Sheona Wood and Verity Wilson discuss the implications of this important decision which reiterates the need for there to be a nexus between the breach of duty and the alleged loss (Charles B Lawrence & Associates (Appellant) v Intercommercial Bank Limited (Respondent) (Trinidad and Tobago) [2021] UKPC 30, Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 and Meadows v Khan [2021] UKSC 21 ) and re- emphasises that cases in which a valuer might be found liable for all the foreseeable consequences of a commercial transaction entered into as a result of negligent advice are likely to be rare.
There are also helpful observations about the recoverability of contractual interest, the "tolerance" applicable to a valuation of an unusual property and contributory negligence.
The claim was dismissed at first instance and in December 2023, the High Court rejected Hope Capital Limited’s request for permission to appeal. However, their subsequent application to the Court of Appeal was successful, and the appeal hearing is now scheduled for 11-12 March 2025.
Factual background
In February 2018, Hope Capital Limited ('Hope') instructed Alexander Reece Thomson LLP ('ART') to provide a valuation of a Grade II Listed property in Cobham, Surrey known as Cedar House (" the Property") for the purpose of providing a short term bridging loan to a company St Anselm Heritage Properties Ltd (" St Anselm"). The Property contained part of a medieval Hall from the 15th Century. St Anselm had had the benefit of a leasehold interest in Cedar House since 2002 pursuant to a Full Repairing lease containing a covenant to use the Property only as a high class hotel and restaurant.
The freeholder of the Property was the National Trust. In 2016 a Mr Pieri had bought St Anselm and wished to sell St Anselm's interest in the Property. In or around 2017 the local council had granted planning permission for the Property to be converted from a hotel into a residence, but consent would have been required for this change of use from the National Trust under the terms of the Lease. In the meantime, the National Trust had served a Notice to repair the Property ("the section 146 Notice"). Following its instruction ART valued the property at £4 million on an open market basis and £2.475m on a 180 day basis on the specific assumption that the section 146 Notice had been complied with.
The bridging loan of £2.448 million (c 64% LTV) was made in March 2018 for a period of six months. Before the loan was made Hope's solicitors pointed out that Hope's exit strategy for the loan (selling the Property as a residence) was problematic as the existing Lease was in the name of St Anselm (which was to be the Borrower) and yet the National Trust's correspondence had referred to entering into a new Lease with Mr Pieri personally. The solicitors also pointed out that Hope should check that the section 146 Notice had been complied with as otherwise the National Trust might be able to terminate the Lease.
The loan was not repaid in September 2018 when it should have been and by November 2018 Receivers had been appointed to take possession of the Property. In the same month the National Trust served subsequent s146 Notices on the basis that works had been carried out to convert the Property into a residence without permission. In 2019 the National Trust raised further s146 issues. A marketing campaign to sell the Property began in earnest. The Property was sold in October 2020 for £1.4 million. Mr Pieri became bankrupt in November 2020.
The claim
Hope issued proceedings against ART seeking damages of c£875,401.40 plus contractual interest /costs of funds as a further head of damages. Hope asserted that this was a clear no transaction case and that " the purpose of the provision of the valuation was, and was known to be, the only light which had to be green for the transaction to go ahead: advice as to valuation was tantamount to advising on entering the transaction as whole."
The Court determined that the actual open market value of the Property was £2.75 million and that the 180 day valuation at the time and at the date of default was £2.475 million. ART conceded that the open market valuation had been negligent, and that it had breached its duty. It did however, deny causation and submitted that there had been no loss suffered by Hope as a result of the negligent valuation of the Property given that the 180 day valuation provided in March 2018 of £2.475 million was also the 180 day valuation in September 2018 and was more than the loan made whether net or gross.
Instead, ART argued that the resulting losses stemmed from a number of other factors including (1) the second Section 146 Notice issued by the National Trust and (2) the impact of COVID-19 on the property market.
High Court decision
Constable J, considered a number of authorities including Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 and Meadows v Khan [2021] UKSC 21 and drew together the following principles:
- Categories of 'advice' and 'information' are neither distinct nor mutually exclusive categories. The fact-sensitive question of categorisation is, instead, whether the person providing the service has assumed responsibility for the risk of the whole transaction, or just for part of it;
- In answering this question, it is necessary to focus on the purpose for which the advice or information was provided;
- Criticality of the information provided by the professional (i.e. its causative potency) cannot of itself be determinative of the categorisation in circumstances where this will inevitably be the case in all 'no transaction' cases. However, it may be relevant to the question of purpose;
- It will usually be clear that a valuer's responsibility is limited to their particular area of expertise and that there will be other considerations relevant to the client's decision which are not for the valuer to assess. As such, cases in which a valuer is liable for all the foreseeable consequences of a commercial transaction entered into as a result of negligent advice are likely to be rare;
- Assessing a counter-factual is but a tool, may be of secondary importance within the analysis and may indeed be unhelpful in some circumstances.
Constable J held that the duty of the valuer did not in the circumstances of this case extend to protecting the lender against the consequences of unlawful acts of the borrower or dramatic collapses in the property market. The Court held that the purpose of the valuation in the present case was not to protect Hope from any and all foreseeable risks upon entering the loan, and even though ART's valuation was a persuasive factor for entering into the loan agreement, it was not the only reason to enter into the agreement. The result was a finding of nil loss for Hope and the claim was dismissed.
Comment
Constable J’s decision is a welcome one for valuers and professional indemnity insurers and underlines the need to consider the purpose for which advice is provided and the connection between the duty of care owed and the loss suffered. It emphasises that cases in which valuers will be liable for all of the financial consequences of a loan gone bad will be rare and provides helpful commentary on the very high hurdle which would have to be overcome by any lender seeking to recover either contractual interest or the cost of funding as damages.
The observations in the judgment are clear: that valuations will be subject to a significant tolerance (particularly in relation to unusual properties) and that lenders will have to take responsibility for their own lending decisions. In this case the judge would have reduced any damages Hope might have recovered by 50% in particular because: it did not consider whether the Borrower's exit strategy was feasible, it did not consider that the Lease might be terminated because of the breach of the s146 Notice and it ignored the character and probity of the borrower.
The outcome of the Court of Appeal's consideration of these issues will be awaited with interest.
On the horizon
In December 2023, the High Court rejected Hope's request for permission to appeal. However, their subsequent application to the Court of Appeal was successful, and the appeal hearing is now scheduled for 11-12 March next year. We will continue to monitor developments in this area and update further following the Court of Appeal decision.
Authors: Sheona Wood and Verity Wilson.
