The Supreme Court has overruled a decision by the Court of Appeal that lenders can recover all of their losses resulting from negligent valuations.
In the case of lender Tiuta International v De Villiers Surveyors, the court was asked to decide whether the lender could recover all of its losses on a refinance loan from a negligent valuer, or only the top-up advanced after the existing loan was redeemed.
The case concerns a £2.2m loan to a borrower, advanced in April 2011 for a term of 9 months, on the basis of a valuation of a potential property development carried out by the surveyors.
By December 2011, the borrower had incurred debts of £2.5m, and sought to extend the loan and borrow an extra £500,000 from Tiuta.
De Villiers carried out a second valuation and the lender extended a second loan that was structured as a re-financing arrangement. It advanced £2.5m to repay the amount outstanding under the original loan, plus further amounts to be drawn down from time to time.
When the term of the second facility expired, £2.84m remained outstanding, of which the sale of the property as security was expected to achieve only £2.1m.
The lender brought proceedings against the surveyor for its loss, alleging that the second valuation was carried out negligently.
Tiuta did not allege negligence in respect of the first valuation, under which all the advanced sums were repaid in full.
De Villiers’ application for summary judgment argued that Tiuta would have suffered some loss in any event because, but for the allegedly negligent undervaluation in respect of the second facility, no sums would have been advanced under the second facility.
As a result, sums owed to Tiuta under the First Facility would have remained unpaid.
The Court of Appeal had allowed Tiuta’s appeal against the Deputy High Court Judge’s ruling that Tiuta’s loss was limited to the new money advanced under the second facility.
But the Supreme Court ruled that, while the second advance was designed to pay off debts, Tiuta would have lost the sums that had been outstanding under the first facility in any event.
Alexandra Anderson, partner at law firm RPC, commented: "This decision makes clear that a valuer who overvalues a property can only be responsible for the difference that their negligence made to the Claimant's position.
"The fact that a lender may structure its loans one way or another, which may have an effect on the loss suffered, does not undermine this basic principle.
"In this case, had De Villiers not allegedly overvalued the property (which point has not yet be decided by the court), that would not have in any way changed the fact that Tiuta would still have a very substantial loan outstanding, which the borrower would not have repaid.
"This decision is therefore a victory not just for valuers but also for common sense."
Juliet Schalker, a partner in law firm Debenhams Ottaway’s commercial disputes team, said: “It is important to remember that this decision does not extinguish a lender’s ability to bring a claim against a negligent valuer where the valuation was provided for refinance purposes. It merely limits the quantum that lenders can claim to the “top up” advance.
“It may well be that, in order to recover the loss incurred on the first loan, lenders include a loss of chance claim arising out of the first loan when suing on the refinance loan. No doubt this judgment will prompt lenders and their lawyers to think of innovative ways to maximise recoveries to ensure that the loss incurred on the first loan does not fall down a black hole.”
simon.allin@ft.com
