Surveyors facing claims for negligent valuations from residential property lenders received clear guidance on the margin for error that courts are likely to find acceptable in two recent cases: Webb Resolutions v E.Surv and Blemain Finance v E.Surv.
The cases also highlighted where courts are likely to find lenders negligent in making loans to high risk borrowers and reduce the damages awarded against valuers accordingly.
The cases followed the valuation guidance set out in Lincoln and Others v CB Richard Ellis Limited (2010). For a standard residential property with no unusual or outstanding features the margin for error could be as low as 5{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53}. This rises to 10{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} for ‘one-off ‘properties with no easy comparison and to 15{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} for properties with unique features.
The Webb and Blemain cases also clarified that lenders are unlikely to be found guilty of contributory negligence simply because their lending model was imprudent, particularly if it was consistent with market practice at the time of the loan. They are however likely to be found negligent if they offer an unacceptably high loan to valuation (LTV) to borrowers in financial difficulty prior to the application. Here, the reduction in damages could amount to 50-60{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} of the award.
Webb Resolutions v E.Surv concerned valuations by E.Surv in relation to mortgage advances to two borrowers, Mr Ali and Mr Bradley. Mr Ali was buying a flat in a new development valued by E.Surv at £227,995. The court considered the correct value was more than 11{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} lower than E.Surv’s valuation. In Mr Bradley’s case, his 4 bedroom detached property which was valued by E.Surv at £295,000. Again, the correct found the correct value to be some 13{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} lower. The court decided that the acceptable margin of error in both cases was 5{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} and awarded damages against E.Surv. In the Ali case there was no contributory negligence by the lender despite the lending being potentially imprudent. In Bradley, however, the court ruled that damages should be reduced by 50{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} as the lender had been negligent in making an advance to Mr Bradley who was clearly in financial difficulties at the time, on a 95{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} LTV without proper proof of income.
In the Blemain case, E.Surv valued a 5 bedroom detached house on a private road at £3.4 million. The borrowers obtained a second mortgage on the property from Blemain, but the property was subsequently repossessed. The court concluded that the correct value was £2.8 million making the valuation negligent by 21{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53}. It ruled that an acceptable margin of error was 10{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53}, as although the house was distinctive there were a number of comparables available, and awarded damages against E.Surv.
“Yet again this underlines how important it is for surveyors to put in place effective procedures to ensure they can justify their valuations,” said James Burgoyne, Director, Brunel Professional Risks. “It is a well known that valuation is not an exact science – but with the courts only allowing a small margin for error of as little as 5{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53}, it means that surveyors need to have great confidence in the accuracy of their valuations, particularly in times of volatile property prices.
“On the plus side, there is some relief for surveyors and their insurers in the courts’ findings, as damages can be reduced if a lender has been reckless in making an advance to a poor risk borrower without making proper checks. Nevertheless, it is a disappointing result that the courts did not find practices at the time to be more fundamentally flawed, and considered this to be judging the situation with hindsight.”
Details of the Webb and Blemain cases have been reported by Law Now, here. An review of the cases by law firm Rosling King LLP was published in Mortgage Finance Gazette, here.
