Value for Money

Can banks take action against the valuers who acted on their behalf in the property boom? 

The value of property has plummeted, and as a result banks (together with other secured creditors) are trying desperately to point the finger of blame on any party who advised them negligently in reaching the decision to lend so furiously in the property boom.

A recurring question, arising from both valuers and their clients, the banks, is whether a valuer can have any liability for the valuations they gave 2-3 years ago given the significant devaluation of the property assets now.

At last, the question has been answered (at least, at first instance) in the case of K/S Lincoln & others -v- CB Richard Ellis Hotels Limited (No 2), decided in May 2010. 

The case involved a group of Dutch investors acquiring a number of hotels which were valued by the defendant, who failed to point out that the 25-year occupational lease of each property had no rent review provision and was subject to some quite unusual turnover rent provisions including a shortfall claw-back provision.  The exact wording of the turnover rent provisions meant that the likelihood for rental growth at any point throughout the term was negligible.

The case is not new law, but re-emphasises the decision in Goldstein -v- Levy in 2003, which required the liability of the valuer to be determined by the final valuation figure, not the methodology employed in getting to that figure.  This is different from the normal rules of negligence, however valuers are given a special interpretation given the nature of the work they do.

The interesting aspect of this decision is that, save for exceptional circumstances, if a valuation comes within a certain reasonable bracket, the valuer would not be considered negligent even where particular aspects of the valuation were unsatisfactory.  The court even held that a valuer could make a series of mistakes, but if the correct figure (or within the permitted tolerance levels) were arrived at (even if this was by sheer luck) the valuer would not be negligent.

The High Court held that, for a standard residential property, a tolerance of plus or minus 5% would be acceptable brackets within which a value would not be considered negligent, and for a valuation of an unusual property this could increase to 10% of the correct valuation figure, and if there were exceptional features of the property in question a tolerance of 15% of the valuation figure, or even higher in certain cases, would be perfectly acceptable. 

In this particular case, the 10% margin for error was deemed to be a minimum level within which the valuer would not be considered negligent, even though it was noted that he had failed to take account of the shortfall claw-back provision for rents and his methodology was overly complicated.  As the valuer came within the 10% margin for error, it was deemed that he was not negligent.

As banks turn their attention increasingly upon the valuers who acted on their behalf in lending matters, this case provides a strong insight into how the courts will respond to such claims.  Obviously, if improper conduct or, even worse, fraud or criminal activity is involved there may be other issues to deal with in respect of valuation figures, however as a result of the K/S Lincoln case the ability to pursue valuers for negligence has closed further. 

It must be remembered that valuations were carried out in the boom and following that mindset, and as such valuers were assessing the value of properties at that date.  It is much more difficult to look back on a deflated property market and rationalise some of the figures given, however unless the valuer has gone outside the tolerance thresholds detailed above as at the date of the valuation, it will be very difficult to show negligence on the valuer's part in giving a certain valuation figure on a certain day even if their methods for getting to that figure were completely negligent in their own right.

While valuers remain cautious in this climate, the guidelines set out in K/S Lincoln should serve as some comfort to them moving forwards.  Although the banks may need to check over valuations, which have been given, it would need to be substantially off the mark to give rise to a negligence action, and unfortunately this closes another door for the banks trying to recoup their money from the property market.

Tom Adair
Partner, Banking and Finance

Graeme McKee
Associate, Banking and Finance

David McAleese
Associate, Banking and Finance