The tangled Webb of permissible margins

Judgment has recently been handed down by Coulson J in two lenders’ claims against valuers – Webb Resolutions Ltd v E.Surv Ltd and Blemain Finance Ltd v E.Surv Ltd – which reaffirmed the judge’s earlier summary (in K/S Lincoln v CB Richard Ellis Hotels Ltd) of the “permissible margin” of 5 per cent for a “standard residential property” and 10 per cent for a “one-off property”. Dealing with allegations of contributory negligence, the judge reduced one of the claims in Webb by 50 per cent.

Webb concerned the valuation of two properties: a flat in a large block for a buy to let purchaser (the flat) and a detached house for a re-mortgage (the house). The judge concluded that both were “standard residential properties” having no unusual features and there was a wealth of comparable property sales. Further, the valuer of the house conceded that he would expect his valuations to be accurate to within a five per cent margin.

Blemain concerned a larger and more valuable property valued by the defendants at £3.4 million for a re-mortgage. The judge held that the non-negligent valuation was £2.8 million and the permissible margin ten per cent. The house was distinctive with a steel frame and floor to ceiling plate glass windows elevating it to the status of a “one-off property”.

There were allegations of contributory negligence by the lender in both cases which succeeded only in relation to the house in Webb. There, the judge accepted that a 95 per cent LTV (loan to value) ratio “was just not enough of an equity cushion”. The borrower also claimed to be a self-employed scaffolder earning £75,000, although he had not answered the question in the lender’s application form asking about default on any borrowings. The lender’s “Experian” search showed that there was a small outstanding county court judgment but, much more importantly, credit card defaults totalling £18,000. Against that background, the judge also held that the borrower’s financial position made it imperative that the application was not treated as self-certifying” as it had done. Taking both factors into account, the judge reduced the lender’s claim by 50 per cent.

However, the judge did not find that acceptance of self-certified income in the case of the flat in Webb was negligent, nor was it negligent to agree to lend on the basis of a LTV of 85 per cent in respect of the flat or a 73 per cent LTV in the case of the property in Blemain. Other allegations of contributory negligence and failure to mitigate fell away on factual grounds.

The judge was critical of the lender’s approach to lending but observed that it was shared by other lenders and had not been criticised by the FSA (Financial Services Authority) until after the market crashed.

Two lessons for valuers and their insurers emerge from these cases:-

• In this round of lender litigation it is difficult to persuade the court to accept a “permissible margin” for valuations of standard residential properties of more than five per cent. That is probably because much of the litigation so far has concerned flats in the buy-to-let market which are all remarkably similar. But it may be worth re-visiting this issue if the recession continues and claims emerge relating to different types of property.
• Any allegation of contributory negligence by the lender needs a firm factual underpinning supported by bombproof expert evidence. The courts have been particularly reluctant to accept that practices adopted by the whole lending market before 2007/08 were negligent no matter how rash they were. In contrast, it is much easier to gain traction with arguments that the characteristics of an individual borrower – such as credit history, reluctance to answer questions or answering them incorrectly – demanded further investigation by the lender which would have led to rejection of the application.

One vision for the future is that at some point these issues will be reviewed by the Court of Appeal, but it will be important to select the right case with firm factual evidence of the lender’s contributory negligence.