If a bank’s valuer overestimates the value of a construction site by over 20%, and the bank ends up losing millions of pounds of lending when the developer collapses, you might think that the bank would have a slam-dunk case against its valuer. Think again, according to a recent Technology and Construction Court case*.

The bank of Ireland was funding the residential development of a block of flats in Manchester. It was contemplating making a loan to the developer of around £8 million. Before doing so, it instructed Faithful & Gould (F&G) to produce a feasibility assessment. It also instructed CBRE, a commercial property and real estate services adviser, to produce a valuation of the site’s gross development value (GDV) and open market value (OMV).

F&G undertook its feasibility assessment and CBRE valued the site’s GDV at £34 million and it’s OMV at £8.9 million. CBRE passed its valuations on to the bank, which then advanced the money.

In 2008, the developer went into administration. The Bank ended up losing almost all of the £8.9 million that it advanced.

The Bank initially sued F&G, on the basis that they had given negligent advice as to the value and location of building materials (to the value of £4.5 million) that the developer said that it had. Following a legal fight, F&G settled the Bank’s claim against it for £3.35 million.

It had also come to light that CBRE had substantially overestimated the GDV and OMV of the site. F&G therefore, sued CBRE for a contribution to what it had had to pay to the bank.

To succeed in such a contribution claim, F&G had to show that CBRE would have been liable to the bank for the same damage for which F&G was liable (i.e. the £8.9 million loss).

The Court found that CBRE overestimated the GDV by 20%, and had overestimated the OMV by nearly £5 million. However, this did not automatically mean that CBRE would have been liable to the bank for all its losses. Indeed, it is established law that a valuer is not liable for every foreseeable loss his client may suffer when it enters into a loan agreement as a result of a negligently overstated valuation**. Instead, the valuer is only responsible for the consequences of the valuation being wrong. Usually, this will be the difference between the valuer’s valuation and the actual value of the site.

In terms of CBRE’s overvaluation of the GDV, the site was never completed, and so GDV was not realised. This meant that there was no consequence of CBRE’s overvaluation.

CBRE might have been on the hook in terms of its valuation of the OMV, as the bank eventually sold the site for around £5.4 million less than CBRE’s valuation, and so there was a clear loss. However, CBRE was saved by the fact that there was strong evidence that the bank had not actually relied on CBRE’s valuation of OMV (it was clear that, amongst other things, the bank had focussed on the GDV rather than the OMV).

So, even though CBRE’s valuations were held to be negligent, it did not follow that CBRE would have been liable to the bank (and thus to F&G) for a contribution. In such cases, a clear causal link has to be shown between the negligence and the loss. In this case, there was no such link. 

For more information, please email blogs@gateleyuk.com.

 *The Governor and Company of the Bank of Ireland v Faithful and Gould and CBRE Limited [2014] EWHC 2217 (TCC)

**South Australian Asset Management Company v York Montague [1997] AC 191

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.