Property valuations and refinancing transactions

Facts

Tiuta International Limited (TIL) was the financier of a residential development at Sunningdale in Berkshire and De Villiers Surveyors Ltd (DVS) was its surveyor.

In February 2011, DVS valued the partly completed development at £3.25m in its current state of development and £4.9m on completion. In reliance on the valuation, TIL advanced approximately £2.56m to the borrower and took a first legal charge over the development.

In November 2011, the borrower requested that the amount of the loan should be increased to approximately £3.088m. TIL instructed DVS to provide an updated valuation. In a valuation dated November 2011, DVS valued the property at the same amounts as it had done in February. In December 2011, it valued the development at £3.5m in its current state and £4.9m on completion.

TIL increased the amount of its loan to the borrower. It documented the further advance not by way of an amendment to the original loan agreement but by entering into a new loan agreement with the borrower. It discharged its existing security and took a new legal charge over the development.

The borrower encountered financial difficulties and, on the repayment date, some £2.84m of the loan remained outstanding to TIL. TIL appointed recovers to enforce the security and, on the resulting mortgagee sale, the development realised some £2.141m. TIL looked to DVS for the shortfall as a result of the alleged negligence of DVS in relation to the valuation conducted in December 2011.

Legal Arguments

TIL argued that the valuation provided to it in December 2011 was negligent and that, had it been provided with reasonable care, TIL would not have made the new loan to the borrower. TIL argued that the measure of damages was the difference between the amount it advanced (£3.088m) and the amount realised on sale (£2.141m).

DVS replied that, as at the date of the December 2011 valuation, TIL had already advanced some £2.56m to the borrower and that, if the valuation was negligent, TIL could not have suffered any greater loss than the amount of the further advance (namely, the difference between £2.56m and £3.088m).

TIL countered that the original transaction and the refinancing were entirely separate transactions. It sought summary judgment on the issue which DVS raised in its defence. So the issue which the court was called on to decide was not whether DVS had been negligent but whether, if it had been negligent, the measure of damages which flowed from it.

Decisions

The High Court (Mr Timothy Fancourt QC, sitting as a Deputy Judge of the Chancery Division) decided that the “but for” test of causation was applicable in the case and that any negligence by DVS in relation to the December 2011 valuation had not caused the loss attributable to the original loan. DVS was liable only for any loss resulting from the additional lending.

TIL appealed to the Court of Appeal. In a 2:1 majority decision, the Court of Appeal reversed the decision of the High Court. For the purpose of the appeal, the court assumed that the December 2011 valuation was negligent and held that the measure of damages was the shortfall between the amount advanced by TIL and the amount realised on the mortgagee sale. The measure of damages was not the amount of the further advance.

The two judges who formed the majority (Moore-Bick and King LLJ) declined to look behind the refinancing transaction. They rejected an argument made by counsel for DVS that the court was able to do so. Moore-Bick LJ said, at paragraph 17 of the judgment, that:

“When a lender is considering making a fresh loan, part of which is to be used to re-pay an existing loan, the purpose to which the new loan will 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. The valuer is liable for the adverse consequences flowing from the lender’s entering into the transaction insofar as they are attributable to any negligent deficiency in the valuation. In my view the judge’s application of the “but for” test failed to take into account the fact that the transaction was structured in such a way that the second loan was used to pay off the first. That would have been clear enough if it had involved a lender other than the appellant, but the fact that the lender was the same in each case does not in my view affect the analysis. The loan made under the second transaction was the means by which the borrower was enabled to pay off the first and it was the fact that the second loan was used to repay the first in full that released the respondent from any potential liability in respect of the first valuation. The second loan therefore stands apart from the first and the basic comparison for ascertaining the appellant’s loss is between the amount of that second loan and the value of the security.”

He added, at paragraph 20, that “I very much doubt whether the court can or should disregard the way in which commercial parties have chosen to structure a routine business transaction of this kind.”

However, McCombe LJ disagreed with Moore-Bick and King LLJ. He thought it was unfair that the respondent, DVS, should have been “saddled” (in his words) with liability arising under the original loan agreement simply because of the manner in which the appellant, TIL, had structured the second loan. He said, at paragraph 31, that:

“In so far as the appellant “lost” a potential claim in respect of the first valuation - a claim which it does not make in the proceedings at present – that result has been caused only by the way in which it chose to structure the second transaction. I can see no good reason to adjust the law of causation to avoid a problem of the appellant’s own making. There seems to me to be an inherent unfairness to the respondent if the manner in which the new transaction was set up should enable the appellant to saddle the respondent with liability in respect of advances made long before the allegedly negligent valuation was provided and in respect of which it already stood to make a loss.”

He added, at paragraph 33, that:

“It seems to me that the appellant’s case requires one to ignore an important element of the factual background, namely that the appellant was already in danger of being unable to recover the amount advanced on the first loan at the time when it chose to make the second.”

However, all three judges agreed that it would have been preferable for the issues to have been determined at the main trial, rather than preliminary proceedings (as had been the case here). Moore-Bick LJ noted, in a post script, that if it were found that DVS had not been negligent or that the second transaction did not result in the repayment of the first loan, then the application and the appeal may have wasted time and money.

Comment

The decision is of practical importance for valuers and demonstrates that a further valuation report will create a new source of potential liability, even when no question is raised in relation to the original valuation. It highlights the commercial pitfalls which are involved in providing an increased valuation to enable the completion of a development project.

Appeal

The judgment of the Court of Appeal in Tiuta International Ltd v De Villiers Surveyors Ltd [2016] EWCA Civ 661 has been appealed to the Supreme Court and is scheduled to be heard on 06 November 2017 by Lady Hale, Lord Kerr, Lord Sumption, Lord Hughes and Lord Lloyd-Jones.  For further details, see the relevant page of the Supreme Court website .