PROVING THINGS 233: THE DEFENDANT WAS NEGLIGENT – BUT THE DAMAGES ARE NIL

In Hope Capital Ltd v Alexander Reece Thomson LLP [2023] EWHC 2389 (KB) Mr Justice Constable found that the claimant had suffered no loss.  This could be an expensive loss for the claimant, after a seven day trial.

“”For these reasons, the Claimants’ actionable loss is nil.”

 

THE CASE

The claimant lent money secured on a Grade II listed property. They lent £2,215.440. The defendant had provided a valuation of £4 million for the property prior to the loan.  The property eventually sold for £4 million and the claimant suffered a major loss.  The claimant brought proceedings alleging that the loss was due to the defendant’s negligence.  The judge found that the value of the property at the time of the survey was £2,475.00. The price had reduced because of a collapse in the property market over COVID and the National Trust serving a notice  in relation to some repairs carried out.

 

THE ADMISSION OF NEGLIGENCE

In closing submissions the defendant conceded that it had been negligent. The issue for the court was whether the claimant had suffered any loss, the amount of that loss and whether the claimant had been contributory negligence.

 

THE DECISION

The judge found that the claimant had not suffered any actionable loss.   If the survey had been carried out in a non-negligent manner, the value of the house would still be more than the loan.

 

What was the scope of the Defendant’s duty in this case?
    1. In my judgment, there is nothing which removes this case from the ordinary valuer’s negligence case where the purpose of the advice was 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 is undoubtedly a very important piece of information, and there is no dispute that it was in this case critical in the sense that there is no dispute that this is a ‘no transaction’ case. However, there is no evidence which elevates this into the ‘rare’ situation which a valuer’s duty is taken to be one which extends to protecting the lender against all the risks of entering into the transaction.
    1. The first factor relied upon by Mr Nicol is that ‘the nature of the Claimant’s business is singular and unusual both because of its position in the market and its scale‘. In describing its scale, it is suggested that it has no unused lines of lending or that it has never wanted for business, and that – predominantly by reason of the LTV ratios uses and the requirement to retain competent professional advisers – those lines of funding have been profitably deployed. The second factor is that (as known, it is said, by the Defendant through Mr Mussett) its business model was one in which it advanced funds on a low LTV ratio for short periods at high rates of interest and that the value of the security was the key consideration and crucial in decision making.
    1. In essence, Mr Nicol contends, taking the two points together, is that that in light of the business model the purpose of the provision of the valuation by the Defendant was, as known to Mr Mussett, not just to provide an important piece of information about the value of security within a wider commercial transaction decision making process, but was the sole piece of information upon which entering into the transaction turned, such that responsibility for that information extends to the decision itself. Put another way, the purpose of the provision of the valuation was, and was known to be, the only light which had to be green for the transaction to go ahead: advice as to valuation was tantamount to advising on entering the transaction as whole.
    1. This submission fails for a number of reasons:
(1) Whilst an extension of a valuer’s duty beyond that ordinarily restricted to responsibility for the valuation being wrong is (as made clear in the authorities) conceptually possible, it is improbable that this duty would come into existence without some clear understanding between the parties, most likely expressed within the instructions to the valuer. There is no evidence of any communication between the parties which could even arguably give rise to such an extended duty;
(2) there is no evidence about Mr Mussett’s (or the Defendant’s) particular knowledge of the Claimants’ business model. It cannot be gleaned or inferred from the correspondence which evidence Mr Mussett’s dealings with Mr Pieri, which have been set out earlier in this judgment. There is nothing to suggest, for example, that any of the valuers used by the Claimants (including Savills) were provided with particular details of the Claimants’ business model such as the LTV, or the relevant interest rates, or were told that the sole criteria upon which a decision to lend would be made was to be their valuation. Whilst Mr Nicol may contend that Mr Mussett has not given evidence, the Claimants have come nowhere close to raising a prima facie case in this regard. Indeed, neither factual witness called on behalf of the Claimants give any evidence of Mr Mussett’s understanding of their business model and the importance of that in the context of the assumption of responsibility they considered the valuer to be undertaking;
(3) an understanding that this was to be a short term bridging loan is, of itself, incapable of extending the valuer’s duty to include a responsibility for all the consequences of entering into the bridging loan, even in circumstances where it may be that in the context of such a business the importance of the valuation is elevated;
(4) similarly, a low LTV is not of itself determinative. It might be noted that the LTV in Charles B Lawrence was 20%.
(5) as a matter of fact, the valuation did, or should have according to the Claimants’ own criteria, have played just a part of the overall decision making. Notwithstanding the insistence by Mr Sealey in his oral evidence that the only thing that mattered was the valuation, on the basis both of the Claimants’ documented procedures and Hope’s internal communications, the following matters were or should objectively have been of relevance to Hope’s decision to enter the commercial transaction (and to its ability to secure the institutional funding from Triple Point) and were matters in relation to which the Defendant played no part:
(a) the Claimants’ Core Lending Criteria. This included:

