to find some clues.
An obvious clue to my mind is the price
paid and the cost of any subsequent works. I have already said that the price
paid was £375,000. No one knows what Mr Hussain paid for the extensive works
done, but the most expensive estimate is £0.5m. The price was fixed in about
May 1989 which was close to the top of the market. Mr Peter Veitch [frics], the defendants’ expert valuer,
suggested that if the property had been sold only a couple of months later it
would have fetched £600,000. I found that unlikely and I think Mr Veitch was
stretching things here somewhat. Yes, the property market was mad in 1989, but
it was not that mad. There had after all been no less than 12 competitive
tenders and it seems fanciful, even trying to forget what we all know now by
hindsight, that offers would have been so much higher so very quickly. Besides
by August 1990 the market had certainly come off the top.
So, one fix on the value would have been
to add the cost of the works to the price. It is said that there is no point in
asking the owner of the house as to what the cost of the works and the price
would be because he may not be telling the truth. That would not have mattered
provided the valuation report made it clear that some reliance was being placed
upon these inquiries. Then it would have been for the lender to decide whether
or not to follow up and verify those figures. Of course given those figures one
does not come to an exact answer or anything like it. Allowances for the cost
and the time of the works might have to be made and a general allowance for
comparison of the market conditions must be taken into account. But I do not
think that in any way one could have got to a £1.5m valuation by conducting
that exercise and making those allowances. By the time of the valuation reports
of Mr Moss on August 14 and Mr Arthur on August 8 1990 interest rates had been
at 15% base since the previous October. The market had slowed down. It was
simply wholly improbable that anyone would pay the suggested valuations and it
was, in my judgment, negligent just to conjure a figure out of the air.
Valuation is
star struck by what they saw and did not have their feet on the ground.
Another possible guide would have been
the prices paid for nearby houses. Unfortunately hardly any had come on to the
market recently but investigation would have shown that the highest price paid
for any Edgbaston house was £650,000, 65 Westfield Road, a house to which I
will refer later. If the valuers had learned that I hardly think they would
have come to so much higher a figure for 9 Carpenter Road, though it was
obviously a better house. A possible reason as to why the valuers did reach the
figure they did was that it was suggested to them in advance. This was so for
each of the valuers including Mr Cutler. Each of them knew that the value had
been estimated at £1.5m either by Mr Hussain or another valuer. That is also
true of a Mr Fowler who, while not a qualified valuer, was an employee of the
first defendant. He had been asked to see the property of Mr Hussain and wrote
him a letter on June 26 1990. He said:
In many ways the property is unique and
although the market is generally slow at the moment, we feel sure that property
of this calibre, which does not often become available on the open market,
would arouse considerable interest, both in people living locally in
Harborne/Edgbaston as well as outside the Midlands, many of whom will only move
if a certain property or particular type of property becomes available. Having
researched as much evidence as possible from transactions of other properties
in and around the general locality, we are of the opinion that the current open
market price of the Freehold interest in the above property would certainly be
somewhere in excess of £1,500,000.
The wording of this paragraph is
unfortunate. The fact is that Mr Fowler had not researched any evidence of
transactions of other properties in and around the general locality. He said
that was a standard form of wording. The truth is that Mr Fowler had never sold
any property for more than £0.5m. He was guessing as much as the other valuers.
Another possible reason for the
over-valuations was that the valuers concerned were not essentially based in
the Edgbaston area. It is true that their areas covered Edgbaston, but were
rather a long way away relatively speaking. They did not have the contact with
the market which Mr Powell, the plaintiffs’ expert and Mrs Biddy Ribchester, a
local agent, had.
It had been strongly urged on me that
four valuers cannot be wrong and that they represent a substantial body of
opinion among experts. I cannot accept this. If a valuer has no relevant
experience, as was the case with these gentlemen, it is negligent just to guess
which is effectively what they did. A valuer in those circumstances should
either refuse to value, seek out more information or expressly qualify his
figure. Mr Arthur did in fact try to find out some prices from nearby agents,
but found out nothing useful. In this case I have the contrary evidence from an
expert for the plaintiffs, Mr Powell, an experienced valuer and agent, and Mrs
Ribchester. I found the latter to be particularly impressive. Mr Powell in
retrospect would have valued the house at £700,000 and Mrs Ribchester would
also have made a retrospective valuation of about £850,000, a figure she put in
a letter of January 27 1994. She said:
I would confirm that during the period in
question the property 9 Carpenter Road would have easily been valued in the
region of £850,000. This opinion is based upon properties which annually sold
at that time in this location. I personally dealt with a number ranging from
£660,000 to one million, being properties of distinction within this address.
