Negligence – Valuation – Mortgage – Respondent firm of surveyors providing valuation of development site in connection with grant of loan facility by appellant – Borrower already indebted to appellant under earlier loan facility – Borrower failing to repay loan under new loan facility — Appellant claiming damages against respondent for negligent valuation – Whether negligence causing loss – Whether “but for” test of causation to be applied – Appeal allowed
In February 2011, the respondent firm of surveyors provided the appellant lender with a valuation of a partly-built residential development in Sunningdale in connection with a proposed loan to the developer. The appellant valued the property at £3.25m, on the basis of which the respondent lent more than £2.5m on the security of a first legal charge over the property.
In November 2011, the developer sought to increase the amount of its loan facility to more than £3m. The respondent provided the appellant with a fresh valuation report for that purpose, valuing the property at £3.25m as it then stood and £4.9m on completion of the development; in a further valuation carried out in December 2011, the respondent increased its valuation of the development in its then current condition to £3.5m.
The appellant entered into a fresh loan agreement with the borrower for the grant of a new loan facility in the increased amount, with part of that sum used to redeem the original loan and the remainder advanced as additional funds. The original charge was released and a new charge was executed and registered in respect of the new loan facility.
When the term of the new facility expired, roughly £2.84m remained outstanding and was not repaid.
The appellant appointed receivers to enforce its security but the sale of the property was expected to realise only about £2.1m, which was insufficient to discharge the borrower’s indebtedness.*
The appellant brought a claim against the respondent to recover its loss, contending that the November and December 2011 valuations had negligently overstated the value of the property.
The respondent applied for summary judgment in its favour, contending that any negligence in the November and December valuations had caused no loss to the appellant. It argued that any loss was attributable to the existing indebtedness under the original loan facility, to which the appellant would have remained exposed even in the absence of the second loan and which had been advanced in reliance on the February 2011 valuation which was not negligent.
Granting summary judgment, the judge held that causation had not been established according to the “but for” test of causation: see [2015] EWHC 773 (Ch); [2015] PLSCS 103.
The appellant appealed. It contended that the new loan facility was a separate transaction, unrelated to the original loan facility, and therefore had to be viewed on its own.
Held (McCombe LJ dissenting): The appeal was allowed.
In the context of a case such as the present, the court was not entitled to disregard the structure of a routine refinancing transaction in favour of what it regarded as the substance of the case. In order to determine what loss, if any, was caused by the respondent’s over-valuation, it was necessary correctly to identify the nature of the transaction and the part that the respondent played in it. The starting point was that the appellant had been willing to enter into a new facility agreement with the developer under which part of the new loan would be used to repay the original loan. In a case of that kind, the basic comparison that was called for was between the amount of money lent by the appellant, which it would still have had in the absence of the transaction, and the value of the rights acquired under that transaction, which would normally comprise the borrower’s covenant and the true value of the property: Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] 1 WLR 1627 applied. In the instant case, the borrower’s covenant had no value, so that all the appellant acquired was the value of the property.
If a lender was considering making a fresh loan, part of which was to be used to repay an existing loan, then the purpose to which the new loan would be put was of no interest or relevance, either in fact or in law, to the person who was asked to value the property on which it was to be secured. The valuer was liable for the adverse consequences to the lender of entering into the transaction, so far as they were attributable to any negligent deficiency in the valuation.
The judge’s application of the “but for” test in the instant case failed to take into account the fact that the transaction was structured in such a way that the second loan was used to pay off the first. The loan made under the second transaction was the means by which the borrower was able to pay off the first loan; moreover, it was the fact that the second loan was used to repay the first in full that released the respondent from any potential liability in respect of the first valuation. The second loan therefore stood apart from the first, and the basic comparison for ascertaining the appellant’s loss was between the amount of that second loan and the value of the security.
The appellant had entered into the second transaction in reliance on the respondent’s valuation. Had the valuation not been negligent, the appellant would not have entered into the second transaction, and would have suffered no loss on that transaction as a result, since it would have been left with the first loan and the security for it, together with any claim that it might have had against the valuer. However, that was of no relevance to the respondent in its capacity as valuer for the purposes of the second loan. The valuations carried out by the respondent in November and December 2011 were for the purposes of supporting a transaction that was factually and legally separate from that which had been carried out earlier in the year. The two transactions were linked only in the sense that the second loan enabled the borrower to repay the first. The loss that the appellant sustained as a result of entering into the second transaction was the advance of the second loan, less the developer’s covenant and the true value of the security. If the value of the property was negligently overstated, the respondent would be liable to the extent that the appellant’s loss was caused by its over-valuation: Swynson Ltd v Lowick Rose LLP [2015] EWCA Civ 629 and Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] EWCA Civ 336, [2002] PNLR 35 distinguished.
Per curiam: In deciding the present issue on a summary judgment application, the court had proceeded on two assumptions, namely that the appellant had been negligent in over-valuing the property in December 2011 and that the effect of the second transaction was to discharge the original debt. However, an issue of the present kind was generally better determined at trial on the basis of findings of fact, rather than on a hypothetical basis. In the unlikely event that it was desirable for the issue to be determined in advance of trial, it would be better to direct the trial of a preliminary issue, which would enable both parties to call any relevant evidence and the court to make findings of fact that would provide a clear basis for its decision.
Joanna Smith QC (instructed by Rosling King LLP) appeared for the appellant; Alexander Hickey QC (instructed by Reed Smith LLP) appeared for respondent.
* This sentence was amended (on 6 February 2018) from an earlier version, which stated that the property “… realised only about £2.1m.” This was incorrect and the sentence has been updated accordingly.
Sally Dobson, barrister
Click here to read transcript: Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd
