The topic of negligent property valuations has been a hot subject of litigation in recent years, particularly following the property boom pre-recession. In assessing these cases, the courts consider comparable properties but what happens when there are none?
The recent case of Barclays Bank v TBS Ltd involved a loan secured against a care home business in a leasehold property which TBS had valued. When the business failed, Barclays forfeited the lease and sought to recover their losses from TBS for negligently over-valuing the security at £350,000. Barclays contended it had been worth just £130,000.
The property in question was a Grade II listed building in Devon consisting of several buildings and was in use as a 17-bed care home, under a 40 year lease from the local council. The care home business was sold as a going concern along with other buildings which were used as accommodation by the vendor and members of staff. The sale price was agreed at £350,000.
Barclays instructed TBS to value the property based on the care home business as a going concern. TBS calculated the figure for the net annual profit (as a multiplicand) and fixed a multiplier having regard to the features of the property. They valued at the level of the sale price and Barclays agreed to lend £250,000 based on that valuation.
Following the decision of Coulson J in K/S Lincoln v CB Richard Ellis Hotels, the permissible margin of error will generally be between 5 per cent and 15 per cent depending on the nature of the property and the extent to which its characteristics may be exceptional.
TBS argued that there were no realistically comparable properties due to the relatively short lease, the property’s exceptional and unusual features and the fact there were no similar properties in the local area. Taking account of these issues, the court allowed a margin of error of 15 per cent. It specifically refused to accept TBS’s argument that the property was so unusual that it warranted a bigger margin.
Taking into account all of the factors considered by the experts in respect of the costs and profitability of the business and the relevant multiplier to be applied, the court formed its own view as to the non-negligent valuation which it determined was £330,000 (and thus accepting neither of the expert’s valuations). TBS’s valuation fell well within the margin of error and was therefore not negligent.
While relatively uncontroversial as a decision on margin of error, the case demonstrates that the court will be prepared to consider both expert valuers’ methodologies and the facts of the case in order to form its own view as to a property’s true value. Further, having found there was no breach of duty, the court’s views on causation and loss are of interest:
- Reliance – although Barclays had made an unconditional offer of lending which the borrowers had accepted prior to the valuation, the court accepted that a term was implied into the loan documents that the offer was conditional upon receipt of a satisfactory valuation.
- Causation - while Barclays had agreed to restructure the loan a year after the valuation to increase the overall sum lent to the borrowers, the court considered this to have effectively been an internal accounting exercise because the loan was never redeemed and a new valuation was not obtained. Since it was not a new transaction, the loss suffered remained within the scope of the valuer’s duty of care.