Time Gentlemen Please.

Lenders who await the result of recovery action before pursuing errant valuers risk losing the right to claim

In a September decision in the Central London County Court a lender’s claim against its valuers was lost for being out of time.

The Law

Section 2 of the Limitation Act provides for a limitation period of 6 years for tortious claims. In negligence cases the time runs from the date the damage is suffered. In simple terms where a loan has been granted, that damage may be suffered on the date of the loan, if for example, the borrower’s covenant has no value, but in other cases, from the date of default by the borrower. The loss suffered on negligent valuation will be the difference between the value placed upon the property by the errant valuer, and its true market value. A cap is generally applied, and that cap will be the amount by which the property has been overvalued, so that, any losses arising as a result from the fall in the property market would not be recoverable.

The Facts

In Canada Square Operations Ltd –v- Kinleigh Folkard & Hayward Ltd (KFH), the borrower applied for a mortgage advance which equated to 90% of loan to value. The lender took two valuations. Firstly from Connells who valued the property at £475,000 on the 23rd December 2005 and then from KFH in January 2006. They valued the property at £500,000. The lender noted the discrepancy between the two valuation figures and went back to Connells informing them of the higher valuation received and asking Connells to reconfirm, which they duly did. No evidence was taken from the lender as regards reliance, and notably the issue of reliance was not decided. Nevertheless, the loan was completed and the borrower maintained payments albeit sporadically until January 2008. In August 2008 the borrower surrendered the property to the lender. Although placed in auction, the property did not sell, but was subsequently sold in May 2009, the sale price being £305,000. On the 23rd October 2013 the lender chose to issue its claim for damages against KFH.

The Decision

The lender’s claim was vigorously defended and the primary issue which came before the Court to be decided was one of limitation. The material question was whether or not the lender had suffered a measureable loss, and whether the claim had been commenced within the statutory limitation period, i.e. 6 years from the date of cause of action.

In its judgment the court confirmed that a “basic comparison” had to be undertaken. This comparison required the court to value both the security, and the borrower’s covenant and whether the combined value, was worth more or less than the amount outstanding under the mortgage at the given dates. In a departure from previous thinking the Court decided that the costs of repossession and sale should be deducted in arriving at true valuation, and also, less controversially, an uplift was also to be applied, taking into account the movement in general market conditions at the date which was to be determined as the date of cause of action. Applying all factors, the Court valued the property at £385,818 as at October 2007 creating an overvaluation of £115,000 (the shortfall), which shortfall amounted to a 29% overvaluation. Prima facie, a negligent overvaluation was established, and notably, liability had been admitted.

Having established the true value of the property the Court compared that value, with the debt outstanding at various dates until repayment ceased. Based on the particular facts of this case, the Judge found that the borrower’s covenant was worth less than the shortfall by early 2007, this being the date that the borrower first fell into default. Although the borrower had made later payments, these had been sporadic and not always in the full amounts. On this basis, the date of first default was taken to be the date at which the borrower’s covenants lacked sufficient value to meet the shortfall.

Therefore the lender had suffered a measurable loss in February 2007, and predicated on that finding, proceedings would have to have been commenced by February 2013. The proceedings had not been issued until October of that year. As a result the lender had failed to issue in time, and its claim against the valuer was lost, even though the valuer had admitted liability for negligence.

There are some significant lessons to be learned for lenders.

Lessons for Lenders

• Where more than one valuation is take or received lenders must establish reliance to support an effective claim. This they should do by documenting the credit sanction, internally evidencing exactly which valuation was relied upon and why.

• The courts when establishing the true valuation of a property will take into account extraneous factors such as the cost of repossession and realisation as well as any other unknown defects or factors at the time. That can give more weight to any prospective claim.

• The test for valuing the borrower’s covenant is fact sensitive, but the starting point will almost always be the date of first default, the cause of action date could be extended to a later date depending upon the facts and the borrower’s payment profile.

• When default first arises, lender’s recovery teams must immediately assess property value, and seek to identify whether an overvaluation has taken place, or whether a shortfall, based upon the borrower’s covenant, is likely to be suffered. At that point, be aware of the limitation date and issue the claim if a prima facie claim lies against the valuer because failure to do so may leave valid claims out of time and lost.