Negligence – Valuation – Mortgage – Appellant surveyors providing valuation of development site in connection with grant of loan facility by respondent – Developer indebted to respondent under earlier loan facility – Developer failing to repay loan under new loan facility – Respondent claiming damages against appellant for alleged negligent valuation – Whether negligence causing loss – Whether “but for” test of causation to be applied – Appeal allowed
In February 2011, the appellant firm of surveyors provided the respondent 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 over £2.5m on the security of a first legal charge.
In November 2011, the developer sought to increase its loan and the appellant provided a fresh valuation of 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 appellant increased its valuation of the development in its then current condition to £3.5m. The respondent entered into a fresh loan agreement for the grant of a new loan facility in the increased amount. Part of that sum was used to redeem the original loan. The original charge was released and a new charge executed. When the term of the new facility expired, the outstanding amount was not repaid. The respondent appointed receivers to enforce its security.*
The respondent brought a claim against the appellant to recover its loss, contending that the November and December 2011 valuations had negligently overstated the value of the property. The appellant applied for summary judgment arguing that the respondent would have suffered some loss in any event because, but for the allegedly negligent valuation in respect of the second facility, no sums would have been advanced under the second facility. As a result, sums owed to the respondent under the first facility would have remained unpaid. A deputy High Court judge accepted that argument and held that the respondent’s loss was limited to the new money advanced under the second facility: see [2015] EWHC 773 (Ch); [2015] PLSCS 103. The Court of Appeal disagreed and allowed the respondent’s appeal: see [2016] EWCA Civ 661; [2016] PLSCS 195. The appellant appealed.
Held: The appeal was allowed.
(1) The basic measure of damages with which the court was concerned was that which was required to restore the claimant as nearly as possible to the position that he would have been in had he not sustained the wrong. In a case of negligent valuation where but for the negligence the lender would not have lent, that involved the “basic comparison” which was typically between the amount of money lent by the claimant, plus interest, and the value of the rights acquired under the loan agreement, plus the true value of the overvalued property. Assuming for the purposes of the appeal that the valuations for the second facility were negligent as alleged, if the appellant had not been negligent, the respondent would not have entered into the second facility, but they would still have entered into the first. On that hypothesis, the respondents would not have lost the new money lent under the second facility, but would still have lost the original loans made under the first. The loans made under the first facility would not have been discharged with the money advanced under the second facility, so that if the first valuation had been negligent, the irrecoverable loans made under that facility would in principle have been recoverable as damages. There being no allegation of negligence in relation to the first facility, that point did not arise. Accordingly, the respondent’s loss was limited to the new money advanced under the second facility: Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627 considered.
(2) The fact that the advance under the second facility was applied in discharge of the advances under the first did not oblige the court to ignore the fact that the respondent would have lost the advances under the first facility in any event. The “basic comparison” assumed that, but for the negligent valuation, the lender would still have had the money which it induced him to lend. In the present case, the respondent would not still have had it, because it had already lent it under the first facility. The premise on which this matter came before the court was that there was no potential liability in respect of the first facility because that was entered into on the basis of another valuation which was not negligent.
(3) It was irrelevant for the purposes of the “basic comparison” that the valuer might have contemplated that he might be liable for the full amount of the advances under the second facility. The foreseeability of loss was not relevant to the basic comparison. There were legal filters which might result in the valuer being liable for less than the difference. However, the valuer could not be liable for more than the difference which his negligence had made, simply because he contemplated that on hypothetical facts different from those which actually obtained, he might have been.
(4) The general rule was that where the claimant had received some benefit attributable to the events which caused his loss, it had to be taken into account in assessing damages, unless it was collateral. Collateral benefits were generally those whose receipt arose independently of the circumstances giving rise to the loss. The discharge of the existing indebtedness out of the advance made under the second facility was not a collateral benefit in that sense. The net effect of the refinancing part of the second facility was neutral rather than beneficial as it both increased the respondent’s exposure and reduced its loss under the first facility by the same amount. The terms of the second facility required the indebtedness under the first facility to be discharged so that the outcome was not collateral to the second facility.
Alexander Hickey QC and Robert Scrivener (instructed by Reed Smith LLP) appeared for appellant; Joanna Smith QC, Edwin Peel and Niranjan Venkatesan (instructed by Rosling King LLP) appeared for the respondent.
* This article was amended (on 13 February 2018) from an earlier version, which stated that “…the sale of the property realised only about £2.1m.” This was incorrect and the sentence has been updated accordingly.
Eileen O’Grady, barrister
Click here to read transcript: Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd
