In 2018 a historic Grade 2 listed National Trust property known as Cedar House was put on the market. It dated back to the 15th century and had many original features including a huge medieval main hall, and had had many well-known guests over the years including, at one time, Lord Nelson. It was situated in Cobham Surrey and in more recent times had been a high-end hotel and restaurant.
The defendant (‘ART’) was a firm of chartered surveyors and property consultants and had valued Cedar House at £4,000,000 in its report dated 14 February 2018. Cedar House was intended to be the security for a bridging loan. This bridging loan was for £2,215,440 excluding interest and fees and was provided to St Anselm Heritage Properties by Hope. St Anselm reneged on the loan and Cedar House fell into the hands of receivers in November 2018. Cedar House was finally sold in October 2020 for the greatly reduced price of £1,400,001.
Hope Capital brought proceedings against ART alleging that the loss in value of the property was due to ART’s negligence in initially overvaluing the property for collateral for the bridging loan. They argued that the true value was only £2,150,000, and that by funding the bridging loan they’d lost a total amount of £2,527,749. This was a cumulative figure made up of different losses: – loss of profit on the deal, loss of capital and loss of interest on the loan.
When I was young, I thought money was the most important thing in life; now that I’m old I know it is.”
Oscar Wilde
ART admitted that it had breached its duty of care towards Hope and that it had been negligent. The Court had to decide whether Hope had suffered any loss as a result of that negligence, how much the loss was and also whether Hope had been guilty of contributory negligence. The loss would be limited to the difference in the original valuation of £4,000,000 and £1,950,000 which is what Hope claimed should have been the correct 180-day valuation of Cedar House at that time. A 180-day valuation is what is commonly used in bridging finance and many finance companies will only lend against this particular valuation. It is the value of a property assuming there were only 180 days to advertise and sell the property i.e. often some 5%-15% lower than the open market value, depending on the type of property. Judge Nicol, taking into account the “uncommon” nature of the property agreed that a valuation of 15% above or below the true value was acceptable and would not have been considered negligent. He thought the true valuation should have been £2,475,000 which was well below the 15% tolerance value, and that ART’s valuation was therefore incompetent. There were a couple of external factors leading to the eventual drop in sale value of Cedar House – the unprecedented collapse in the property market due to the global pandemic and Cedar House’s reputation as a ‘problem property’ due to difficulties with the National Trust. The Judge also found that Hope’s conduct contributed to making Cedar House incapable of a quick sale and on that basis they had not suffered loss of capital.
The key issue at the heart of the case was whether the duty of care owed by the valuer was greater than normal (i.e. simply providing a valuation opinion on which the lender was entitled to rely), in effect protecting the lender against all risks associated with the transaction. Given that the principles of this case were similar to numerous other property transactions, the Judge noted that there would have had to be a direct communication between the parties extending the duty of care to a higher level. The fact that this particular valuation was the only “green light” in the whole process was not sufficient to extend that duty of care to a higher level.
The lack of money is the root of all evil.”
Mark Twain
The Judge concluded that even though ART had been negligent in giving the original valuation, Hope had suffered no actionable loss as a result of the negligence and therefore the claim for damages by Hope was dismissed.
The experts for both sides gave evidence that an exit strategy for the lender is a fundamental consideration in any lending decision particularly if it involves, as it usually does, the sale of the property. In this case there was no basis to consider that the a change to residential use for the property would have been a viable option as the owner was a company and residential use would only be granted to an individual. The borrower, Mr Pieri’s company, had a poor his credit rating and doubts about his ability to achieve the conversion and the honesty of his application left the Claimant in a weak position given the lack of investigation prior to the loan being granted. Both expert agreed that the lending had been imprudent as a minimum. The problems were then made worser by the lack of supervision of the going construction works.
If it had come to a decision of contributory negligence, the Judge said that such were the failings on both sides that, should he have to have made a determination, he would have set the figure at 50%.
This case is important in that it underlines the established principle that a duty of care is owed by a surveyor to the lender who has instructed him to value a property. If the valuation falls outside the accepted parameters for that particular property there may be a breach of contract. Only if there is direct financial loss resulting from that breach will there be grounds for a claim for damages resulting from professional negligence.
In this case, both the experts were sourced from Expert Evidence International Limited. Expert Evidence prides itself on assisting throughout the legal process where required and is a professional firm concentrating on the four main areas of dispute resolution; acting as expert witnesses in financial litigation, mediation, arbitration and adjudication. The firm has a civil, criminal and international practice and has advised in many recent cases. Areas of specialisation include banking, lending, regulation, investment, and tax.
Link: Hope Capital Ltd v Alexander Reece Thompson LLP [2023] EWHC 2389 KB
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