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Valuers’ negligence and lenders’ contributory negligence

05 March 2013

In valuers' negligence claims, it is common for the defendant valuer to plead contributory negligence on the part of the lender in an attempt to reduce the amount of damages if the valuer is found to be negligent. In two related valuers' negligence cases, Blemain Finance Ltd v E.Surv Ltd [2012] EWHC 3654, 20 December 2012 and Webb Resolutions Ltd v E.Surv Ltd [2012] EWHC 3653, 20 December 2012, the court put two lenders' lending policies to the test. In a decision which will be welcomed by lenders, the court has provided helpful guidance on the circumstances in which contributory negligence will be applicable. In particular, the court has held that a lender's practices have to be evaluated against what was commonplace in the market at the time.

Background

In a professional negligence valuation claim:

  • A valuer will be negligent if the standard of the valuation falls short of that of a reasonably competent valuer. As valuation is an art and not a science, a valuer will be allowed a margin of error. This will typically vary according to whether the property is a standard residential property (+/-5%), a one-off property (+/-10%), or if it has exceptional features (+/-15%).
  • If a valuation is found to be negligent, the defendant valuer may ask the court to reduce the damages on the basis that the lender has been contributorily negligent. This requires the defendant valuer to prove that: (i) the lender's behaviour fell below that of a reasonably competent lender; and (ii) such negligence was also causative of the loss.

The facts

Coulson J in the Technology and Construction Court was asked to hear two related valuers' negligence cases concerning the same defendant, E.Surv Limited (E.Surv), one of the largest residential surveyors in the UK. In the circumstances, and given that the parties' legal teams were the same, Coulson J handed the judgments down at the same time. The cases concerned allegedly negligent residential mortgage valuations carried out by E.Surv to GMAC RFC Ltd (a centralised mortgage lender) (GMAC) on the one hand and Blemain Finance Ltd (Blemain) (a lender specialising in second mortgages) on the other. In the first action, GMAC's claim had been assigned to Webb Resolutions Ltd and the case involved two separate low value (GBP 227,995 and GBP 295,000 respectively) property valuations. In the second action, Blemain was taking action on its own behalf and the case involved a single valuation of a high value (GBP 3 million) property limited to the extent of a second charge in the sum of GBP 250,000. E.Surv was therefore answering three cases of negligent valuations that had resulted in losses to the respective lenders by virtue of the borrowers in each case having defaulted and the borrowers' equity in the properties on default being insufficient to redeem the various charges.

In each of the three valuations, the court found E.Surv to have been negligent. Not only had their valuations fallen (without justification) outside the reasonable margin but their methodology had also fallen below the expected standard (for example, by failing to inspect the properties and by using asking prices as opposed to sales prices as comparables). Furthermore, if it had not been for the negligent valuations, GMAC/Blemain would not have made the loan. In each case, the claim for damages was limited to the difference between the negligent valuation and the correct valuation (plus interest). However, E.Surv alleged that the respective lenders in each case had negligently failed to look after their own interests and that this had caused (to some degree at least) the losses that were the subject of the claims.

Contributory negligence

E. Surv's allegations of GMAC/Blemain's contributory negligence concerned several factors (differing in relation to each of the valuations) and variously included: (i) high (and therefore "risky") loan-to-value ratios (LTV); (ii) self-certification of income; (iii) high levels of borrower indebtedness; (iv) the existence of warning signs (eg existing defaults/reliance on credit cards); (v) the correctness of affordability calculations (for example secure debt to income as opposed to total debt to income); and (vi) insufficient attention being given to errors or omissions on the applicant borrower's mortgage application forms.

When considering the appropriate standard against which GMAC/Blemain's lending practices should be measured, Coulson J said that he should be "wary" of concluding that banking practices that were logical or commonplace to the practice or policy of a particular category of lender at the time were in fact illogical or irrational and therefore negligent. His caution was expressly stated to derive from the judgment in another professional negligence case (Paratus AMC Ltd v Countrywide Surveyors Ltd [2011]), in which Keyser J rejected allegations of contributory negligence founded on a business model of lending at 90% LTV on a self-certified basis. While Keyser J conceded that this model was "at the high-risk end of the market", its use would not, of itself, necessarily be negligent. However, applying the model to the facts in that case, Keyser J would have allowed a contribution of 60% (had the valuation been negligent in the first place, which it was not). Coulson J emphasised the point acknowledging a 2011 FSA report in which it had described self-certification of income as "unacceptable" and the assumption of ever-increasing property prices as "mistaken". However, Coulson J stressed that allegations of contributory negligence on these bases must always be judged in light of the facts and against the context of the lending market at that particular time, in this case during the over-heated market around 2007 when lending policies were "over-generous".

The decisions

In the first GMAC valuation, the court held there was no contributory negligence despite a relatively high LTV of 85.13%, errors on the borrower's application form and self-certification of income. Whilst the LTV was high, the court held that it was in line with the marketplace standard for self-certified mortgages. Furthermore the application form errors were immaterial, self-certification had been recommended by an intermediary and borrower defaults totalling GBP 2,477 did not warrant further investigation.

In the second GMAC valuation, the court decided otherwise. A reasonably competent centralised lender would not have lent to the borrower at an LTV of 95%. Moreover, significant borrower debts (including an outstanding County Court Judgment) plus a failure by the borrower to substantiate his income made a decision by GMAC to treat the application as being on a self-certified basis negligent. Accordingly the court concluded that GMAC's damages should be reduced by 50%: GMAC and E.Surv were equally to blame. In the Blemain valuation, the court concluded that there was no contributory negligence, as any reasonably competent second charge lender in July 2007 would have made the loan. This was despite an LTV of 73% (3% in excess of Blemain's own lending policy of 70% for this kind of loan) which the court considered reasonable by reference to evidence of other second charge lenders' criteria at the time. The borrower's high levels of indebtedness were mitigated by an excellent debt servicing history and a high credit score. Although the court found that the credit committee might have made further enquiries regarding the borrowers' reliance on credit cards, this would not have altered the ultimate lending decision. E.Surv also criticised Blemain's affordability calculations and asserted that they should have used a total debt to income ratio as opposed to a secure debt to income ratio. The court held that even if this had been done, Blemain would nevertheless have chosen to lend because of the high monthly net disposable income.

Comment:

Although these cases involved the residential context, they are potentially relevant to any case involving allegations of contributory negligence against lenders, as they highlight the factors that a court may consider when deciding the extent to which a lender has been contributorily negligent. These include:

  • a lender's internal guidelines/business model eg LTV, credit checks;
  • the particular category of lending (eg sub-prime), and the usual market practice of that category at the time;
  • what due diligence was, or should have been, carried out in respect of the borrowers eg whether there were any warning signs such as borrower default, insufficient evidence of income;
  • whether other mitigating factors would have supported a decision to lend eg debt servicing history; and
  • whether reliance on an intermediary at any stage in the lending process was justified.

The case is also interesting for the light it shines on the extent to which lenders are actively pursuing valuers' negligence claims. Given that the height of the market was in July 2007, limitation periods will be fast approaching for lenders who have not yet commenced such claims, making it vital that lenders review potential claims as a matter of urgency. Where limitation periods have not yet expired, lenders may only have a matter of months to commence claims.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.