The Court of Appeal has issued a landmark judgment siding with lenders in a professional negligence case that will have wide-ranging ramifications across the lending industry.
Georgina Squire, head of Dispute Resolution at Rosling King (RK), examines the implications of the decision in Tiuta International Limited (in Liquidation) v De Villiers Surveyors Limited. RK acted for Tiuta, the successful appellant.
The question before the Court of Appeal was: can a lender recover all its loss on a refinance loan from a negligent valuer, or is the lender limited to the “top up” advanced after the existing loan is redeemed (because it would have suffered the loss on the existing loan in any event)?
The respondent was De Villiers Surveyors Limited, who were instructed by the appellant, Tiuta International Limited, to value a property in Sunningdale, Berkshire. In reliance upon the valuation report prepared by the respondent, the appellant advanced funds to its borrower.
The borrower later approached Tiuta to request an increase in the loan facility. De Villiers was instructed to prepare a second valuation report, in reliance upon which Tiuta redeemed the existing loan and advanced further funds to the borrower by way of a refinance.
Tiuta sought to recover from De Villiers the loss arising out of the refinance loan (c£890,500), claiming that the second valuation report had negligently overvalued the property.
De Villiers applied for summary judgment in relation to the issue of quantum, claiming that if its second report was negligent, Tiuta could not have suffered a greater loss than the amount by which the indebtedness had increased thereafter (i.e. the appellant’s loss is limited to the “top up” advance of c£272,700).
At first instance, the Court agreed with the respondent and held that any negligence by the respondent in relation to the second valuation had not caused the loss attributable to the original loan, meaning that Tiuta’s recoverable loss was limited to c£272,700. Tiuta sought leave to appeal this decision, which was granted, and the matter came before the Court of Appeal on 21 April 2016.
In the judgment handed down today (July 1), the Court of Appeal held, by a majority that the respondent is liable to the appellant for all of the loss flowing from the negligence of its second report. The respondent accepted instructions from the lender to value the property in question. They accepted those instructions, in their professional capacity, in the knowledge that their valuation was sought in order to inform the lender in making its decision in respect of the borrower’s application for a loan to be secured on the property. It is of no interest to the respondent the purpose to which the new loan is to be put. The respondent valued the property in expectation that the appellant would advance funds up to its full reported value in reliance on the second valuation report.
The Court of Appeal held that there is “nothing unjust in holding the respondent liable in accordance with its own valuation, prepared specifically for the purposes of the second transaction” and that the “second loan is entirely independent from the first loan…had there not been a negligent valuation, the appellant would not have entertained the second transaction and [its] loss is the total advance of the second loan, less the [borrower’s] covenant and the true value of the security”.
Siding with lenders, the Court of Appeal went so far as to state that “it could be said to be inherently unfair that…. a negligent valuer could use an attack on the legitimate working practices and systems of the appellant as a means of escaping part of the consequences of his or her negligence.”
This case is a resounding win for lenders on an important point of law. It has wide ramifications for claims against their professional advisers. Lenders will welcome this decision as it settles a contentious issue in relation to how much of their loss they can recover arising out a refinance loan. They can now be certain that they may recover their full loss in the event the valuation was negligent, not being restricted to the amount by which the refinance exceeds the original loan.