Negligent valuations and lenders losses (Barclays Bank v Christie Owen & Davies)

The liability of a property valuer for a lender’s losses resulting from a negligent valuation is examined by barrister Nicola Rushton, of Hailsham Chambers, in the light of Barclays Bank v Christie Owen & Davies.

Original news

Barclays Bank plc v Christie Owen & Davies Ltd (trading as Christie & Co) [2016] EWHC 2351 (Ch), [2016] All ER (D) 06 (Oct)

The Chancery Division ordered the defendant property valuer to pay damages to the claimant lender, a bank which had sustained losses after it made a loan to a borrower in reliance on the defendant’s valuation of three properties. The court found that the defendant had been negligent in adopting the wrong basis for valuing the properties and thereby over-valuing them, which had caused the claimant’s losses when the borrower was placed in administration and the properties were sold at a price substantially lower than the defendant’s valuation. However, the court held that the bank had been contributorily negligent, so that it would only be entitled to 60% of the sum that it sought.

What was the background to the case?

The claimant alleged that the defendant had over-valued three amusement arcades in Great Yarmouth. The borrower already owned two of them and applied for an equity release loan to buy the third. The defendant was instructed to value all three, on a trading valuation basis. It valued the three arcades at £4.2m in total.

What issues were before the court?

The eight principal issues were whether:

  • the defendant had adopted the correct basis for the trading valuation
  • the arcades were negligently over-valued and how the court should reach that decision
  • the sale price paid by the borrower was relevant as evidence of value
  • the claimant would have made any loan on an accurate valuation
  • the claimant needed to give credit for parts of the sale proceeds used to redeem pre-existing lending
  • the claimant had to give credit for payments made by the borrower from its overdrawn current account
  • the fact that the advance was initially paid into an overdrawn account meant the claimant had recovered part of it, and
  • the claimant had been contributorily negligent and if so, what reduction should be made

What did the court decide?

It concluded the defendant had over-valued the arcades by 20% overall and, as a result of its negligence, the claimant had suffered a loss. On the eight principal issues, the court reasoned as follows.

A competent valuer would only have done such a valuation by assessing earnings before interest, tax, depreciation and amortisation (EBITDA) of a reasonably competent operator of the properties, and then arriving at a capital value for each by applying a multiplier derived from considering the sales prices in relation to EBITDA of sales of comparable properties. However, the defendant had not used the EBITDA/multiplier basis.

The court could carry out its own EBITDA/multiplier assessment and calculation, based on all the evidence, and reach a conclusion as to true value. On that basis, it concluded the true value was £3.5m. The valuation was therefore negligent, since it was outside the margin of error of 15% and the methodology had also been incorrect.

The sale price provisionally agreed between vendor and borrower was not reliable evidence of value, since there was no evidence of proper exposure to the market the trading level had fallen and the borrower was not taking that into account sufficiently and there would be circularity in doing so because the fact that the sale proceeded would have been affected by the supportive valuation.

The claimant would not have made a loan on an accurate valuation, among other things because the borrower and vendor would then most probably have been unable to agree a price.

The claimant did not need to give credit for parts of the sale proceeds used to discharge either a pre-existing mortgage or overdraft facility.

The claimant did not need to give credit for payments made from an overdrawn account which was effectively not recovered.

The payment of the advance into an overdrawn account did not mean the claimant had recovered it unless either the overdraft was thereby brought back within its facility or the facility was reduced. What mattered was the facility level.

The claimant had contributed to its loss by its own negligence and there should be a reduction of 40% to the actual loss in this respect.

What was decided about the manner of valuing the properties?

These were trading properties which should have been valued in accordance with the relevant guidance in the Red Book. This was to the effect that a trading valuation should be done on an EBITDA/multiplier basis unless there was a good reason not to do so, which was not the case here. The defendant had instead valued the property by reference to a multiplier of turnover, which was not a recognised valuation method. If it had undertaken its researches competently (which it had not), it would have had the information to undertake an EBITDA/multiplier valuation.

How had the claimant contributed to the loss by its own negligence?

It did not give appropriate weight to information which it had that the borrower’s directors had misused a previous advance by using it to buy property in Spain, rather than for the purposes of the business. This was evidence of dishonesty, which should have caused the claimant to refuse to make what was a substantial increase in its lending to the borrower.

What should lenders note from this case?

There are three main points:

  • trading valuations should be done on an EBITDA basis and will be suspect if not (unless there is evidence of an accepted alternative method)
  • credit does not have to be given in professional negligence claims for sums which have not in reality been recovered because they have been paid through or from overdrawn accounts, or properly used to discharge other pre-existing secured lending
  • due weight needs to be given to information which casts doubt on the integrity of the borrower, even where the proposed loan appears commercially sound

Nicola Rushton appeared for the claimant in this case.

Interviewed by Robert Matthews.

The views expressed by our legal analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

Relevant Articles
Area of Interest