A decision handed down from the High Court just before Christmas 2012, has re-confirmed the Courts’ position on negligent over-valuations. It gave detailed consideration on the attempted defence of contributory negligence by the mortgagee – a defence which was soundly trounced – but importantly, made comment on what our professional negligence solicitors at Slee Blackwell are repeatedly seeing as “convenient” valuations, rather than true ones.
Mr & Mrs Sherman had bought a new development in Putney. The judgment made it clear that the property was of a very modern design, its principal features including a steel frame and floor-to-ceiling plate glass windows. It was located in an area of Putney which was predominantly of Victorian, Edwardian and inter-war buildings so finding properties of a similar design in the area was not easy for valuation purposes.
In 2007, Mr & Mrs Sherman wished to raise a further loan on the property for the sum of £350,000 and Blemain Finance Ltd was approached to provide a second mortgage. The interesting aspect of the loan application is that it was accompanied by two valuations by Haywards Surveyors & Valuations. The first had been carried out at a much earlier date; the second was simply a re-type of the original, confirming a valuation for the property of £3.33m.
Blemain were not happy with the report largely as Haywards were not on their panel of approved surveyors so instructed E.Surv who were provided with a copy of Haywards’ report and then carried out their own survey, valuing the property at £3.4m.
Blemain then considered the Sherman’s ability to fund the mortgage. The Sherman’s accountant provided a certificate suggesting that their net monthly income was in excess of £46k. An Experian report showed that there was some £240k owing on loans and credit cards and over £686k owing on three other mortgages. Although it was clear that the Shermans were living their lives purely on their credit cards, they had an excellent servicing record and in all, Experian gave them a good credit rating.
There was a further issue. Blemain’s policy was that their Loan to Value ratio (LTV) was 73%. The value of the first charge on the property and Blemain’s would total 73% of the £3.4m valuation of the property. However, the full credit committee of the lender gave consideration to the matter. They concluded that even at 73%, there was still a comfortable equity cushion and, of course, the Shermans were high earners.
Having given full consideration to the matter, Blemain made a loan of £250k (not the full £350k requested). Unfortunately, the Shermans defaulted on their mortgages so the first mortgagee took possession and sold the property for £2m. There was not enough money in the pot to pay off the Blemain mortgage. They decided to sue the valuer for professional negligence.
There are some interesting characteristics in this case. Much of the judgment revolves around the original valuation and the fact that, as the property was fairly unique, it was very difficult to find a suitable comparator. After much deliberation, Coulson J found that the true value of the property was in fact £2.8m and that the margin of error – despite the experts saying that the concept was “legally driven” – was 10%.
However, it is the deliberations of the defence that makes this case interesting as E.Surv alleged there was contributory negligence by Blemain.
The LTV ratio was heavily criticised by the Defendants but Coulson J made it clear that a 73% LTV ratio – given there were other prime moneylenders in the market that would have a LTV of 75% – was not negligent, particularly given the equity cushion.
There was also criticism of Blemain for not making further investigation following receipt of the Equifax report which demonstrated a level of indebtedness that was simply too high. Although an accountant’s certificate had been obtained, E.Surv went so far as to suggest that Blemain should have conducted further investigations on that front as they considered it “clear” that the certificate only dealt with the net profits of the Shermans’ business and so did not take into account personal tax liabilities. Coulson J said that that sort of investigation went too far and there was no need for Blemain to go behind such a certificate and certainly did not agree that the issues raised by the Defence about the certificate were “clear”.
However, one of the things that I found most interesting in this judgment is at paragraphs 32 and 89. I am currently engaged in a large number of mortgage overvaluation claims. In these I often find that valuers are told the price that the property is being sold for and their valuations then seem to tally. This is the wrong way round. The point was made by Coulson J when he stated:
“I note… that [the valuer] was given the £3.4m figure at the outset. Again, like both the surveyors in the Webb [Resolutions Ltd v E.Surv Ltd 2012 EWHC 3653 (TCC)] case, [the valuer] was endeavouring to reach a valuation that married up with the figure that he had been given by the prospective buyer. For the reasons set out in the judgment in Webb, I regard that as bad practice.”
In light of this, it will interesting to see if subsequent Courts pick this up and take a sterner view of surveyors’ conduct when carrying out valuations.