Notes in the margin
Janet Bignell QC and Jamie Sutherland explain the court's approach to negligence claims against valuation surveyors
In two recent High Court decisions, Barclays Bank PLC v Christie Owen & Davies Limited (t/a Christie & Co) and Barclays Bank PLC v TBS & V Limited, the bank respectively succeeded and failed in claims against surveyors for allegedly negligent property valuations.
Despite the different results, the cases are consistent in demonstrating the approach which the court will take to such claims, forming its own view as to the correct valuation and then considering the possibility of negligence only if the defendant’s valuation falls outside an appropriate margin of error.
In Christie Owen, the bank’s customer owned two arcades and applied for a loan to purchase a third, to be secured over all three. In TBS & V, the customer sought mortgage funding to purchase a care home. In both cases, the bank proceeded with the loans following valuations by the defendants, and the borrowers’ businesses failed, with resulting losses to the bank.
In professional negligence claims generally, the question is whether the defendant ‘acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession’ (per Lord Justice Hoffman in Zubaida v Hargreaves, paraphrasing Mr Justice McNair in Bolam v Friern Hospital Management Committee). As the House of Lords recognised in Bolitho v City and Hackney Health Authority, the court can apply its own logical analysis to the body of professional opinion and find that it is not reasonable or responsible.
However, Merivale Moore PLC v Strutt & Parker established a threshold test for claims against valuers, which must be crossed before Bolam-type considerations come into play. Lord Justice Buxton stated: ‘The first question is whether the valuation... falls outside the range permitted to a non-negligent valuer... A valuation that falls outside the permissible margin... calls into question the valuer’s competence and the care with which he carried out his task.’
Merivale was applied in the two recent Barclays cases. In TBS & V, Mr Justice Dove summarised the court’s approach:
The court must form its own view as to the correct valuation, following professional practice standards which applied at the valuation date;
The court must consider what the appropriate margin of error would be, in order to determine the bracket in which a non-negligent valuation would fall;
If the defendant’s valuation is within the relevant margin of error, negligence will not have been established; and
- If – and only if – the margin of error is exceeded, the valuer’s care and skill is called into question, and negligence will be assessed on the Bolam/Bolitho basis.
In both the recent cases, the judges rolled up their sleeves and applied the applicable standards from the Royal Institution of Chartered Surveyors ‘Red Book’, taking account of the relevant expert evidence to reach their own view at each stage. First, the court established the projected net profit of the hypothetical ‘reasonably efficient operator’, comprising the business’s earnings before interest, tax, depreciation, amortisation, and rent (EBITDAR). The EBITDAR, as multiplicand, was then subject to an appropriate multiplier, representing a number of years purchased, to reach a valuation.
In both cases, the court followed K/S Lincoln v CB Richard Ellis Hotels as to the applicable margin of error, in which Mr Justice Coulson considered that 5 per cent was appropriate for a standard residential property, 10 per cent for a one-off property, and 15 per cent for a property with exceptional features, or even higher in an appropriate case. Both the arcades and the care home were exceptional properties, with no direct comparables for the care home.
In TBS & V, the defendant’s valuation of £350,000 was within 15 per cent of the court’s figure of £330,000, and so was not negligent. The defendant’s methodology was thus not open to question: ‘the law properly focuses on the end result, not the way in which that end result may have been achieved’, per Coulson J in K/S Lincoln. In Christie Owen, the defendant’s valuations exceeded the 15 per cent margin and, at the next stage, the methodology was found to be negligent.
The court’s approach to valuers’ negligence claims requires a fiercely forensic approach from parties’ advisers. It is not enough to think that your expert witness will fare better than the other side’s overall: the court will take account of all the valuation evidence in reaching its own view, and so the likely outcome at each stage of the valuation process has to be considered. While the 15 per cent margin of error for unusual properties may seem generous to valuers, Christie Owen shows it can be exceeded in some cases, and TBS & V suggests that a higher margin will be very rare indeed.
Janet Bignell QC, pictured, and Jamie Sutherland are barristers at Falcon Chambers