Refinancing loans and valuations
16 September 2016
Liability for a negligent valuation relied upon by a lender in refinancing a pre existing loan facility would not be limited to any new funds advanced but extend to the entire refinanced facility. Had there not been a negligent valuation, the lender would not have made the refinancing loan. The fact that the purpose of the loan was in part to discharge an earlier (potentially loss making) loan on the part of the same lender was irrelevant in fact and law to the valuer, who was fully liable in respect of the full amount of the loan (Tiuta International Ltd v De Villiers Surveyors Ltd  EWCA Civ 661).
Secured loan for property development
De Villiers Surveyors Ltd (the Valuer) was instructed in February 2011 by the appellant, Tiuta International Ltd (the Lender), to value a partly completed residential development (the Property) it was considering accepting as security for an advance to the borrower‑developer. The Valuer valued the property at GBP 3.25 million in its current state and GBP 4.9 million on completion (the February Valuation). In reliance on the February Valuation, the Lender advanced GBP 2.5 million (the Original Facility) in exchange for the security of a first legal charge over the Property.
In November 2011, the borrower‑developer sought to increase the facility to GBP 3 million on the basis of the same security. The Valuer was instructed to provide a fresh valuation of the Property, which was GBP 3.5 million in the Property’s current state and GBP 4.9 million on completion (the December Valuation). In reliance on the December Valuation, the Lender agreed to provide the additional funds, but did so by way of a complete refinancing (rather than a variation) of the Original Facility. Consequently as well as providing additional funds, the Lender advanced the GBP 2.5 million necessary to repay the Original Facility, released its first legal charge and registered a new charge over the Property at the Land Registry (the Second Facility).
Upon expiry, the Second Facility was not repaid and approximately GBP 2.84 million was owed to the Lenders. The sale of the Property recovered only GBP 2.1 million for the Lender.
The Lender commenced proceedings against the Valuers seeking to recover the entirety of its loss in respect of the Second Facility on the basis that the December Valuation had negligently overstated the value of the Property. The Bank did not allege that the February Valuation had been negligent. In response, the Valuer contended that, at the time of the December Valuation, the Lender had already advanced GBP 2.5 million under the First Facility to the borrower‑developer, and even if the December Valuation had been negligent (which was denied) the Lender’s loss should be limited to the additional amount advanced from December 2011 only. The Valuer sought summary judgment on this question. For the purpose of the hearing and judgment, all other matters of fact in contention were assumed to be established in the Lender’s favour (including the negligence of the December Valuation). The Valuer succeeded at first instance, and the Lender appealed.
Court of Appeal allows full recovery
The Court of Appeal allowed the Lender’s appeal. Lord Justice Moore‑Bick gave the leading judgment, with Lord Justice McCombe dissenting. The Valuer was, on a correct application of the ‘but for’ test of causation, liable to the Lender for the full amount of the loss flowing from any negligence in the December Valuation.
In order to determine the loss caused by the negligent valuation, it is necessary to identify the nature of the transaction and the Valuer’s part in it. The Lender was willing to enter a new facility agreement with the borrower‑developer, the proceeds of which would be used (in part) to repay the original loan. However, the purpose to which a fresh loan would be put is of “no interest or relevance, either in fact or in law, to the person who is asked to value the property on which it is to be secured”. A valuer remains liable for the adverse consequence attributable to any negligence in its valuation.
The appropriate measure of damages recoverable from a negligent valuation (applying Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd  1 WLR 1627) remains the difference between the amount of money lent and the value of the rights acquired (being the borrower’s covenant and the true value of the property). In this case, the borrower‑developer’s covenant had no value, so all the Lender acquired was the value of the security (ie the Property). The correct measure of the Lender’s loss was therefore the difference between the net amount of the Second Facility and the true value of the secured property.
What about the fact that the Lender would likely have suffered a loss without the refinancing? Moore‑Bick LJ recognised that, had the refinancing not occurred, the Lender would have been left with the Original Facility and the security over the Property together with a (potential) claim against the Valuer in relation to the earlier February Valuation. However, he founds this “of no relevance” to the Valuer in the context of preparing the later December Valuation relied upon by the Lender in entering the Second Facility. The Valuer had valued the Property “in the expectation that the [Lender] would advance funds up to its full reported value in reliance on its valuation”, and that there was nothing “unfair” in the Valuer being held liable for its own “factually and legally separate” valuation prepared for the purpose of the Lender advancing funds under the Second Facility. The only link between the two valuations was that the Second Facility enabled the borrower to repay the Original Facility.
The trial judge’s decision in favour of the Valuer had failed to take into account the fact that the transaction had been structured in order that the Second Facility should be used to repay the Original Facility. This would have been very clear on the facts had the refinancing lender been different to the original lender, but the fact that the lender in both transactions was the same entity was “immaterial”. Importantly, the repayment of the Original Facility with the proceeds of the Second Facility released the Valuer from any potential liability in respect of the February Valuation.
Lady Justice King agreed with Moore‑Bick LJ, and emphasised that “it is of no interest to the [Valuer] the purpose to which the new loan is to be put”, noting that the Valuer could have limited its exposure by way of negotiated terms and conditions when accepting instructions.
In times of increasing market turbulence and oscillating property values, the case clarifies the extent of valuers’ liability when re‑valuing property for the purpose of refinancing. The result is that a valuer’s liability is not reduced simply by virtue of the fact that other valuations (and loans) may have pre‑dated the refinancing: they are bound to their own valuation, regardless of what may have passed before between lender and valuer. Valuers (or more accurately, their insurers) cannot seek extra‑contractually to limit their liability for any fresh advance merely because a refinancing may discharge an earlier liability, even if to the same lender.
Lenders should consider, when advancing new funds in reliance on an updated valuation, clearly structuring any fresh advance as a refinancing such that the second transaction does result in the redemption of the first loan in the lender’s books and ensures the clear transfer of full liability to the later valuation.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Sarah Garvey email@example.com, or tel +44 20 3088 3710.