What issues arise when deciding whether a valuer owes a duty of care to a third party?

The recent case of Freemont (Denbigh) Limited v Knight Frank LLP [2014] EWHC 3347 considered this issue.

The facts

Freemont Denbigh (FD) claimed against Knight Frank LLP (KF) for damages said to run to many millions of pounds in connection with a valuation of development land which was made in early August 2006.

  • The development site formed approximately 17 acres of a larger plot of land on the outskirts of Denbigh, which until 1995 was the site of the North Wales Hospital.
  • In July 2006, the site was transferred to FD.
  • An existing outline planning permission had been granted, subject to a satisfactory Section 106 Agreement being entered into.
  • One of the proposed Section 106 requirements was for the owner of the site to provide a bond to secure its agreement to deposit approximately £5m into an account in the name of the Council, in order to finance works to the listed buildings on the site.
  • Lloyds Bank had confirmed they were interested in providing the bond, but required a valuation first. KF provided this valuation report. It was dated 1st August 2006 and was said to be provided for secured lending purposes. The report valued the development land as at 26th July 2006 at £17m with the benefit of outline planning permission and £18.7m with detailed planning consent.
  • The Section 106 Agreement was signed, but detailed planning consent was never obtained and no development took place at the site.
  • The listed buildings fell even further into disrepair. In FD’s view, the whole site is now worthless due to the state of disrepair and the fact the likely costs of reinstatement are so high.
  • FD’s claim against KF was that it had entirely lost the value in the site and that that loss was caused by the negligent overvaluation of the site by KF in 2006. FD said it relied on the valuation report for the purposes of assessing whether to sell the development land to developers in the months or years which followed the report, but because the developers were not prepared to match KF’s valuation, it declined all offers for the land.
  • Had the valuation been for what FD alleged was the correct figure, it claimed it would have taken a different approach to the offers and would have accepted one of them.
  • It was no part of FD’s claim that KF’s valuation report was deficient for the express purpose for which it was provided - in connection with the provision of security by Lloyds Bank. Following the provision of the report, the bond was provided for the three years for which it was required by Denbigh County Council (ie for the duration of the outline planning permission).

What were the issues involved?

This High Court had to decide just five preliminary issues:

  1. Did a contract of retainer come into existence between KF and FD in relation to KF’s valuation of the property and the preparation of its valuation report dated August 2006?
  2. If the answer was yes, what were the terms of the contract of retainer?
  3. Did KF owe FD a common law duty of care to exercise reasonable skill and care in the valuation of the property and the preparation and provision of the valuation report?
  4. In the light of answers to points 1 and 3 and/or the content of the valuation report, was FD precluded from relying on the valuation report?
  5. Were the heads of loss pleaded capable of falling within the scope of any obligation or duty held to be owed by FD to KF and/or were they too remote/unforeseeable to be recoverable from KF?

What did the court decide?

The court decided on the facts that:

  1. A contract of retainer come into existence between KF and FD in relation to KF’s valuation of the property and the preparation of its valuation report dated August 2006. It may have been that in the end KF intended to have a contractual relationship only with Lloyds Bank, that they did also enter into a contractual relationship with Lloyds Bank and they believed that their contract of retainer was with the bank alone. However, for a long period of time the intention was for the retainer to be between KF and FD. There was nothing exceptional about this –it was not uncommon for a developer to procure a valuation for security purposes which the developer would then use to try to obtain funding
  2. The critical term of the contract was that KF would provide a valuation of the development land for the purpose of enabling FD to obtain the financing which it required - a report for financing or secured lending purposes. However, it was not also a term (express or implied) of the contract of retainer that the report was to be provided for FD to rely on in the future when forming its plans for the development land.
  3. KF did owe FD a common law duty of care, in tort, to exercise reasonable skill and care in the valuation of the property and the preparation and provision of the valuation report. However, that duty of care extended only to the provision of a report for secured lending purposes. KF were to take care to produce a report which gave a fair value for the development land so that FD was able to obtain the financing it had negotiated. If KF had negligently valued the land at such a low figure that Lloyds Bank had been deterred from providing the bond, FD would have been entitled to sue KF both for breach of contract and for damages at common law. However, that did not happen - the valuation achieved the aim of persuading (or at least not dissuading) Lloyds Bank to provide the bond which was required. It would be remarkable if the duty of care owed by KF in tort was more extensive than their contractual duty of care. There was no warrant for any extension of the duty in this case - the common law duty was coincident in its extent with the contractual duty of care.
  4. FD was not precluded from relying on the valuation report for the purposes for which the report was provided - to enable it to try to obtain the financial support it required. However, if it did indeed rely on the report in the months or years ahead for other purposes for which the report was not provided, it was not entitled to bring a claim against KF in respect of any loss it suffered in consequence of that reliance. KF did not owe FD a duty of care to protect it against such loss, either in contract or in tort.
  5. The heads of loss claimed (including loss of profit on a subsequent sale alternatively the loss of a chance of a subsequent sale at a profit) were therefore not capable of falling within the scope of the duties owed by KF to FD. The further questions of remoteness or foreseeability therefore did not arise.

What are the lessons for lawyers?

The clear message for lawyers where property valuations are concerned is to ensure that the duty of care owed by a valuer to their client (whether direct clients of the valuer or third parties) is spelt out expressly in the documentation.

Filed Under: Property

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