financial institutions
energy
infrastructure, Mining and commodities
Transport
technology and innovation
Pharmaceuticals and life sciences
Professional negligence
claims against valuers
Professional negligence claims against valuers
“This team is a “class act”
whose lawyers possess
“excellent technical skills.
It handles the full range of
commercial disputes...”.
“The firm has a complete
understanding of both legal
and practical dynamics –
the lawyers know the
people, the players and
the issues involved.”
“Norton Rose provides a
‘one-stop shop that covers
all our needs’.”
Chambers UK 2012
Time critical action
Following a lengthy period of restructuring,
banks and issuers under commercial
mortgage backed security (CMBS loans)
are starting to take enforcement action
and crystallise their losses. As part of
that process, banks and issuers should
be scrutinising reports that they obtained
and relied on by professional valuers
about the market value of the underlying
property asset.
Even though property values and rental
incomes have fallen as a result of the
recession, valuers who heavily overstated
property values and future rental income
streams will find that they may be liable
for negligence to the banks and/or issuers.
This will be the case if the loss suffered as
a result of the security being worth less than
the underlying asset can be attributed (in
whole or in part) to the overstated valuation.
If banks and issuers are to bring professional
negligence claims against valuers then action
should be taken sooner rather than later as
the six year limitation period for claims in
connection with loans that completed just
before the recession began may be about
to expire.
Our expertise
Our dedicated team of specialist real estate
and banking litigators has the knowledge
and expertise to advise banks and issuers on
the merits of negligence claims against
valuers and the extent of any losses that
could be recouped.
Complex transactions and valuation
principles
Due to the increased complexity of property
transactions and finance arrangements,
assessing whether a valuer has been
negligent is often a difficult task requiring
specialist advice. It is rarely a simple
valuation exercise of considering whether
a surveyor has reached the wrong figure
for a value of commercial property.
Special features will often arise where the
valuer has effectively been instructed to
advise a buyer/investor on whether it should
proceed with the transaction and/or a bank
on whether the property asset is sufficient
security for a loan.
In such circumstances, the negligence of
a valuer may, for example, extend to advice
about rental and investment yields and the
future commercial prospects of the property
acquisition.
One recent example of a significant and
complex negligent valuation case is Capita
Alternative Fund Services (Guernsey) Limited
(1) Matrix-Securities Limited (2) v Drivers
Jonas [2011] EWHC 2336.
In that case, the court carefully assessed the
role of Drivers Jonas in the context of failed
investment in a shopping centre and whether
it had overstated the commercial prospects
and value. The court analysed each component
of the market valuation by Drivers Jonas
(including advice on guaranteed rental
values and future yields) and considered
whether an adequate retail analysis had
been carried out in relation to the shopping
centre and its location.
Drivers Jonas has been ordered to pay
£18 million in damages for negligent advice
although the decision is subject to appeal.
Norton Rose Group Professional negligence claims against valuers
The key issues
The key issues that often arise in claims
against valuers for professional negligence
are detailed below.
What is the scope of a valuer’s duty?
In determining the scope of the duty owed
by a valuer, the starting point is to consider
the terms of any retainer and the effectiveness
of any exclusion clauses that seek to limit
or exclude liability. In the absence of a
written retainer, the scope of duty may be
implied or judged by the standard that is
applied in tort, to exercise reasonable care
and skill.
Special considerations apply to issuers in
CMBS transactions, who may not have a
direct contractual relationship with the
valuer and who will need to establish
sufficient proximity to establish a duty of
care in tort (for example by pointing to
terms in the valuer’s instructions which
expressly contemplate a securitisation and
disclosure of the valuation to the issuer).
Alternatively, claims arising out of the
valuation may have been assigned by the
original lender to the issuer.
When is a valuation negligent?
It is accepted that reasonably competent
valuers will differ in their views as to valuation
and there is therefore an acceptable range
or bracket for the correct value of a property.
In general, the bracket has usually been
found to lie in the range of 10-20 per cent
above or below the true figure although
each case depends upon its own facts and
the particular characteristics of the
property concerned and the market for it.
