Expert valuation evidence, the “Margin of Non-Negligent Valuation”, and how to approach lenders’ contributory negligence
Both cases also dealt with the proper approach to allegations that the lender had been contributory negligent.
Webb and Blemain were two separate claims brought by lenders. Both claims were against E.Surv. In both cases the lenders alleged that E.Surv’s surveyors had negligently over-valued the properties in question, with the result that the lenders had been persuaded to lend too much money.
In Webb, the court dealt with two valuations provided by E.Surv. Mr Ali purchased a 2-bedroom flat in a new development in Birmingham. E.Surv valued the property at £280,000 in November 2006. The true value was just £204,658, making the valuation negligent by 11.4%. Mr Bradley was seeking a remortgage. E.Surv valued Mr Bradley’s property at £295,000. The correct value at the time (July 2007) was £260,000, meaning the valuation was “out” by 13.5%.
In Blemain, in July 2007 E.Surv’s surveyor valued a 5-bedroom modern detached house located on a small private road in Putney Heath at £3.4 million. The borrowers obtained a second mortgage on the property from the claimant lender. Following repossession, Blemain as the second charge holder recovered nothing from the forced sale. In the claim against E.Surv the Court concluded that the proper valuation was £2.8 million, making the valuation negligent by a margin of 21%.
The Acceptable “Margin of Error” In Valuation
Coulson J accepted that valuations are not an exact science, and there was a permissible (ie non-negligent) margin of error within which a valuation may fall without it being negligent. He adopted the test set out in K/S Lincoln and Others v CB Richard Ellis Limited  EWHC 1156 (TCC): ..
For a standard residential property, the margin of error may be as low as +/- 5%. That reflected the significant number of comparable properties, which would provide an accurate gauge of the market value; ..
For a “one-off” property, the margin of error will usually be +/- 10%, again reflecting the comparable sales information (or lack thereof);
If there are truly exceptional features to the property, the margin of error could be +/- 15%, or even more, depending on all the circumstances.
In the Blemain case, Coulson J held the appropriate margin of error for a non-negligent valuation was 10%, despite both experts agreeing in their evidence that the appropriate margin of error was 15%. Coulson J considered that whilst the property was “distinctive”, there were nevertheless a number of comparables available.
In Webb, the judge held the appropriate margin of error for both properties was 5%, mainly because there were a significant number of comparable properties, which permitted the market value to be gauged with a relatively high degree of accuracy.
Contributory Negligence Contributory negligence and the associated level of reduction to any damages is a key feature in lender claims. In both Blemain and the case of the Ali loan in Webb, the Court held that there should be no reduction. However, the Court applied a reduction of 50% for the Bradley loan in Webb.
Although in Ali it was a high loan to value ratio (LTV of 85%), with a failure by the lenders to investigate the performance of other mortgages or verify income and defaults in Mr Ali’s current account, Mr Ali did not appear to be in any substantial financial difficulty at the time of the loan. Although Coulson J considered that lending to Mr Ali was a “recipe for disaster,” it concluded that the appropriate standard to apply was that of a reasonably competent centralised lender and practices common at the time should not be considered with hindsight. As the sub-prime self certified model was common between 2004-2007 (ie before the financial crash), the Court could not conclude that such lending was irrational or illogical. There was therefore no reduction for contributory negligence. The lender’s principal safeguard against loss was of course the fact that it only lent 85% of the valuation, and so given there should have been a 15% “cushion” to absorb any losses. It was of course that “cushion” that E. Surv’s negligent valuation had taken away.
The Court applied a 50% reduction in respect of the Bradley loan in the Webb case because of Mr Bradley’s financial position. Mr Bradley was clearly in financial difficulty prior to his application. He had £18,000 worth of defaults and £1,000 CCJ against him. The 50% contributory negligence was the result of the particular combination of factors. In particular, the remortgage was required to consolidate significant debts, and the very high LTV (95%) was considered beyond the acceptable exposure in the market at the time. Coulson J also concluded that the lender should never had advanced funds to Mr Bradley on a self-certified basis. Coulson J decided that a 50% reduction was appropriate.
These cases provide a good example of how the rules on the “margin of error” should be applied by valuation experts in practice. In essence, they make it clear that it all depends on the nature of the property. Coulson J also had no difficulty in substituting a lower margin of error despite the agreement of the experts that a 15% tolerance was appropriate. Both cases re-affirm that wherever possible, comparables should be used to achieve non-negligent valuations.
The ruling on contributory negligence is also interesting. Contributory negligence is of course a matter for the trial judge, being a matter of law. However, in many cases experts will still be able to give very useful evidence as to what is, and what is not good practice. It is significant to note that the judge did not feel it appropriate to reduce the damages in two of the three claims under consideration even though in at least one case the lending was relatively aggressive. In dismissing the allegations of contributory negligence in those instances, Coulson J took account of the then-prevalent practices in the marketplace. Those practices, and the general attitude in the market to risk, are things which often it will be very useful for experts to give evidence on.