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Landmark Judgment For Lenders on Negligent Valuation Case

Landmark Judgment For Lenders on Negligent Valuation Case

Negligent Surveyors

The Court of Appeal has issued a landmark judgment in a professional negligence case that is forecast to have wide-ranging implications and may raise negligence insurance policy premiums for professional advisers.

The court's decision on the matter of Tiuta International Ltd (in Liquidation) v De Villiers Surveyors Ltd helps clarify the long-established “but for” test in situations where a lender provides security on the strength of a negligent valuation and then later provides additional security, or replacement security, on a further negligent valuation.

Bridging lender Tiuta was seeking to recover from surveying company De Villiers the £890,500 loss it suffered arising out of a refinance loan, claiming the valuation report significantly and negligently overvalued the property.

At an earlier hearing in the Chancery Division, the Court ruled that Tiuta’s loss should be limited to the amount lost in ‘topping up’ the original loan of £272,700.

The Court of Appeal (with McCombe LJ dissenting) overturned the lower court's decision.

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Allegation that original valuation had been negligent

The case centred on the valuation of a property development in Sunningdale, in Berkshire.

In February 2011, De Villiers provided a valuation for a former nursing home undergoing substantial redevelopment into four three storey mid-terraced houses. Tiuta advanced the sum of around £2.2m to the borrower. In November 2011, De Villiers was once again instructed to value the development, this time for the purposes of a further advance.

Tiuta lent further funds to the borrower but instead of amending the original loan to extend it, the original loan was repaid with funds lent in the new loan. The original charge was released and a new charge was registered at the Land Registry.

In September of the following year, Tiuta entered administration after the collapse of its main funder. The developer entered administration several months later leaving £2.84m unpaid. A claim was subsequently brought against De Villiers alleging that the original valuation had been negligent.

De Villiers claimed Tiuta could not have suffered a greater loss than the amount by which the indebtedness had increased thereafter, i.e. the loss is limited to the ‘top up’ advance of approximately £272,700.

Court redefines the “but-for” causation test for negligence

The question before the appeal court was whether there was a pre-existing indebtedness created by the initial loan, which prevented the lender pursuing a claim for the full loss suffered by entering into the second loan, on the basis that it has already arisen in the original loan and so could not be claimed on the second loan in accordance with a strict application of the “but for” test.

In its judgment, the Court of Appeal held: “There is nothing unjust in holding the respondent liable in accordance with its own valuation, prepared specifically for the purposes of the second transaction," noting that the “second loan is entirely independent from the first loan . . . had there not been a negligent valuation, the appellant would not have entertained the second transaction and [its] loss is the total advance of the second loan, less the [borrower’s] covenant and the true value of the security.”

The court added: “it could be said to be inherently unfair that . . . a negligent valuer could use an attack on the legitimate working practices and systems of the appellant as a means of escaping part of the consequences of his or her negligence.”

The Court of Appeal's ruling clarifies how loss will be calculated when loans have been refinanced. The risk for surveyors is that they could be found negligent for far larger sums than previously thought.

Ruling will be appealed

De Villiers says it intends to appeal the decision. James Perris, managing director of De Villiers, said: “We would like to stress that we have not been found negligent and this decision, which is being appealed, is not about valuation.”

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