The margin for error in property valuation negligence cases can only exceed 15{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} in the most exceptional circumstances the High Court has confirmed.
The decision is still good news for surveyors who can be confident that the courts will at least allow some leeway in valuations. But it also means that lenders can have greater certainty about the margin for error which will be allowed by the courts.
Barclays Bank claimed that TBS had overvalued a seaside care home in Lynmouth after the business failed and the owners did not pay back a loan secured on a lease on the property. The bank said the property was only worth £130,000, rather than TBS’s £350,000 valuation.
The property had been difficult to value for a number of reasons. It had a seaside location which may have increased its value, but it also had a number of outbuildings which could not be used for care home purposes. It also benefited from an unusually long lease from the local council to operate as a care home. TBS had used an EBITDA valuation method, to which it applied a multiple, in line with the RICS Red Book valuation guidance and also a nationwide database of care home property market information in reaching its valuation.
The Court decided that the EBITDA valuation was the correct method. It also took into account all the expert witnesses evidence and concluded that the property’s true valuation had been £330,000. Case law permits a margin for error of up to 15{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} for commercial property valuations where there are ‘exceptional features’, so TBS’s valuation was not negligent. The judge did however criticise the valuation surveyor’s report for lack of clarity.
The case may encourage the earlier settlement of valuation claims, believes Michael Fletcher of law firm Pinsent Masons. “It may also give claimants greater confidence commencing claims, because they can have greater certainty over the margin of error that will ultimately be applied by the courts,” he said.
TBS had also argued that the valuation could not have caused the loss as Barclays had restructured the loan a year after the valuation took place. However the Court found that restructuring alone is not enough to ‘break causation’.
“TBS were fortunate in persuading the court to apply a greater margin for error,” Michael Murray, Associate Director – Claims & Technical, Brunel Professional Risks said: “But this case reminds us all that whilst Courts have softened their line on causation defences and have shown willingness to apportion some contributory negligence to lenders in recent years, there remains a very high evidential bar to be met and these arguments are seldom accepted as a complete defence.”
Reports on the case have been published by Out-Law, Hailsham Chambers and CMS Law Now.
