Duty nexus question explored in valuer claims – Hope Capital v Alexander Reece Thompson

With few reported cases on claims against valuers in recent times, the High Court’s decision in Hope Capital v Alexander Reece Thompson [2023] EWHC 2389 (KB) at the end of last year is of particular interest for its application of the twin decisions of the Supreme Court in Manchester Building Society v Grant Thornton UK LLP and Khan v Meadow to the sphere of valuation and its assessment of the scope of a valuer’s duty by reference to the purpose for which their valuation was sought. It will be welcomed by valuers and their insurers for its analysis as to who bears the risk of losses when realising the security proves calamitous.

Background

The dispute arose from the defendant’s valuation of a long leasehold of Cedar House, a substantial, 15^th Century Grade II listed property owned by the National Trust and which it had leased to St Anselm Heritage Properties Limited (St Anselm) for a term of 99 years for use as a hotel and restaurant.

St Anselm had sought planning consent for a change of use of Cedar House from hotel to residential but required the National Trust to agree to a new head lease permitting residential use. To achieve its aims St Anselm sought from the claimant lender a 6-month bridging loan of almost £2.215 million. On the back of the defendant’s 180-day restricted sale valuation of the property of £4 million in February 2018, the claimant proceeded to advance funds for a period of 6 months. Default and repossession came swiftly in late 2018.

Receivers were appointed but disposal of the security w as fraught with difficulty. The National Trust had come to learn of numerous internal alterations to convert the property to residential use which were in breach of the existing lease and duly served a s.146 notice (pursuant to the Law of Property Act 1925) requiring those breaches to be remedied, which in gave rise to a risk of forfeiture of St Anselm’s lease and the loss of the claimant’s entire security.

The property was marketed from March 2019 and works were undertaken to address the breaches identified in the s.146 notice by the end of that year. Shortly thereafter efforts to dispose of the property  ran into the effects of the COVID pandemic. Interest dwindled and Cedar House sold for just £1.4 million in October 2020.

The Claim

The loan transaction, the claimant contended, resulted in it suffering an eye-watering loss of over £2.5 million, plus substantial interest. The capital loss was just £875,000 with the balance of the claim consisting of loss of contractual interest on the loan and lost profits which it was said would have been earned from the lost capital. All of this loss was said to be recoverable from the defendant for negligently valuing at £4 million a property which the claimant asserted had been worth just £2.15 million.

Only during closing submissions at trial did the defendant first concede that the property had been negligently overvalued and that its actual value at the valuation date was just £3.175 million. However, liability was denied entirely on the basis that loss was properly to be assessed as the difference between the true value of the property at the point of default (but ignoring factors which impeded resale and led to the subsequent decline in value which were outside the scope of the valuer’s duty) and the amount of the loan: if the security’s value exceeded the loan amount at that stage – as the claimant contended was the case here – then there was no recoverable loss, even though the lender might go on to suffer a very substantial loss on resale.

The finding of negligence

The trial judge determined that the property’s market value in February 2018 had been £2.75 million and that its 180-day restricted sale value was £2.475 million. Accepting that Cedar House had been a challenging property to value, a 15% bracket was applied. Applying such a margin to the property’s true value as the court had determined, the defendant’s valuation at £4 million was plainly excessive and the court accepted that no advance would have been made if the true value had been reported.

Assessment of loss

The court dismissed the largest element of the claim for contractual interest or loss of profits. Such claims are rare and the claimant advanced no credible evidence to persuade the court that the funds advanced to St Anselm could otherwise have been deployed profitability elsewhere (the requirement being for cogent evidence of limited funding, an unsatisfied demand and a clear history of profitable operation).

That left a potential claim for the capital loss of £875,000. However, the defendant argued that at least at the point of default in late 2018, the property’s value remained at £2.475 million (the court’s assessment of its value as at the valuation date) which was in excess of the loan amount. This meant that the property was adequate security for the loan at that particular point in time. That the claimant was unable to realise such value, however, was as a consequence of the s.146 notice running into the effects of the COVID pandemic and these matters were not within the scope of the valuer’s duty.

The claimant’s position was that this is one of those rare cases where the valuation was so fundamental to the lending decision that the valuer should nonetheless be liable for all of the foreseeable consequences of entering into the transaction.

