Lenders and valuers that have been caught out by the downturn in property prices will be interested in the decision in Paratus AMC Ltd v Countrywide Surveyors Ltd [2011] EWHC 3307 (Ch); [2012] PLSCS 08. It provides useful guidance on the courts’ approach to claims against valuers in the context of a loan made by a sub-prime lender while property prices were booming. It is important to remember that each case will turn on its own particular facts. However, valuers will welcome the decision.
The court noted that comparable property prices were inconsistent and that the property market for flats in the locality had been volatile at the time. It concluded that this justified a greater margin of error than might otherwise be appropriate in the case of a modern residential flat. It fixed the acceptable margin of error in this case at 8% and dismissed the claim on the ground that the valuation was within this margin.
The judge also commented on the scope of the valuer’s duties while rejecting the lender’s valuation, based primarily on the application of a price per m², on the ground that size is only one of the factors that informs a valuation. The judge ruled that a valuer is not excused from doing what is necessary to provide a competent valuation merely by the low level of his remuneration. However, valuers will not normally have detailed information about the floor areas of comparable properties on their files and should not be expected to make enquiries of developers who have completed their developments and moved on, especially as values do not depend on floor areas.
The judge went on to consider whether the lender had been contributorily negligent. He accepted that the lender’s practice of making loans of up to 90% of the value of a property on a self-certified basis was at the high-risk end of the market, but thought that the courts should be slow to hold that entire classes of transaction are imprudent.
The judge referred, in particular, to the decision in Bruxelles Lambert AS v Eagle Star Insurance Co Ltd [1994] 2 EGLR 108, where the court declined to apply standards appropriate to orthodox lending on the grounds that it could not ignore the particular structure of the transactions in that case. In addition, the application of such standards would preclude any such transactions. Consequently, the judge rejected the suggestion that the lender’s business model was, of itself, so imprudent as to be negligent or incompetent.
However, the judge did accept that the lender should have verified matters of central importance before making the loan. In his judgment, the lender had failed to do so in two important respects. It did not make enquiries into the borrower’s liabilities and income, despite oddities on the application form completed by the borrower and discrepancies in the information received about the borrower’s financial position. Had it done so, it would have concluded that the borrower was dishonest and would not have made the loan. Consequently, if the valuation had been negligent, the judge would have held the lender responsible for 60% of the loss when the loan went bad.
Allyson Colby is a property law consultant
