In the aftermath of the financial crisis that hit in 2007, it is fair to say that lenders have taken the brunt of the criticism for their lending practises and consequently financial institutions have become subject to tighter financial regulation. With the aforementioned in mind, Rosling King’s recent professional negligence case brought on behalf of Blemain Finance Limited (“Blemain”) against e.surv Limited and heard before Mr Justice Coulson in the Technology & Construction arm of the High Court, is a victory for lenders and has set a new legal precedent in the sphere of professional negligence.
This case involved the accuracy of a valuation provided to support a loan which was secured by way of a second charge. The Judge ruled that the valuation report, on which reliance was placed to make this loan, had been negligently wrong by some £600,000 or 21.4%. Mr Justice Coulson said that on the evidence, Blemain would not have made the loan had they known the true valuation figure and that he did not think Blemain’s conduct had been negligent when considered against their own lending policy or in the context of a reasonable second charge lender. As a result, the full damages were awarded with no reduction for contributory negligence or failure to mitigate.
Facts of Case
The property in question was a modern detached house comprised of 5 bedrooms and located in a small private road in Putney Heath. It was valued by e.surv on 13 July 2007 at £3.4million.
The borrowers applied to Blemain for a loan of £250,000 to be secured by way of a second charge on their property; governed by the Consumer Credit Act under the auspices of the Office of Fair Trading. The borrowers had originally purchased the Property in September 2004 for the sum of £1.92m and just prior to the date of the valuation in question, the borrowers had remortgaged their Property with Cheltenham & Gloucester who became the first charge holder and whose loan was made in reliance on a valuation prepared in January 2007 which valued the property at £2.65m.
After the borrowers defaulted on their loan with Blemain, the Property was sold on repossession, in 2010, for the sum of £2m. Blemain, as second charge holder, did not receive any sale proceeds. Thereafter, Blemain issued a claim against e.surv for providing them with a negligent valuation report.
The borrowers completed a Declaration of Income & Affordability and in addition, their high annual salaries were verified and certified by a Chartered Accountant. This was a status loan to prime borrowers.
Although the borrowers had a good credit score, had serviced their debt and had no defaults, it was the defendant’s case that the credit report showed a significant level of indebtedness and that they were funding their life with credit cards, had highly monthly credit repayments and a number of searches showed up against their names for credit. The Judge held that overall, the good credit servicing and the high credit score were to be regarded as a source of comfort to Blemain when making this loan.
The loan to value (“LTV”) at 73% was slightly outside of Blemain’s Product Guide for a loan of this type (70%), but was approved by Blemain’s Credit Committee who had the discretion within the general underwriting guide to lend outside of policy. The LTV allowed a cushion of equity of circa £890,000. This satisfied the Judge as a reasonable approach. He held that there was to be no finding of contributory negligence on this transaction.
Blemain’s case was that the true value of the property as at 13 July 2007 should have been £2.65m which suggested the property had been overvalued by £750,000 or 28%. Conversely, the Defendant ascribed a value of £3.1 million to the Property which suggested that it had been overvalued by £300,000 from the outset but that this fell within a 15% tolerance, which they said was the correct margin of error for this large unique property.
The Judge was in no doubt that the valuation had been negligently performed. He considered that this modern designed property amidst Victorian and Edwardian properties was unusual and to some extent unique. He had in a related case already concluded that the margin of error for a standard residential property is 5% but as this was unique in its area, he applied a 10 % margin of error. He certainly did not think anything more than that or 15% could be sustained.
The Judge held the true value of the property to be £2.8m. He favoured the use of contemporaneous comparable sales available before the date of the valuation. He also heavily criticised the ‘mechanistic’ use of indices which he said was exacerbated by the steeply rising market in the twelve months before July 2007 and which produced unreliable figures and lacked any use of expertise.
For further information, please contact Georgina Squire or the Partner with whom you usually deal.