Mrs Ribchester was particularly
knowledgeable about this property. She had known it for about 20 years. The
previous owner, Mrs Fuller, before Mr Hussain had been a friend of her parents.
She said that the property was in a classically run down state when Mrs Fuller
died and Mr Hussain bought it. She then saw the property in October 1989 when
some but not all of the works had been done. She could plainly see the kind of
works that were being done. She saw the property as a result of a journalist
friend who tried to make a story about this house which was being done up in
Edgbaston. The journalist gave it a big write up in the Birmingham Post.
That article was not accurate. It suggested Mrs Ribchester was selling it and
doing so for £1.5m. She never suggested to the journalist that the value was
£1.5m. The journalist must have got that from Mr Hussain. At the time she
thought it might be rather embarrassing, but in the end it did not matter. The
price in the Birmingham Post was the subject of gossip among local
agents. Mr Powell did not believe it at the time and said the gossip described
it as a ‘chuckle price’. I think that was right. The property was not worth
anywhere near that much.
What then was the true valuation? I have
had a mass of evidence about sales of other properties after the event. These
have been sought to be used as comparables by retrospective analysis. The
valuers have taken widely different rates of market fall to support their
alternative views. The hard evidence, however, is that no property in Edgbaston
sold for more than £750,000 after the date of valuation and the highest price
ever paid before the valuation was £650,000 in the summer of 1989. It is said,
rightly, that this latter house, 65 Westfield, is not a close comparable with 9
Carpenter Road. It is not Georgian and not as big. But I cannot think that with
9 Carpenter Road going for about £375,000 about the same time, albeit that a
lot of money needed to be spent on it, it was so wildly different from 9 Carpenter
Road in terms of price. I do not believe it will serve a useful purpose for me
to go through all these retrospective valuations in detail. The houses are
generally lesser than 9 Carpenter Road. The nearest reasonable comparable is 12
Church Road. The other houses all went for somewhere between £400,000 and
£500,000. 12 Church Road is a somewhat smaller house than 9 Carpenter Road set
in much better grounds. 9 Carpenter Road is overlooked on one side by some
ordinary houses. Church Road is a busier road but the house is well set back
and it has this much in common with the best house of all, Lawnfield. It is a
bit nearer the students. It sold in December 1992 for £750,000 in good
condition, having been sold in less good condition in October 1990 for £520,000.
In each case the marketing was by Mr Powell’s firm.
Taking all these factors into
consideration I find that the maximum reasonable valuation for 9 Carpenter Road
in August 1990 was £1m. I do not pretend to be certain about this figure but I
do have some guide in comparables and I am particularly impressed by 12 Church
Road.
Reliance on the valuation
Mr Michael Pooles for the second and
fourth defendants suggested the plaintiffs have not proved reliance on the
valuations. This is because they did not call the man who actually handled the
mortgage application. He no longer worked for the plaintiffs. In the event I do
not think it matters that he was not called. I think it is wholly improbable
that the loan would have been made if the valuations had not come in. The
valuations were central to the whole of the plaintiff’s policy.
Would the loan have been made?
On a valuation of £1m Mr Hussain would
have got a loan of no more than £700,000 less transaction costs. On that basis
I do not think the loan would have been made.
Did the plaintiffs fail to mitigate their
loss?
Mr Hussain in due course defaulted,
though he did not do so at once, and the plaintiffs obtained possession. They
put the property in the hands of Mrs Ribchester who sold it in February 1994,
having obtained some competition between three possible buyers. It is said that
the sale was an under-value. I do not see that this is established. Mrs
Ribchester advertised the property in the Birmingham Post, as Mr Veitch,
the defendants’ expert, accepted was the proper way of advertising. It was
suggested that the plaintiffs ought to have spent more money on the property,
particularly dealing with some damp. Mrs Ribchester said that the property was
bursting with damp at the time and the plaintiffs ought to have waited. They
were under no duty to wait and it is not shown that if any money had been spent
on the property (though I am by no means convinced that there is any duty on a
mortgagee in possession to spend money on a property) that that spending would
have been recovered in a higher price. It is suggested
money judgment against him. It is not shown that if that had been done that any
money would have resulted.
