"Claims, strong on liability, well put and crafted with a detailed understanding of the short term lender’s credit process, can settle at protocol stage even before proceedings are taken."
Valuation issues are masked by a rising property market, but are laid bare when the market falls, or remains stagnant. Every lender’s criteria includes a loan to value ratio, so when values fall, the risk of non-recovery increases.
Tiuta v De Villiers Surveyors made the headlines in December 2017, sending a shiver through the lending industry. It is of real interest to funders in the present climate because professional negligence claims against valuers are on the rise. This case involves a bridger and internal refinancing arrangements, which are industry common amongst short term lenders. However, this case does provide guidance for improved processes for safer lending.
Tiuta lent circa £2.5 million in early 2011, secured against a residential development. De Villiers valued the site at £2.3 million with a gross development value of £4.5 million. In December 2011, the borrower sought to restructure with Tiuta and raise further capital. De Villiers, the original valuer, was again retained to produce a second valuation, this time valuing the property at £3.5 million, with a GDV of £4.9 million.
In reliance on the second valuation, Tiuta advanced an entirely new loan facility of circa £3 million, repaying the original facility debt in full (£2.8 million) and releasing a further £280,000 by way of ‘additional lending’ (my terminology). The registered legal charge securing the first original facility was released and a new mortgage deed was entered into and registered to protect the second, new and separate facility.
What is unusual in this case that the administrators did not make any claims on the first valuation, framing its case and claim for all losses on the second valuation alone.
Tiuta argued that if the second valuation was negligent, then surveyors should be liable for all losses arising on the second loan facility of £3 million. Losses claimed were in the region of £980,000.
De Villiers argued that in fact the lender had suffered no loss on its original loan facility because that facility had been in repaid in full, albeit by Tiuta themselves. Therefore, any losses recoverable on the second valuation should be limited to the additional sum advanced (£289,000).
The Supreme Court reaffirmed the long established principle that a claimant shall be restored to its original position as if negligence had not taken place. On these facts, Tiuta would still have suffered losses arising out of first loan facility and valuation, had the second valuation never taken place. It would not have lent a further £280,000 and the original facility would not have been repaid. Therefore, the level of loss was restricted to the ‘second capital sum advanced’ (my terminology not theirs) only.
Following De Villiers, lenders need to carefully consider the mechanics for refinancing existing facilities internally, to avoid self-harming. Secondly, they need to balance the commercial benefits of redeeming and advancing afresh (paid exit fees/enhanced terms and the like), against the potential risk of restricting themselves on potential claims against valuers. This they can do by making further advances against purposely instructed valuation.
Thirdly, lenders need to consider the time and cost efficacy of instructing the same valuer with existing knowledge of the property, against the additional comfort taken from a separate set of valuers looking at a subject with fresh eyes.
So on the face of it, this is a victory for valuers and insurers on quantum. But pyrrhic in nature. The lender (via administrators) did succeed on liability and did recover. This one went all the way to trial and then upwards, because a particular point arose, a point of potentially significant commercial value to insurers. Comparatively few credible valuation claims go to contested trials. Claims, strong on liability, well put and crafted with a detailed understanding of the short term lender’s credit process, can settle at protocol stage even before proceedings are taken.