Since the onset of the economic downturn, various claims brought against property valuers have appeared before the Courts. Most of these cases have concerned valuations of residential property. The first major professional negligence case against a valuer of commercial property since the downturn has now been decided.
In 2001, Capita Alternative Fund Services (Guernsey) Ltd (“Capita”) and The Matrix Chatham Maritime Trust (“Matrix”) (together the “Claimants”) retained Drivers Jonas (“DJ”), a firm of chartered surveyors and property consultants, to provide valuation advice in relation to the acquisition of the Chatham Historic Dockyard in Kent intended to be developed as a factory outlet shopping centre (the “Property”). The Property fell within an ‘enterprise zone’ (“EZ”) and was eligible for EZ tax allowances. DJ valued the Property at £62,850,000 (with the benefit of EZ tax allowances) and £48,150,000 (without the benefit of EZ tax allowances). The purchase price was £62,850,000. The Claimants brought a claim against DJ for breach of contract and negligence on the basis that DJ had substantially overstated the commercial prospects and value of the Property. They argued that because the Property was in an EZ, a valuer requires substantial expertise in this area, expertise that DJ did not have. The Claimants sought damages in respect of all the losses they had suffered (some £64m) on the basis that this was an ‘advice’ case; in other words, DJ were not just advising the Claimants on the value of the property but were instead advising the Claimants whether or not to proceed with the transaction. In the alternative, they claimed the difference between the price paid for the Property and its true value.
DJ sought to defend the claim and argued that they did have the relevant expertise. They argued that their role was much more limited than the Claimants were stating and that the failure of the investment was not their fault but rather due to the venture being ‘conceived in a boom but born in a bust’.
The High Court found in favour of the Claimants and ordered DJ to pay damages to Capita of £18.05m. The individuals at DJ who worked on the valuation were held by the Court not to have the required experience or expertise, as they did not have any experience of valuing factory outlets. DJ should have declined to act or commissioned a specialist firm. This was clear from DJ’s failure to recognise issues which a competent valuer would have (for example, the need to commission a CACI Report, lack of visibility of the Property from main access sites, competition from Bluewater, no or very little passing trade, restrictions on signage to draw in trade, poor public transport, disadvantages with the design and layout, higher maintenance and operating costs).
The Court found that a competent valuation of the Property (without the benefit of the EZ allowance) should have produced a figure of £34,375,000, which was significantly less than the value of £48,150,000 given by DJ. It also ascribed a competent valuation (with the benefit of the EZ allowance) to be £44,800,000 and not £62,850,000 as ascribed by DJ. DJ’s valuation was found to be outside the ‘permissible margin of error’. They were held to be in breach of the duty of care they owed to the Claimants and were negligent. The Court acknowledged that the appropriate measure of damages depended upon the scope of the valuer’s duty; it acknowledged that if a valuer provides advice on whether the transaction should proceed (as opposed to merely giving valuation advice for its client to evaluate and decide whether to proceed), the valuer could be liable for all losses suffered by its client, not just the difference between the valuer’s negligent valuation and the “true” valuation. However, in this instance, although the Court held that DJ did provide investment advice, this was part of providing its valuation of the Property and the scope of DJ’s duty was limited to ensuring the valuation was accurate. As a result, Capita was not awarded damages for all the losses suffered but was awarded £18.05 million, being the difference between DJ’s valuation and the “true” value of the Property (with the benefit of the EZ allowance).
This case shows the need for professionals not to take on assignments which are outside the scope of their expertise. Professionals should clearly document, through an express retainer, what expertise they are providing and specifically what expertise is excluded. If a professional assumes responsibility where it is not sufficiently competent, it will be potentially holding itself out as being competent and could be liable for negligence if the advice is incorrect. We may now see narrower express retainers and more specialists being instructed on particular aspects of transactions.
As the first high profile claim against a commercial property valuer to be decided by the Courts since the economic downturn began, this case will inevitably cause commercial property valuers and their insurers significant concern. Whilst investors, developers, lenders and other real estate professionals may thus far have been focussing their energies on rescuing their real estate investments with all eyes on the future, this decision may lead some to glance over their shoulder to the past and dust off old valuation reports to see if they could be sitting on a potential negligence claim.
For further information please contact Georgina Squire or the partner with whom you usually deal