In valuer claims, what margin of error is allowed before a valuation is negligently wrong? Also, what type of lending practices do the courts consider negligent? The recent cases in this area, Webb Resolutions v E.Surv [2012] and Blemain Finance v E.Surv [2012], provide more guidance and affirm the position in the K/S Lincoln case on margins and GMAC v Countrywide on lender contributory negligence.
Background
Webb and Blemain were two separate claims brought by lenders against the valuer, E.Surv, alleging over-valuations.
In Blemain, E.Surv valued a 5 bedroom modern detached house located on a small private road in Putney Heath at £3.4 million in July 2007. Following default on the second mortgage in favour of Blemain, the lender recovered nothing. The court concluded that the correct value was £2.8 million making the valuation negligent by 21%.
In Webb two valuations were provided by E.Surv in relation to mortgage advances to two individual borrowers, Mr Ali and Mr Bradley. Mr Ali was purchasing a 2 bedroom flat in a new development in Birmingham. E.Surv valued it at £227,995 in November 2006. The correct value was held to be £204,658, making the valuation negligent by 11.4%.
Mr Bradley was seeking a remortgage. E.Surv’s valuation of his 4 bedroom detached property in Whitstable, Kent was £295,000 in July 2007. The correct value was found to be £260,000, a 13.5% overvaluation.
Margin of error
The K/S Lincoln case sets out the following margins for error for valuations, in recognition that valuation is not exact and even a reasonable competent valuer may reach a different value from another equally competent professional:
- For a standard residential property +/-5%.
- For a one-off property +/-10%.
- For a property with exceptional features as much as +/-15% or higher in appropriate cases.
In Blemain the appropriate margin of error was 10%, despite both experts agreeing that the margin was 15%. The court held that whilst the property was “distinctive” there were a number of comparables available.
In Webb, the margin of error for both properties was 5%, because there were numerous comparables for both properties. The court viewed the Ali property as being “as far from a one off property as it was possible to get”.
Contributory negligence
Where lenders have been lax in making loans there is the possibility of their damages being reduced to reflect the contribution their negligence made to the loss.
In Blemain and the Ali loan in Webb, the court held that there should be no reduction. Although in Ali it was a high loan to value ratio (85%), with a failure by the lenders to investigate the performance of other mortgages or verify income and defaults of £2,477 in Mr Ali’s current account, Mr Ali did not appear to be in substantial financial difficulty at the time of the loan. The court considered these ordinary features of sub-prime lending and decided that the appropriate standard to apply was that of a reasonably competent centralised lender. It also said that practices common at the time should not be considered with hindsight. As the sub-prime self-certified model was common between 2004-2007, the court could not conclude that such lending was irrational or illogical. This decision is similar to the view reached in the GMAC case reported earlier in 2012.
On the other hand in relation to the Bradley loan, the court applied a reduction of 50% because Mr Bradley was clearly in financial difficulty prior to his application. He had £18,000 of defaults and £1,000 CCJ against him, yet a 95% LTV remortgage was made.
Conclusion
These cases confirm that it will be difficult to persuade a court that anything other than a 5% margin of error will be permissible for standard residential properties, although each valuation of course relies on its specific factors. Lenders will also be pleased to note that the courts will be reluctant to find that practices are negligent when used widely across the market at the time, although a failure to react to signs that a potential borrower is in financial difficulties is likely to lead to a substantial reduction in damages recovered.
