20/12/2012 was an important day for lenders in the UK with the handing down of two favourable decisions by Mr Justice Coulson in the Technology and Construction Court.
Rosling King was instructed to pursue claims against E.Surv Limited, a company of chartered surveyors providing property valuations.
This resulted in two interlinked cases, Webb Resolutions Limited and E.Surv Limited [2012] EWHC 3653 (TCC) and Blemain Finance Limited and E.Surv Limited [2012] EWHC 3654 (TCC).
In these cases the Court was asked to decide on the accuracy of valuations provided by E.Surv to support residential loans by (i) GMAC who had assigned their loans to Webb and (ii) Blemain. The rulings in favour of Webb and Blemain provided welcome judicial guidance in the lending and valuation sectors and have been heavily relied upon over the past year, particularly by Claimant law firms like Rosling King.
As the 1 year anniversary of 20/12/2012 approaches, Rosling King reflect on the impact these cases have had on the professional negligence market.
In summary, the Blemain case concerned the accuracy of a valuation provided to support a loan which was secured by way of a second charge against a property in Putney. Coulson J ruled that the valuation report had been negligent.
On the evidence, Blemain would not have made a loan had they known the true valuation figure. Crucially, he found that Blemain’s conduct had not been negligent when considered against their own lending policy or in the context of a reasonable second charge lender. Full damages and costs were awarded.
The Webb case concerned two valuations by e.surv provided to support loans by GMAC to a Mr Ali in the first instance and Mr Bradley in the second.
In Ali, no reductions for contributory negligence were made but in Bradley GMAC were 50% contributorily negligent.
Both loans were self-certified with high LTV ratios; 85% on Ali and 95% on Bradley. Crucially, the Judge found 85% LTV not to be negligent in the market at the time.
The issues which persuaded Coulson J to make a 50% reduction in the Bradley case were the extreme facts of the case.
In valuation terms, the decisions have been extremely useful. The cases affirmed that the margin of error for a standard residential property would be 5%; 10% for a one off property and 15% for a property with exceptional features (such as a hotel).
In the Blemain case, even where the experts had agreed a 15% margin of error, Coulson J deemed that a 10% margin of error should instead apply on the basis that it was noted that margins were a legalistic analysis of valuation and the experts had themselves considered the true valuation in terms of a bracket of values for the property rather than percentage values.
This has assisted us in convincing Defendants that over valuing properties by as little as 5% may amount to negligence and even where expert valuers agree margins between themselves which are generous, the Court may draw its own conclusions from the evidence.
Following these decisions, we have seen a decline in arguments for margins of error higher than 5% on standard residential transactions, indicating that the tide has turned for good on valuation deviations.
In addition, the Blemain case made clear that valuers should not be guided by the price estimates given by prospective purchasers and then marry these up with the figures with little or no explanation.
This has helped us consider loan applications where the borrower's estimate and the valuation figure is the same and is not supported by appropriate comparable evidence.
Comparables that are of the same size and in the same style and location, with the sale date preceding the valuation will be the most reliable comparables.
Although this seems obvious, the Blemain case showed that a valuer’s reliance on a wide range of more expensive comparables, without consideration for their size or proximity to the property, was highly questionable and ultimately negligent.
This has helped us to dismiss unsuitable comparables advanced by Defendants and/or their experts. The Judge also criticised the mechanistic use of house price indices to value properties, especially sale prices obtained from different geographical areas as these are likely to produce inherently unreliable results, especially in a rising market.
Justice Coulson’s comments have helped us dismiss indices results and show a lack of expertise where valuers have sought to rely on them.
In the Webb cases, the Judge heavily criticised the valuers for starting at the asking/estimated prices and working back.
The valuer was criticised in the Ali case for producing his valuation without inspecting the Property and relying on the developer’s sales team for information.
The valuer on the Ali property was wrong to make no enquiries regarding incentives, despite RICS guidelines, and also to rely on comparables on the Quest table which were not necessarily based on sale prices.
The valuer’s methodology in the Bradley case was awry; he added his own 5% margin of tolerance. The valuer in Bradley also failed to take into account adverse factors that affected the property.
As these valuation errors are all common ingredients in professional negligence claims, lenders have been able to rely on Coulson J’s comments in these decisions in convincing Defendants that their valuations were negligent.
Arguably the most marked impact of these cases has been on lending analyses. The rulings contain important commentaries on the market in the mid-2000s, and the standards by which to judge lenders in that market, namely that of the reasonably competent lender.
These rulings made clear that lenders cannot be criticised for making loans which, with hindsight, look unpromising if another lender at that time would have made the loan in question, as the necessary ingredient of causation will not be made out. This has been hugely helpful in dealing with allegations of causation and contributory negligence, particularly on self-certified loans with high LTVs.
We have been able to rely on the judgments in the face of severely credit-impaired applicants with strings of defaults and CCJs, provided we have been able to show that the lending was neither irrational nor illogical.
The fact is that Coulson J accepted that defaults and CCJs were an ordinary feature of the sub-prime market and whatever the flaws in accepting investment mortgages as self-funding, this was in line with the marketplace.
