Independent Monitoring Surveyors: counting the cost of not counting the costs

The High Court has recently considered the duties owed to lenders by independent monitoring surveyors, and their potential liabilities, in the case of Eiger Funding (PCC) Limited v Ridge and Partners LLP [2026] EWHC 609 (TCC). In this article we consider the implications for claims in this area.

The Facts

The borrower, Signature Living, was intending to convert and refurbish an existing building in Liverpool into apartments. Valuers had estimated the development’s value upon completion of the proposed development (its Gross Development Value, or GDV) at just over £20 million. In 2018 the borrower sought a substantial secured loan from the claimant, Eiger Funding, to complete the project and realise the GDV, having financed the initial stage of the works from 2016 through another lender, Lendy Finance. The construction was being undertaken by another company in the borrower group.

The claimant appointed the defendant as its independent monitoring surveyor (‘IMS’) and sought their advice as to the anticipated construction costs to completion of the development before proceeding with an advance. In fact, the defendant had earlier been retained by the borrower in 2015 to carry out a construction costs appraisal for the scheme from the outset, and had then been appointed as IMS for Lendy at that time.

Funds of some £12.9 million were sought from the claimant, £3.1 million of which was to complete the works, with the balance to be used to redeem Lendy’s first charge. The £3.1 million was informed by the defendant’s advice as to the costs of the construction works required to complete the development, based on their assessment of the total costs of the project, from inception, less the costs which had been certified to date. Notably, as part of that exercise the defendant had inexplicably assessed the total construction costs (as they had previously done at inception of the project in 2015) at 2015 prices, whereas construction costs in the intervening period had increased by some 20%.

The loan proceeded although works progressed very little before it became clear that much more money was needed to complete the scheme than the defendant had estimated, and that there were significant defects in the work which had been undertaken. Administrators were appointed and the claimant ultimately sustained a loss of some £10.8 million after recoveries.

The Claim

Eiger’s complaints of the defendant were fourfold:

1. Conflict of interest – having previously acted as quantity surveyor for the borrower, to then act as IMS for the claimant placed the defendant in a position of conflict.

3. The pricing issue – the defendant failed to advise that the contract sum agreed between the borrower and its connected construction company was inadequate such that there was a real risk that the contractor would be unable to complete the scheme at the price agreed, in which eventuality any replacement contractor would require significantly greater payment than the contracted price.
4. Costs to completion – the defendant had failed to provide its own estimate of costs to complete the development.
5. The relationship issue – the defendant had failed to advise on the risks which the relationship between the borrower and contractor posed, including the increased risk that the contract price and programme would not be adhered to, and concern over the application of proper quality control of the works undertaken. 

The Decision

The Court considered together the inter-related issues of contract pricing and costs to complete. Here the Judge was highly critical of the defendant’s report, finding there to have been no proper basis for the defendant’s assessment of either figure. In particular, the construction costs to completion merely replicated figures provided by the borrower without scrutiny (and without regard to the fact that the borrower’s own figures had not allowed anything for preliminaries, contingencies and fees). The expert evidence was to the effect that the defendant should have either tested the borrower’s figures against standard BCIS (Building Cost Information Service) benchmarking figures, which would have shown them to have been unrealistically low, or obtained much more detailed information from the borrower as to how they had costed the works themselves. Either approach would have identified a significant risk that successful completion would require substantial further costs being incurred in the event of contractor insolvency.

As to the relationship between the borrower and the contractor, it was common ground that such inter-company contracting is not unusual and that the arrangement was understood by all parties. However, the defendant did not advise that the fixed price JCT contract had been converted into a target cost contract and so potentially transferring the risk of cost overruns to the claimant. The defendant also failed to highlight that agreement between a connected borrower and contractor as to the revised project costs figure did not offer any support for the view that the figure was “robust”. The relationship was such that the defendant should have been more circumspect and advised the claimant of the risk of significant costs overrun.

As to the conflict of interest point, the Court referred to the RICS Guidance for IMSs (emphasising that the primary duty of the IMS is to the lender and that their independence cannot be compromised) and to its Conflicts Guidance which prevents acting in a situation of conflict without informed consent. In this case, what the defendant failed to divulge was that they had acted for the borrower back in 2015 in preparing initial costs appraisals based on which the fixed contract sum of £10.2 million had been agreed. The result was that, when later assessing for the claimant the reasonableness of the project costs, they were effectively assessing the reasonableness of figures they themselves had advanced years earlier and as such were, as the Court observed, “marking their own homework”. In particular, the defendant failed to advise that construction costs had risen by some 20% in the intervening period, making it all the more likely that there would be a significant costs overrun.

As to what loss resulted from the defendant’s breaches of duty, applying the principles derived from Manchester Building Society v Grant Thornton UK LLP [2022] A.C. 783 the Court found that the risk to the claimant which the defendant was to guard against was of them proceeding with a loan secured against the development where the uncertainty of the project costs made that venture particularly risky. Part of the claimant’s loss represented the fruition of that specific risk. As to proving loss, the Court accepted that a loss was incurred the moment the claimant entered into an inherently less valuable loan agreement than it had been led to believe. If assessing the claimant’s loss upon crystallisation, all the claimant had to do was to demonstrate that they incurred a loss from the transaction (in this case almost £11 million) and then identify within that an element of loss attributable to the defendant’s breach of duty, namely the loss resulting from undervaluing the costs to complete.

On measuring the loss, the Court found the defendant ought to have warned the claimant of the risk that the real costs to complete the development might well be much closer to the BCIS figures rather than the borrower’s. That would have been an unacceptable risk for the claimant. The Court therefore assessed the real costs to complete as at 2018 at £2.5 million above the figure advised by the defendant. That was the quantification of the risk that the claimant would have to look to a third party to complete the development – at open market prices – if the contractor were unable to do so. It represented the loss attributable to the negligence when viewed either as at the date the loan agreement was entered (on the basis that the loan agreement was a distressed asset at that time) or at the later point when matters unravelled and the claimant’s full loss crystallised.

Comment

The RICS guidance note ‘Lender’s independent monitoring surveyor’, 1^st edition, provides as follows:

“The IMS’s primary obligation relates to the independent technical due diligence of a project, assessing the initial risks and thereafter monitoring the progress of the project, assessing arising risk and approving debt drawdown from a technical perspective in accordance with the agreed lending terms. The IMS should seek to positively influence the project to ensure that the lender’s interest and exposure is properly considered, providing ongoing commentary, opinion and confirming sufficient funds for the project.”

Beyond highlighting the critical importance of monitoring surveyors operating truly independently on a project (and the attendant risks where they do not and where they have not obtained the lender’s informed consent), the case provides important guidance on the issue of the scope of duty and quantification in this area of professional practice. In a case such as this, realising the security’s true value is dependent on the loan advanced being sufficient to achieve completion, as to which the surveyor’s advice is critical. Where costs to complete are underestimated, from the moment the loan agreement is entered the lender is committed to an inherently riskier proposition, with unexpected additional costs having to be found somewhere before the property’s potential value can be realised. In those circumstances the Court’s conclusion that the lender incurs a loss on entering the transaction is unsurprising.

As with a typical valuation claim, the surveyor is not responsible for all of the risks the lender becomes exposed to in making the advance and for all the losses they may incur (in this case just short of £11 million), but they are responsible for loss attributable to an underestimate of the construction costs to complete (in this case £2.5 million). The clarification brought by this decision regarding the scope of duty and recoverable loss will be welcomed by those defending claims of this nature.