The Supreme Court has clarified what a lender can recover from a negligent valuer where there have been successive loans and valuations. It has ruled that a lender cannot expect to recover the full value of the loan secured against the asset which has been negligently valued. This judgment provides a salutary lesson for lenders: in order to avoid suffering irrecoverable losses, lenders may now need to reconsider the basis of their lending and also the terms and conditions they use when retaining valuers.
Consider this scenario: a customer wants to borrow £1m from a bank. The customer offers the bank security over a piece of land. The bank instructs a valuer who values the land at £1m, which is a fair and accurate valuation at the time. The bank lends the money to the customer. Sometime later, the loan is due to expire and the customer wants to refinance and borrow a further £1m from the bank (taking his total borrowing to £2m). The bank instructs the valuer to re-value the land, which he does at a revised valuation of £2m. The bank provides the second loan to the customer, part of which is used to repay the first loan. So far, this is a relatively typical scenario.
However, the customer then defaults on the loan and is insolvent. When the bank tries to enforce its security it transpires that the land is now worth nothing, due to some catastrophic encumbrance or market collapse which occurred after the first valuation but before the second valuation and was not identified by the valuer upon his second valuation.
The bank has a claim against the valuer for negligence. But for what amount? It was a scenario similar to this that the Supreme Court was asked to adjudicate upon in Tiuta. The lender (Tiuta) advanced a loan for approximately £2.5m (the First Loan) to the borrower in reliance on a valuation carried out by De Villiers which indicated that the land offered as security was worth £2.3m-4.5m (the First Valuation). That valuation was not alleged to have been negligent. When the First Loan was due to expire, the borrower sought to refinance and also borrow an additional sum of approximately £300,000. Tiuta commissioned De Villiers to prepare a second valuation which indicated that the land was now worth £3.25m-£4.9m (the Second Valuation). Tiuta advanced a new loan of approximately £3.1m (the Second Loan), of which £2.8m which was used to repay the First Loan and associated interest, and a further sum of £300,000 was advanced by way of additional borrowing. The Second Valuation was negligent and Tiuta was ultimately unable to recover any monies in relation to its security.
Tiuta sued De Villiers for professional negligence on the basis that Tiuta advanced the Second Loan in reliance on the Second Valuation and therefore suffered a loss equivalent to £3.1m. In response, De Villiers argued that the most it could be liable for under the Second Loan was the additional money advanced – i.e. the £300,000. The basis for De Villers' position was that, even if the Second Valuation had been negligent and even if, but for the negligence, the Second Loan would not have been advanced, Tiuta would still have been subject to the First Loan and would have still suffered the majority of its losses in any event.
In a unanimous decision in favour of De Villiers (overturning the Court of Appeal decision in favour of Tiuta), the Supreme Court held that the proper measure of damages is the sum which restores the claimant to the position it would have been in 'but for' the negligent actions of the defendant. The Court therefore compared: (a) what Tiuta's position ought to have been had De Villiers fulfilled its duty of care; and (b) Tiuta's actual position.
More specifically, and applying the decision in the earlier case of Nykredit , the Supreme Court had to consider whether, but for a negligent valuation, Tiuta would still have had the money which the negligent Second Valuation caused it to lend. In answering that question, the Supreme Court noted that "Tiuta would not still have had it, because it had already lent it under the first facility" . Tiuta would have lost the advances under the First Loan in any event. Any loss suffered as a result of the negligent Second Valuation could therefore only be the additional amount of the Second Loan in excess of the repaid First Loan, i.e. £300,000.
For lenders entering into successive loan arrangements with successive associated valuations, there are four key lessons arising from the Supreme Court's decision in Tiuta:
- Whilst a lender can recover losses equivalent to any 'additional' sums advanced under later loans, it will not be able to recover from the second valuer the amount equivalent to any earlier loan which has been repaid using part of the later loan.
- In the light of 1 above, a lender may still be able to bring a claim against the second valuer for the unrecoverable balance of its losses on the basis that, as a consequence of the second loan reliant on the second valuation, the lender has lost the chance to sue the first valuer for negligence. In order to do so, the lender should ensure in advance that:
- its Terms & Conditions (governing the relationship with the valuer) make it clear that: (i) in reliance on a valuation report, a lender may discharge any previous advances, thereby losing any claims it might have had in respect of earlier valuations; and (ii) consequently, the lender reserves the right to pursue any claim of loss of opportunity against the valuer; and
- where more than one valuer is instructed successively, any subsequent valuers are provided with a copy of any earlier valuations, so as to increase the likelihood that the lender's possible loss of opportunity is foreseeable to the second valuer. A loss of opportunity claim could only succeed if the first valuation was in fact negligent.
- In Tiuta (as in our hypothetical scenario above), the first valuation was not negligent. However, in practice, where there are successive valuations it is more likely that – unlike in Tiuta – all of the valuations will be negligent or none of them will be. Consequently, if a lender has a claim against the last valuer, they are likely also to have had a claim against the earlier valuers (and therefore a loss of opportunity claim as set out at 2 above).
3. In any event, one possible practical solution to this problem may be for the lender to increase the amount of the initial loan each time further borrowing is required, rather than making a new loan which discharges the initial loan. That ought to allow the lender to maintain a claim against the first valuer (as well as the second valuer), as the loss suffered from the first loan would not have been discharged by any subsequent repayment.
If you require further information about anything covered in this briefing note, please contact Kate Allass (Kate.email@example.com; 020 3375 7220) or Jolyon Connell (firstname.lastname@example.org; 020 3375 7205) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Disputes page of our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, January 2018
 Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2)  1 WLR 1627