High Court finds that lender suffered no loss despite negligent valuation of security

The High Court has dismissed a lender's claim against a valuer for breach of contract and/or negligence in relation to the valuation of security for a loan, finding that the lender had suffered no actionable loss despite the valuer's admitted negligence: Hope Capital Ltd v Alexander Reece Thomson LLP [2023] EWHC 2389 (KB).

This decision will be of interest to financial institutions as it provides further clarity on the application of the "SAAMCO" principle, as established in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 and expanded upon in Hughes-Holland v BPE Solicitors [2017] UKSC 21 and Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (see our blog post). While the present case involved a claimant lender, this principle most commonly arises in a financial services litigation context where the bank is a defendant, and the question is whether the alleged losses fall within the scope of the bank's duty of care.

Following Manchester Building Society, the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice is being given. The court looks to see what risk the duty is supposed to guard against and then at whether the loss suffered represents the fruition of that risk. The historic distinction between "advice" and "information" cases has been dispensed with. In the present case, the court was satisfied that the purpose of the valuation was to protect the lender in relation to the value of the security, and not all other foreseeable risks of entering into the transaction, particularly the consequences of unlawful acts of the borrower or dramatic collapses in the property market. In the court's view, it was also clear on the evidence that the loss of value in the security was caused by a combination of factors out of the control of the valuer (such as the conduct of the borrower and the Covid-19 pandemic). Accordingly, the lender had suffered no actionable loss.

The decision is considered in more detail below.

Background

In 2018, a property firm (the Valuer), valued a Grade II listed property (the Property), at £4 million, on the assumption that a notice from the National Trust (the First Notice) requiring remedial works had been complied with in full. Based on the valuation, a loan was provided by a bridging loan company (the Lender) with the Property as security. The borrower later defaulted on the loan, receivers were appointed and the Property was eventually sold in October 2020 for £1.4 million.

The Lender subsequently brought a claim against the Valuer contending that they had been negligent in their valuation, and that no transaction would have taken place if the valuation had reflected the true value of the Property. The Lender claimed total losses consisting of the loss in capital, the loss of contractual interest on the loan and the loss of profits which would have been realised by use of the lost capital in the intervening years in other successful bridging loans.

The Valuer accepted it had acted in breach of duty as it had been negligent in its valuation, but denied causation and loss and alleged contributory negligence.

Decision

The High Court found in favour of the Valuer and dismissed the Lender's claim. The key points which will be of interest to financial institutions are examined below.

Key legal principles

Following Manchester Building Society, the court noted that the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice is being given. In the case of negligent advice given by a professional adviser one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk.

As per Hughes Holland, just because information is critical to the decision process cannot of itself mean that the information provider is liable for all the foreseeable consequences of the transaction. Rather, the information may play a role in establishing the purpose of the provision of information or advice. 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.

Scope of Valuer's Duty

Turning to the present case, the Lender argued that the purpose of the valuation was not just to provide an important piece of information about the value of security within a wider decision-making process on a commercial transaction, but was the sole piece of information upon which entering into the transaction turned, such that responsibility for that information extended to the decision itself.

However, applying the above legal principles, the court said that there was nothing which removed this case from the ordinary valuer's negligence case (where the purpose of the advice is to provide the lender with an opinion on which it is entitled to rely of the current market value of the property offered as security for the loan). The valuation was undoubtedly a very important piece of information: there was no dispute that it was a "no transaction" case where the valuation was in fact critical. However, there was no evidence which elevated this to the "rare" situation where a valuer's duty is taken to be one which extends to protecting the lender against all the risks of entering into the transaction.

The court highlighted a number of factors in reaching its decision, in particular:

• It is improbable that the duty owed by a valuer will be extended beyond responsibility for the valuation being wrong without clear understanding between the parties; for example, set out in the instructions to the valuer. In this case, there was no evidence of any communication between the parties which could even arguably give rise to such an extended duty.
• On the basis of the Lender's documented procedures and internal communications, there were a number of matters that were or should objectively have been of relevance to the Lender's decision to enter the commercial transaction and were matters in relation to which the Valuer played no part. The court identified the following as relevant matters: the core lending criteria, an assessment of the borrower's exit plan, the existence of the First Notice, the risk of a further remedial works notice, and the character/probity of the borrower.

On the basis of the above, the court held that the purpose of the valuation was to protect the Lender in relation to the value of the security, and not all other foreseeable risks attendant upon entering into the transaction.

Scope of liability

Having determined the scope of the Valuer's duty, the court turned to the question of what the total actionable loss in the case would be.

The court noted that it was clear on the evidence that the loss of value in the security was caused by a combination of the imposition of a further remedial works notice by the National Trust, the delay in resolving it, and the effects of the Covid-19 pandemic on the property market.

The court underlined 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 market (per Charles B Lawrence & Associates v Intercommercial Bank [2021] UKPC 30, see our blog post here).

Following Manchester Building Society, the court is required to ask whether there is a sufficient nexus between a particular element of the harm for which a claimant seeks damages and the subject matter of the defendant's duty of care. That nexus does not exist where no loss would have been suffered by reason of the negligent over-valuation when considered in isolation from the effects of those matters for which no duty was owed (here, the conduct of the borrower and the Covid-19 pandemic).

For these reasons, the court held that, notwithstanding the Valuer's admitted negligence, the Lender had suffered no actionable loss.

Accordingly, the court found in favour of the Valuer and dismissed the Lender's claim.

Note: In December 2023, the High Court refused the claimant's application for permission to appeal to the Court of Appeal.

In February 2024, the claimant applied to the Court of Appeal for permission to appeal.

In June 2024, the Court of Appeal allowed the claimant's application for permission to appeal. The appeal hearing has been floated for 11/12 March 2025.