Building materials used a security for a loan must be properly checked and certified by Project Monitoring Surveyors (PMS). If not, they face the risk of being liable to the lender if the security subsequently proves ineffective.

Surveyors, Faithful & Gould (F&G), were appointed as PMS by the Bank of Ireland on a development to build a residential tower in Manchester. The Bank of Ireland provided the majority of funding for the development, which failed when the developer and contractor both went into administration.The Bank of Ireland sued F&G, claiming it had failed in its duties as the bank’s surveyor on the £25.6m 24-storey Sarah Tower development. The bank argued the surveyor had failed to tell it that there was no formal contract between the developer and contractor. It also claimed F&G should have advised it that the developer did not have sufficient expertise and failed to quantify the developer’s expenditure, particularly in regard to the off-site materials.

The Judge rejected the banks first two claims, but found that F&G had failed to properly verify the off-site materials which were used as part of the security for the loan. The judge, Mr Justice Edwards-Stuart, said it was “surprising that a project monitor in F&G’s position should have recommended their client to advance such a large sum of money against such unsatisfactory verification.”

The bank had advanced the money on the basis of ‘vesting certificates’ which confirm ownership of materials in a development and confirm that the property will transfer from one party to another on payment. The Court heard that the off-site materials in question were held in four different locations, were not properly itemised and were not clearly marked for the Sarah Tower development. The Judge said that “From the point of view of protecting the Bank’s interest as against the supplier of the materials [the vesting certificate] was almost worthless.

Project Monitoring Surveyors must make sure that vesting certificates are accurate and properly verified or find themselves liable if a loan goes wrong says James Burgoyne, Director – Claims & Technical, Brunel Professional Risks. “Project Monitoring Surveyors have a wide range of responsibilities to lenders, but making sure that the security offered for the loan is robust is one of the most important,” he said. “Whilst the Sarah Tower case did not examine the surveyor’s appointment, we would also expect the drafting of the surveyor’s contractual obligations to be a significant factor in future cases. Surveyors should be alert to onerous clauses or guarantees being included in their appointments and any collateral warranties, which would not be supported by professional indemnity insurance.

Details of the case, and a counter claim by F&G against valuation surveyor CBRE has been published by Building magazine and in a Practical Law blog. RICS has published a Guidance Note for PMSs which sets out the main areas in which a project monitor will provide advice.