Download PDF

The Return of Lender Claims?

February 2023

Introduction

There was an influx of claims against valuation surveyors in the early 2010s largely as a result of the financial crisis. Increasing numbers of borrowers were unable to pay back loans and lenders were unable to recoup their losses by selling borrowers’ repossessed properties due to the sharp decline in the property market.

Lenders therefore sought to recover the shortfall claiming that valuation surveyors had over-valued borrower’s properties and had the ‘true market value’ been known at the time, the lender would never have advanced the loan in the first place. Conveyancing solicitors faced a similar rise in claims.

In the last two years, the property market has soared and in 2021 nearly a third of homes in England and Wales were sold for more than their asking price[1]. Fast forward to 2023, and there is growing uncertainty in the market as the cost of living continues to rise and it has been reported recently that house prices in the UK have continued to fall for the fifth month in a row. Lenders are therefore exercising far more caution when approving mortgages and the Bank of England has reported that lenders approved only c. 35,000 mortgages in December 2022 which is the lowest figure since January 2009, excluding pandemic lockdowns.

Further, as economic conditions have worsened, an increasing number of borrowers have defaulted on loans and the Ministry of Justice has reported that mortgage repossessions have increased by 134% between October and December 2022 in comparison to the same period in 2021.

As house prices continue to fall, it is expected that, similar to previous decade, lenders may not be able to recover all of their losses by way of repossession and surveyors will again by subject to an influx of claims in 2023/2024.

We set out below a summary of the key legal issues we consider will be at the forefront of the ‘new wave’ of surveyor claims.

1. Limitation

In claims brought by a lender against a surveyor, limitation does not necessarily begin to run from the date the loan agreement was entered into. As set out in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) [1997] 1 W.L.R. 1627 the date of loss is defined as the first date where the loan amount plus interest is deemed to be higher than the market value of the property.

Limitation issues are likely to be subject to expert evidence if it has been longer than six years since the loan was advanced. If primary limitation has expired, the lender may also have recourse by way of section 14A of the Limitation Act 1980 if it can show that it has been less than three years since it had enough knowledge to make it reasonable to investigate a potential claim.[2]

Any question of fraud or concealment under section 32 of the Limitation Act 1980 will also need to be considered.

2. Breach of Duty

It was decided in the case of South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (“SAAMCO”) that where a surveyor provided information to a lender which formed part of its’ decision on whether to advance the loan, losses would be capped at the difference between the surveyor’s valuation and the ‘true’ market value of the Property at the time plus interest.

The courts recognised the potential limitations of the test in the cases of Khan v Meadows [2021] UKSC 21 (“Khan v Meadows”) and Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (“MBS v GT”) and put forward a six-stage test which centres on first ascertaining the purpose of the advice/information provided and analysing whether the losses sustained flow from the risk that the advice/information was intended to guard against.

It was held that the SAAMCO test is still a useful cross-checking exercise to assess the scope of duty and in many cases will still lead to the same measure of losses. However, if a lender can demonstrate that the loan would not have been entered into at all but for the surveyor’s valuation, it may be able to recover all of its losses caused by entering into the loan. We are yet to see any judgments showing the application of the tests set out in Khan v Meadows and MBS v GT in the English courts.

3. Margin of Error

It is commonly debated in these claims what the permissible range/margin of error is for a surveyor’s valuation. In K/S Lincoln v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC), it was decided that:

1. the margin of error for a residential property where there is a large amount of comparable evidence would likely be +/- 5%.
2. any other property would likely have a margin of error of +/- 10%.
3. If a property is complex, has unusual features or there is no comparable evidence, the margin of error would likely be +/- 15%,

It was also decided that even if a surveyor was negligent in methodology used to reach a valuation figure, it was not negligent if that valuation still fell within a reasonable range.

In Capita Alternative Fund Service (Guernsey) Ltd and another v Drivers Jonas (A Firm) [2012] EWCA Civ 1417 it was held that where a property has multiple components, e.g., a residential flat and a retail unit, a different margin of error should be applied to each component. This case was in relation to the development of a factory outlet centre. One of the components the surveyor provided advice on was the rental value of the outlet centre in 7 years. The judge held that this component should have a permissible range of +/- 20%. In circumstances where a surveyor has provided a development appraisal valuation therefore, it may be possible to argue that +/- 15% is not the maximum cap.

4. Causation

A lender must demonstrate that it relied on the advice provided by the surveyor when advancing the loan and this was causative of the losses suffered.

In Bank of Ireland v Watts Group Plc [2017] EWHC 1667 (TCC), it was found that the lender failed to comply with its own lending policies before advancing the loan and if the lender had done so, the loan would never have been advanced. The case failed entirely on causation however Justice Coulson stated that he would have ordered a contributory negligence deduction of 75% on any losses if this had been necessary.

Other common factual causation issues include where there is evidence of a lender disregarding valuation advice provided on other occasions or failing to carry out due diligence which should have put the lender on notice that there was a risk the borrower would not be able to repay the loan.

5. Contributory Negligence

In order to argue contributory negligence, a valuer must show that a lender’s failure caused or contributed to the loss and there must be evidence of this. A lender is to be judged by the standards of the part of the market in which they operated.

Common contributory negligence arguments include whether the lender has adequately mitigated its losses when selling the property.

Comment

We expect that we will see a significant rise in claims against valuation surveyors and conveyancing solicitors in late 2023/2024 as lenders are unlikely to be able to recoup their losses after repossession. There are a number of legal issues set out above which we anticipate will take centre stage if any of these claims proceed to trial.

In order to reduce the scope for potential claims, we recommend that surveyors review new instructions carefully to ensure that they properly reflect the advice they have agreed to provide. Further, if possible, financial caps on liability or terms which exclude liability for certain types of losses should be negotiated.

Beale & Co have substantial experience defending claims against valuation surveyors. Should you require any further assistance or have any queries on the above, please contact Jo Lewis or Priya Thakrar.

Download PDF