There are two matters, however, in which
the plaintiffs did fail to look after themselves properly and failed to
mitigate. One is accepted in the sum of £5,000 and I need not go into it. The
other relates to the enforcement of certain covenants. The valuers had advised that
covenants be extracted from Mr Hussain to check for damp and rot and to have
any necessary works done. There were also covenants about landscaping the
gardens. These covenants were duly extracted. The plaintiffs did absolutely
nothing about seeing whether or not they were enforced. It seems to me manifest
that if damp proofing works and landscaping had been done that probably the
property would have been in better condition when it was sold in 1994. It is
very difficult to come to any figure. Given that there would have been the cost
of the works and the cost of any damage to the property because the works had
not been done, I have decided simply, almost out of the air, to fix a figure of
£35,000, giving a total failure to mitigate of £40,000.
I will hear counsel as to the effect of
what I have done.
Following further submissions, Jacob J said: Following judgment I
have a knotty problem on quantum. I have held there was contributory negligence
in two respects. One was in lending on a 70% LTV on a loan as large as one over
£1m and the other in relation to the particular way that this loan was handled
and in particular the failure to require the borrower to fill up the mortgage
application form.
The first point taken by the plaintiffs
is that these two forms of contributory negligence are different. They should
be treated differently, following the decision of the House of Lords in South
Australia Asset Management Corporation v York Montague Ltd [1996] 3
WLR 87*. The plaintiffs say that that case shows that the damage for which the
valuer is liable is the difference between the true valuation and his negligent
valuation because his duty is limited to getting the valuation right. It is
said that here the two forms of contributory negligence are different. One impinges
upon the operation of that duty in the manner I have held but the other, the
more general form, does not and that therefore it is not within the Act.
*Editor’s note: Also reported at [1996] 2
EGLR 93
The Act provides that where any person
suffers damage as a result partly through his own fault and partly the fault of
any other person or persons a claim in respect of that damage shall not be
defeated by reason of the fault of the person suffering the damage but the
damages — and I emphasise the plural — recovered in respect thereof shall be
reduced to such extent as the court thinks just and equitable having regard to
the claimant’s share in the responsibility for the damage.
I do not think that the sort of subtle
distinction suggested by the plaintiffs is catered for by this provision nor do
I think it makes any sense. The contributory negligence is 20% applied across
the board.
The next question is what then is the
measure of damage given that across the board deduction. The plaintiffs have
put before me a number of calculations. Forgetting for the moment contributory
negligence, one of these calculations shows that the measure of damage at the
date of valuation is £500,000. To this is added interest at the statutory rate
which gives a total of £818,000. Even if one applies an across the board
contributory negligence figure of 20% one comes to a figure of £650,000. That,
say the plaintiffs, accepting the principles of South Australia is the
maximum they could get including the question of contributory negligence at the
£650,000 figure. But, say the plaintiffs, if you look at actually what
happened, take into account the original loan, the interest the plaintiffs had
to pay over the period while Mr Hussain had the loan, the costs of the sale,
the payments made by Mr Hussain and the sale proceeds and takes into account
the £40,000 deduction for failing to mitigate, one comes to an actual loss of
£611,000. This is less than the previous calculation. Accordingly, say the
plaintiffs, that is the appropriate figure which, when one takes into account
contributory negligence at 20% and then adds statutory interest, gives a total
figure of £585,723.22 and that is the sum the plaintiffs claim.
The defendants say this is going about it
the wrong way. It is the effect of the South Australia case that the
total damages cannot be more than £500,000. From that one must deduct 20% for
contributory negligence, leaving £400,000. That damage was only suffered when
the sale of the property took place. That was when it was crystallised as they
put it, and accordingly the plaintiffs should have £400,000 plus statutory
interest from February 1994. So the defendants say the damages including
interest should be £478,728.77.
I think the plaintiffs are right in this
regard. BBL, the South Australia principle, requires one to look
at the scope of duty of the valuer and see what it is in effect he is
undertaking to do, which is in fact to get the right number. If he got the
wrong number he is liable for the difference. If you find that in fact the
plaintiffs have suffered less than that then the plaintiffs get the lesser
figure, not because the former figure is a cap in some sort of upper-limit
sense, but because that is the natural consequence of the duty. Here, applying South
Australia gives a larger figure than the actual damage suffered by the
plaintiffs and I see no reason why the plaintiffs should not have their actual
damage taking into account contributory negligence. That is what the
plaintiffs’ calculations do.
