Property development — Defendant’s valuer preparing valuation appraisal for developers — Plaintiff lender proposing to advance money on basis of valuation — Report presented at time of falling rents — Plaintiffs advancing money on security of site — Limited personal guarantees also supplied — Plaintiffs suing defendants after default by developers — Guidance on duty of care of valuers in “difficult market” — Judge refusing to uphold plaintiff’s claim — Judgment for the defendants
In 1988, S, and an architect, B, formed a company called RentCrest to acquire a property of 7,750 sq ft at 2-4 Hoxton Square and 33 Coronet Square, London N1, which was sold to the company for £1,250,000. They instructed a Mr Carter (“C”) who was employed by the defendants to carry out an appraisal of B1 office development on the site. C was not a chartered surveyor but had been employed in property business all his life. A financial services company, which was to provide a bridging loan, set out the terms of C’s instructions for an open market valuation for mortgage purposes of the property with the benefit of planning permission. The principal scheme envisaged that the existing buildings were to be demolished and that 33,000 sq ft, comprising B1 office development and 20% of B2 industrial space was to be constructed. On December 23 1988, the defendants through C sent a first report to the financial services company which, inter alia, gave a residual site value of £1,700,000 on the planning permission envisaged with building costs at £100 per sq ft and a rental value of the B1 development of £23.48 on a high level specification and an investment yield of 8%. C made clear that he had been supplied with six plans prepared by the architect, B. In March 1989, Hackney London Borough Council gave conditional planning consent after having taken into account some objections and stipulating a building of five floors and not the original six floors put forward by the planning application. On November 16 1989, C did a further valuation on the basis of the outline planning permission giving the estimated building costs at £79 per sq ft and a rental value of £25 per sq ft. The residual site value was increased by £500,000 on a 9% yield. On April 12 1990, C wrote to the financial services company again stating: “You are well aware that since our initial report there has been a considerable down turn in market demand for this kind of development … developers seeking sites for this kind of development are likely to adopt a more cautious approach … At the same time market demand has weakened.” It was thus reasonable to comment, the letter went on, that those looking for development sites were likely to be “bargain hunters”. Accordingly, the site was to be valued at £1,350,000 to £1,450,000. He arrived at these figures by taking his April valuation less a carrying cost of interest at 16% for one year (£1,450,000) or 18 months (£1,350,000). The plaintiff bank became involved in Hoxton Square after having been approached by a director of RentCrest and a company proposing to acquire a share in RentCrest for an advance of £780,000 against the security of a first legal charge on the site. It was to be part of a package to pay off the bridging loan and the plaintiff also insisted on personal guarantees. It was a condition precedent that the plaintiff received a satisfactory valuation prepared for their benefit indicating the minimum market value of not less than £1,250,000 as they were not prepared to lend anything against security of property if valuation was less than that figure. On June 21 1990 a letter was sent by the defendants to the plaintiff which reiterated C’s April view and stating that the valuation exceeded the bank’s minimum. The loan was made and RentCrest defaulted. The valuation of the property and the guarantees were insufficient to meet the plaintiff’s mortgage. The plaintiff sued the defendants on the basis of negligence in that the property’s value was below £1,350,000 to £1,450,000; that the plaintiff had advanced money on that representation; and had suffered loss. In order for the plaintiff to succeed it had to show: (1) that the defendants were under a duty to take care in making the representation; (2) they had been negligent in making their report; and (3) the plaintiff had relied on them to advance the mortgage.
Held Judgment for the defendants.
1. The question of reliance and causation were capable of easier resolution: RentCrest had been formed solely to acquire the property and the plaintiff had no mandate to proceed if the valuation had been less than £1,250,000. The court was quite satisfied that the plaintiff had relied on the defendants’ valuation of the site at £1,350,000 to £1,450,000. Their loan would never have been made but for the valuation.
2. To succeed the plaintiff also had to show that the defendants owed them a duty of care in making their representation and had not been negligent. The standard of care required by a surveyor in absence of express terms to the contrary was that of an ordinary skilled man. Nor was that standard lessened when valuations were carried out in difficult circumstances as where a market was showing signs of collapsing into depression.
3. However, in order to determine whether the standard had been complied with, the court had to pay regard to circumstances and knowledge current at time of the survey. The court had to be careful to guard against hindsight and determine the knowledge and skill available to a surveyor at the time of the survey. In Corisand Investments Ltd v Druce & Co (1978) 248 EG 315, the court listed matters of principal and fact to which a surveyor should pay heed. In Singer & Friedlander Ltd v John D Wood (1977) 243 EG 212, it was stated that “valuation of land by trained competent and careful professional men is a task which rarely if ever admits of precise conclusion … Two able men each confronted with the same tasks might come to different conclusions without any one being justified in saying that either of them has lacked competence … In exceptional circumstances the permissible margin … could be extended to about 15% either way. Any valuation falling outside … the bracket brings into question the competence of the valuer and the sort of care he gave to the task …”.
4. However in the instant case that approach was rejected because C had not given a single figure. To extend the bracket further would be to allow the defendants too much licence. However, the defendants were entitled to a variation of 15% on either side.
5. Both plaintiff and defendants had enlisted the services of two qualified surveyors as expert witnesses. The major criticism of the expert for the plaintiff was that C had failed to carry out a further valuation in June 1990 when expressly asked by the bank for the residual site value which ought to have incorporated current information available at the time. It was also apparent by then that there was a growing availability of office accommodation in the outskirts of the “fringe” where he placed Hoxton Square. Further, he stated that the building had some poorly lit areas and a lesser rent should have been allowed for in respect of those areas. If a proper valuation had been made, taking into account void periods, the residual site value would have been well below the plaintiff’s minimum (at less than £500,000). The defendant’s expert surveyor stated that C’s deduction of a carrying cost in order to set a current site value was a shrewd and acceptable alternative to a fresh valuation. His appraisal undertaken in view of the plaintiff’s claim also came up to a figure close to that of C. Thus even if defendants had been negligent in failing to carry out a further development appraisal, the methods adopted none the less came within the correct figure.
6. The court accepted the view of the defendant’s expert that a valuation should not distinguish between poorly-lit and well-lit office space and that the amount of natural light was a small factor in determining rent and that open-plan office space relied on artificial light.
7. A further difference in approach concerned whether the valuation should have been on the basis of existing planning permission. The plaintiff’s expert contended that there should be a figure limited by the planning permission and that if there would be a successful appeal, the value might by increased. That was correct. Although the site’s potential could be borne in mind, the question of an appeal introduced speculation and uncertainty, which was bound to effect the accuracy of the valuation.
8. The main difference however concerned the state of the property market in June 1990; the plaintiff’s expert stated that there was a sharp increase in vacancies and that rental levels had declined. The boom years had come to an end and that C should have accepted that the bottom had dropped out of the market. In fact, C adverted to that fact in April 1990 when he pointed to a “considerable downturn” and to “bargain hunters”. However, although C had given the right warning signals, the market’s rapid decline was not reflected in his figures. For the defendants, it was argued that by June 1990, the market had slowed down but had not dried up. That had happened overnight in August 1990 (with the invasion of Kuwait by Iraq).
9. The court preferred the view of the defendants. Although in June 1990, the country was going through a difficult period, on the information then available, nobody could have predicted the decline which was to follow in the second half of the year. The fact that the country was heading for a recession instead of a slowing down with its catastrophic effect on sites awaiting development could not have been foreseen.
Adrian Brunner (instructed by Lloyd Cooper) appeared for the plaintiff bank; Nigel Pitt (instructed by Williams Davies Meltzer) appeared for the defendants.