Causation
The Claimant will need to show that the
loss claimed was caused by the negligent
valuation report. Effectively, this will mean
that the Claimant will need to show that
they relied on the valuer’s advice and that
such reliance caused the loss and damage.
The advice does not need to be in itself
decisive in the decision making process
but it must play a real and substantial part.
In many cases, valuers will seek to defend
a claim for negligence on the basis that the
Claimant has contributed to the loss suffered
through its own neglect or fault. In banking
transactions, different approaches have
been taken by the courts in relation to such
defence arguments. For example, in some
cases, the court has attached weight to the
standards of lending in the relevant lending
category whereas in other cases, it has
been held that the standard of lending
amongst other lenders is irrelevant.
Loss
Damages will be assessed by reference to
the consequences of the valuer’s valuation
being wrong. So, in the context of a
banking transaction, this may be the
difference between the amount lent and
the sums recovered by the borrower. In a
CMBS context, it will be necessary either to
translate a lower portfolio valuation to a
lower initial advance, from which the
issuer’s loss can then be extrapolated (an
alternative transaction scenario) or, more
ambitiously, assert that if the true value of
the underlying portfolio had been known,
there would have been no securitisation at
all. In the context of a real estate
transaction, the damages may be assessed
at the difference between the price paid by
the buyer/investor and the sum it would
have paid if the valuer’s advice had been
correct. Issues about the extent to which a
Claimant has taken reasonable steps to
mitigate its loss may also arise.
Limitation
Generally, the limitation period for bringing
a claim against a negligent valuer is six
years from the date on which the cause of
action accrued. The cause of action will
accrue on the date that the loss is suffered
which could be the date on which the
relevant transaction is entered into or
when the loss is actually suffered following
some contingency. In some cases, it may
be possible to maintain that the limitation
period runs for three years from the date
upon which the Claimant could first
reasonably have became aware that the
relevant property had been over-valued.
The primary limitation period for these types
of actions is likely to expire soon (in some
cases by 2013) and therefore parties with
potential claims need to take action quickly.
Norton Rose Group Professional negligence claims against valuers
nortonrose.com
Contacts
For further information, please contact:
Farmida Bi
Partner
Norton Rose LLP
Tel +44 (0)20 7444 5842
farmida.bi@nortonrose.com
Charlotte Bijlani
Partner
Norton Rose LLP
Tel +44 (0)20 7444 2172
charlotte.bijlani@nortonrose.com
Paul Morris
Partner
Norton Rose LLP
Tel +44 (0)20 7444 5580
paul.morris@nortonrose.com
Norton Rose Group
Norton Rose Group is a leading international legal practice. With more
than 2900 lawyers, we offer a full business law service to many of
the world’s pre-eminent financial institutions and corporations from
offices in Europe, Asia, Australia, Canada, Africa, the Middle East, Latin
America and Central Asia. We are strong in financial institutions; energy;
infrastructure, mining and commodities; transport; technology and
innovation; and pharmaceuticals and life sciences. Norton Rose Group
comprises Norton Rose LLP, Norton Rose Australia, Norton Rose Canada
LLP, Norton Rose South Africa (incorporated as Deneys Reitz Inc), and
their respective affiliates.
The purpose of this publication is to provide information as to
developments in the law. It does not contain a full analysis of the law
nor does it constitute an opinion of Norton Rose LLP on the points of
law discussed.
No individual who is a member, partner, shareholder, director, employee
or consultant of, in or to any constituent part of Norton Rose Group
(whether or not such individual is described as a “partner”) accepts or
assumes responsibility, or has any liability, to any person in respect of
this publication. Any reference to a partner or director is to a member,
employee or consultant with equivalent standing and qualifications of,
as the case may be, Norton Rose LLP or Norton Rose Australia or Norton
Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys
Reitz Inc) or of one of their respective affiliates.
© Norton Rose LLP NR13086 05/12
Extracts may be copied provided their source is acknowledged.