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Court of Appeal: lender entitled to recover full refinancing loan in negligent property valuation case

A lender was entitled to recover the full amount of a refinancing loan it granted after relying on a negligent property valuation, and not just the 'top-up' funding, the Court of Appeal has ruled.

In a majority judgment, the appeal court ruled that bridging lender Tiuta International would not have entered into the second transaction at all had surveying firm De Villiers correctly valued the redevelopment site in Sunningdale, Berkshire. A High Court judge had originally ruled that only the difference between the initial loan and the refinancing could be recovered.

Commercial disputes expert Suzie Boyd of Pinsent Masons, the law firm behind Out-Law.com, said that the decision would have "far-reaching ramifications" for the surveying industry and other professional services firms, and could also lead to increased professional negligence insurance premiums.

"This ruling corrects the incorrect application of the 'but for' test by the judge at first instance," she said.

"The judge failed to take into account the fact that 'the transaction was structured in such a way that the second loan was used to pay off the first', and the second loan was therefore separate from the first loan. The judge should have concluded that, but for the negligent valuation, the lender would not have entertained the second transaction. Therefore, the whole loss under the second loan ought to be recoverable, rather than the lender facing a potential gap in damages that it could not recover against the surveyor for the second loan," she said.

De Villiers was approached to value the property, a partially-completed residential property development, on behalf of Tiuta in February 2011. It did so at £3.25 million in its current state of development, and at £4.9m on completion. On the basis of that valuation, Tiuta provided a loan for just over £2.5m to the developer.

In November 2011, the developer approached Tiuta to increase the amount of the loan to just over £3m on the same security. De Villiers was once again approached to provide a valuation. Tiuta agreed to provide the additional funds on the basis of this valuation but it did so by refinancing the entire loan, rather than by varying the original agreement. The term of this second loan expired with about £2.85m outstanding, which was never repaid. The property only made £2.1m for Tiuta when sold by the lender to recover its loss.

According to Tiuta, had the surveyor "taken reasonable care" in its second valuation, it would not have made the second loan available to the developer. The surveyor denied that it had been negligent, but argued that even if it had been Tiuta "could not have suffered a greater loss than the amount by which the indebtedness increased" as a result of the second loan. The original High Court judge agreed, finding that any negligence by the surveyor in December had not caused the loss attributable to the original loan.

Finding in favour of Tiuta by two judges to one, the Court of Appeal said that this was incorrect. The two loan transactions were separate, and it was "of no interest or relevance, either in fact or in law" that part of the second loan would be used to pay off the first loan.

"[Tiuta] entered into the second transaction in reliance on [De Villiers'] valuation," said Lord Justice Moore Bick, giving the judgment of the court. "If the valuation had not been negligent, [Tiuta] would not have entered into the second transaction, and would have suffered no loss on that transaction as a result. It would have been left with the first loan and the security for it, together with any claim it might have had against the valuer. However, that is of no relevance to [De Villiers] in its capacity as valuer for the purposes of the second loan."

"[De Villers] suggested that, if the first valuation had been carried out negligently by another valuer, the effect of [Tiuta's] argument would be to transfer the liability of the first valuer to [De Villiers], which he submitted would be unfair. However, that overlooks the fact that [De Villiers] valued the property itself in the expectation that [Tiuta] would advance funds up to its full reported value in reliance on its valuation. There is nothing unfair in holding [De Villiers] liable in accordance with its own valuation for the purposes of the second transaction," he said.

"When providing its valuation, the surveyor did not seek to place any limit on its potential exposure," said commercial disputes expert Suzie Boyd. "As such, the court held it would be unfair to allow a negligent valuer to question the working practices of a lender to escape part of the consequences of negligence."

"It is now expected that insurers will seek to increase their premiums as further claims are likely to follow, not just limited to those against surveyors," she said.

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