The court considered the Supreme Court’s guidance for determining the scope of a professional’s duty in Manchester Building Society v Grant Thornton UK LLP [2021] 3 WLR 81 and its focus on the purpose of the duty, to be judged on an objective basis by reference to the reasons why the advice is required and in turn the risks the professional was engaged to guard against. Loss is recoverable to the extent it represents the fruition of such risks. In the context of valuation, the court considered Lord Leggatt’s analysis in the Manchester Building Society case:

“[86] …it is necessary to return to the purpose for which a lender commissions a valuation and the role which the valuation is reasonably expected to play in the lender’s business decision. The purpose of the valuation is to provide the lender with an opinion of which it is entitled to rely of the current market value of the property offered as security for the loan. Clearly, the value of the security is an important consideration for a mortgage lender. It is, however, by no means the only factor relevant to the decision whether to make the loan. The lender will also need to assess the credit risk in lending to the particular borrower – a matter for which the valuer has no responsibility. In addition, the valuer is normally asked to assess only what the property is currently worth and note to forecast what it will be worth at a future date when the lender may need to enforce the security. As Lord Hoffman said in SAAMCO… “a valuer provides an estimate of the value of the property at the date of the valuation. He does not undertake the role of a prophet”.

[87] …The risk that the value of the property will go down is a commercial risk which the lender takes. That does not mean that the lender’s willingness to take the risk is unqualified. The lender may only be willing to take the risk on the understanding that the property is worth what the valuer advises it is worth: that necessarily follows where the lender proves that, had the property not been overvalued, it would not have made the loan. But what can be inferred from the fact that the lender did in fact make the loan is that the lender was willing to bear the risk (without relying in this regard on the valuer) that the property would in future be sold for less than the valuation figure in so far as this would have been so even if the valuation had been accurate. To that extent, any loss suffered by the lender can fairly be said to be a consequence of risks inherent in the lending transaction, including the risk of a fall in property prices, and not of the only risk for which the valuer can fairly be held responsible, namely, the risk that the valuation was overstated.

[88] This is the underlying policy rationale for not shifting onto the valuer all the risks taken by the lender in making the loan and instead leaving the lender to bear the risk of loss which would have occurred even if the valuation had been correct. The aim is to allocate responsibility for any loss incurred by the lender in a way which fairly reflects the assumption of risk implicit in the service which the valuer agreed to provide. ”

It followed from this that, however important the valuation might have been to the decision to lend in this bridging finance context, its significance did not operate to widen the scope of the valuer’s duty (absent a clear understanding between the parties to such effect) and so did not render the valuer liable for all the consequences of entering into the transaction. The court found as a matter of fact that the valuation was still no more than an important component in the overall decision making of the claimant. The purpose of the duty, the court determined, was “to protect the Claimants in relation to the value of the security, and not all other foreseeable risks attendant upon entering into the transaction.”

The defendant’s argument on the scope of duty point relied heavily on the recent decision of the Privy Council in Charles B Lawrence & Associates v Intercommercial Bank Ltd [2021] UKPC 30. In that case, the claimant loaned $3 million on the back of a valuation of security – with assumed good title – of $15 million. In fact it would have been worth just $2.375 million with good title, but since it did not have good title it was worthless. Since it was not the purpose of the valuer’s instruction to advise on title issues, the court determined that loss resulting from the title defect were outside the scope of the valuer’s duty of care. It therefore ascertained that the loss which did fall within scope was the difference between the advance of $3 million and the hypothetical true value (assuming good title) of $2.375 million. It was argued that this decision was directly analogous to the present case: the impact of the s.146 notice and the COVID pandemic were, like the title issues in Charles B Lawrence, risks against which the valuer had assumed no duty to protect the claimant.

The court agreed by analogy with the Privy Council’s reasoning that the duty of the valuer did not extend to protecting the lender against the consequences of the borrower’s breaches of the lease or a dramatic collapse in the market. It found that, but for St Anselm’s unlawful works at Cedar House and the dreadful impact on its disposal, the property ought to have realised £2.475 million within 180 days of default, with the result that the entirety of the capital loaned of £2.215 million (along with interest and reasonable extraction costs) would have been recouped. It followed that the defendant was not responsible for any of the claimant’s loss.

Comment

The decision is helpful to valuers in various respects. It clarifies that even in respect of short-term bridging finance where the security’s value is expected to feature more prominently in the lending decision, the valuation’s importance is unlikely to expand the scope of valuer’s duty and the valuer will not assume liability for all the foreseeable consequences of entering into the transaction. It emphasises the evidential burden on claimants seeking to assert a loss of profits and it shows the court’s willingness to discount lender claims significantly for contributory negligence (in this case the court would have found that the claimant contributed to its own loss by 50%, even when weighed against what was a gross overvaluation).

In December the claimant was refused permission by the trial judge to appeal the scope of duty issue amongst others and it remains to be seen whether the Court of Appeal might be prepared to take a more expansive view of the purposes for which professional valuation advice is sought and applied in secured lending decisions and of the risks which it is intended to guard against.