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22nd December 2017

Supreme Court limits damages for negligent valuation

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On 29 November 2017 the Supreme Court considered the proper approach to the quantum of damages in professional negligence cases where a lender had advanced funds based on the negligent valuation of a property offered as security for the loan. The decision provides welcome clarification on the correct approach to the assessment of damages and, no doubt, a great sense of relief to valuers. One of the essential elements of a negligence claim is establishing that the defendant’s negligence caused the claimant to sustain loss. In other words, a lender must prove, on the balance of probabilities, that if the valuer had not been negligent in reporting the value of the property for the purpose of advancing a loan, the lender would not have entered into the loan and thus would not have suffered any loss. The basis measure of damages is that which is required to restore the innocent party as nearly as possible to the position he would have been if he had not sustained the wrong. Another general rule applicable to damages claims is that where a claimant has received some benefit attributable to the events which have caused its loss, this must be taken into account in assessing damages, unless the benefit is collateral.

In Tiuta International Limited (in liquidation) v De Villiers Surveyors Limited [2012] EWCA Civ 661, a specialist lender entered into a loan facility based on a valuation of a partially completed residential development. The loan was to be secured by a charge. A few months later, the lender advanced a second loan based on a further valuation. Under the terms of the second loan the majority of the amount advanced was used to discharge the liability under the first loan, with a small amount being new money advanced for the completion of the development. The borrower failed to discharge the loan and there was a shortfall when the lender tried to enforce its security. The lender claimed that the second valuation was negligent, and but for the valuer’s negligence, it would not have advanced the second loan. It was common ground that the valuer was not liable for advances made under the first facility as it was not alleged that the first valuation was negligent. The valuer argued that even if the lender would not have made the advances under the second facility but for their negligence, the advances under the first facility would still have been advanced and remained unpaid. The valuer contended that in such circumstances the most they could be liable for was the new money advanced under the second facility.

The High Court agreed with the valuer. The lender appealed the decision and the Court of Appeal ruled in the lender’s favour and held that the valuer was liable to the lender for the whole of the loss flowing from the second valuation. The Supreme Court, however, disagreed and restored the High Court decision. The Supreme Court held that the basis measure of damages applied which meant that what was required was to restore the lender as nearly as possible to the position that they would have been in if he had not sustained the wrong. If the valuer had not been negligent in valuing the property for the purpose of the second facility, the lender would not have entered into the second facility, but would have entered into the first. It was therefore necessary to undertake a purely factual inquiry which involved asking by how much the lender would have been better off if he had not lent the money which he had been negligently induced to lend. The court could not ignore the fact that, had the advance under the second facility not been applied to discharge the first facility, the lender would have lost the advances made under the first facility in any event. The discharge of the debt under the first facility was not collateral because it was required by the terms of the second facility since the lender never intended to advance the whole of the second facility in addition to the whole of the first. Accordingly, the valuer’s liability for damages was limited to the new money advanced under the second facility, being £289,000 as opposed to the whole sum of the second facility of £3,088,252.00.

It has to be stressed, however, that the reasons the Supreme Court gave were sensitive to the facts and the position might have been different if there had been any suggestion that the first valuation had also been negligent. For further information on this or other property litigation issues please contact Natalie Minott on 01223 447421 or click here to email Natalie.