Credit to Nykredit

The recent county court decision in Canada Square Operations v Kinleigh Folkhard & Hayward gives guidance on limitation issues in the context of claims against valuers. It also looks at the fairly common issue of more than one valuation being obtained by a valuer, and how this affects the requirement for the lender to prove reliance.

The facts

The borrowers sought an interest only re-mortgage to fund building a house on their property. In December 2005, Connells valued the property at £475,000. The lender subsequently sought a separate valuation from the defendant (KFH), who valued the property at £500,000. The lender provided a mortgage advance of £427,500 (plus costs/fees). The borrowers kept up repayments until January 2007, then made irregular payments until the last payment in January 2008. In August 2008, the borrowers surrendered possession and the property was sold for £305,000.

The lender sought damages from KFH, for the over-valuation of the property. The over-valuation was admitted. The issues to be decided included limitation (was the claim brought in time?), and reliance (did the lender rely on KFH’s valuation?).

Limitation

Proceedings were issued on 23 October 2013. The claim under contract was clearly time-barred. The court had to decide whether the cause of action in tort arose before 23 October 2007, six years before the claim was issued.

The law on limitation in these circumstance is well-established (see Nykredit Mortgage Bank v Edward Erdman Group (No 2)) and depends on when the lender first suffered measurable loss. In practical terms, when did (i) the value of the security and (ii) the borrower’s covenant become worth less than the outstanding mortgage?

The court held that the burden of proof is on the lender to establish a prima facie case that the cause of action accrued within the limitation period. If established, the burden shifted to the defendant to show that it accrued outside the limitation period.

In Nykredit, Lord Nicholls indicated that the valuation of a borrower’s covenant should not be unduly troublesome but that is rarely correct in practice especially as the borrower is only very infrequently a party to the proceedings. This judgment gives helpful and practical guidance as to how to ascertain when the lender suffered measurable loss.

The judge ascertained various points in time when a shortfall had arisen between the outstanding mortgage debt and the value of the property and considered whether, at those points in time, the value of the borrowers’ covenant was sufficient to cover the shortfall. On the evidence, a shortfall had occurred by February 2007 (a date outside the limitation period) and the borrowers were also in default at that point. That was when the cause of action accrued. The judge considered that the lender had failed to discharge its burden of showing that a loss had not accrued at that time. The claim was statute barred.

Reliance

It is not uncommon for lenders to obtain more than one valuation before making a mortgage offer in respect of properties of significant value. In order to succeed in a claim against either of the valuers, the lender has to show that it relied on the specific valuation. The judge accepted that a reasonable starting point was that the lender would not have commissioned a surveyor unless it intended to rely on its valuation. However, this was not enough on its own for the lender to show reliance. The judge (rightly) looked for other evidence, such as supporting contemporaneous documents, evidence from the actual decision maker(s), and relevant excerpts from the lending manual. Appropriate evidence was not submitted in this case so the lender was unable to prove reliance.

Comment

This judgment follows the long-standing legal principles in Nykredit. Its use is in the practical guidance it provides around valuing measurable loss and, in particular, a borrower’s covenant. It also provides a lesson for practitioners as to the kind of evidence required to establish reliance on a valuation where the valuation in question is one of two or more commissioned at the time.