(i) personal guarantees of all directors of limited companies (and, by extension, the strength of those guarantees) (linked to the existence of the borrower’s asset and liability statement, a condition precedent to the Loan Facility Terms). Whether or to what extent the Claimants sought a personal guarantee, and if so the strength of such a covenant, was entirely a matter for the Claimants;

(ii) different LTVs for different categories of property, and ‘special LTV can be considered for ‘closed’ bridges’. The consideration of an appropriate LTV for a particular transaction was for the Claimants based upon its particular appetite for and perception of risk;

(iii) in relation to adverse credit, ‘each application would be considered on its own merits and subject to detailed explanations as to the adverse credit entry‘. Mr Sealey’s evidence was that ‘Hope would perform credit checks…if a prospective borrower had a poor credit rating [as Mr Pieri did] then Hope may increase the interest rate offered to account for the increased credit risk‘. Consideration of the credit rating of the borrower was a risk consideration for the Claimants and a determinant of the basis upon which it would be prepared to lend and, if so, at what rate;

(iv) for refurbishments/conversions, ‘experienced applicants who can be shown to have done similar deals‘. Assessing the ability of an applicant to realise an exit strategy was a matter for the Claimants;

(v) ‘The above sets out the core lending policy of the board, however there has always been the ability to be flexible and commercial‘. Flexibility in assessing particular conditions is a matter for the Claimants.

(b) an assessment of the borrower’s exit plan. As set out within the chronology above, Ms Carr, underwriter for the Claimants, in communication with the Claimants’ solicitors stated that the Claimants would ‘…We would also need to understand the proposed exit if no lease was granted or if the lease would only be granted to Mr Pieri individually‘. The existence or absence of an exit plan was relevant to the likelihood of having to call on the security, with the attendant costs and risks, and this was a matter for the Claimants to evaluate. Mr Penman, the Claimants’ lending expert, agreed that the existence or type of exit strategy may be linked to the ability to realise the security, and as such may give rise to a concern for a lender. This is not something the valuer advised upon or considered, it was a matter solely for the Claimants;
(c) the existence of a s.146 Notice, and the risk of whether works were undertaken during the currency of the loan which may give rise to the imposition of a further section 146 Notice. The investment paper produced by Hope had, as matter for solicitor confirmation, ‘Confirmation that the previous Section 146 on the previous own has been complied with and how this would affect us if a Section 146 was served during own loan. The stated response was ‘Section 146 sign off received‘, which was not, as identified above, entirely accurate. However, even if it was, the second part (‘how this would affect us ….’) does not seem to have been considered at all. The Defendant’s valuation was explicitly made on the assumption that all works required to discharge the first s.146 Notice were undertaken and did not take into account what might happen if a second s.146 notice was served. It is plain that the valuer was not undertaking the risk that the value may be affected if the works required were not undertaken, or that there were works subsequent to entering into the transaction which triggered a further s.146 Notice;
(d) the character/probity of the borrower. Both lending experts agreed that, even in the context of bridging finance with a low LTV, they would not lend to an applicant who had been dishonest in their application (as Mr Pieri appeared to have been on his statement of assets and liabilities). Indeed, Mr Penman accepted to do so would be imprudent. Whether to lend in these circumstances was entirely a matter for the Claimants and unrelated to the valuation.
    1. Notwithstanding the potentially increased weight the LTV has in a bridging loan context when compared with traditional lending where serviceability of the loan will play an important part, it remains clearly the case that (echoing the words of Lord Hoffman in SAAMCO) ART was not privy to the other considerations which the Claimants in fact took, or objectively would have been considered to be taking, into account, such as how much money it has available, how much the borrower needed to borrow, the strength of his covenant, the attraction of the rate of interest or the other personal or commercial considerations which may have induced Claimants to lend. This is demonstrated not least by the actual considerations which the Claimants’ own criteria and/or terms and, indeed, common sense, required the Claimants to consider.
    1. It follows that the purpose of the valuation was to protect the Claimants in relation to the value of the security, and not all other foreseeable risks attendant upon entering into the transaction.
In light of the scope of the Defendant’s duty, what is the total actionable loss in this case?
    1. It is clear on the evidence the loss of value in security, from what I have found it to be (OMV valuation of £2,750,000 and a 180 day valuation of £2,475,000) to the eventual sale price of £1,400,001 was caused, as a matter of fact, by the combination of the imposition of the second s.146 Notice, the delay in resolving it, and the effects of COVID.
    1. The starting point for this is the valuation experts’ joint view that (at paragraph 2.5 of their revised joint statement) ‘Market conditions between February 2018 and March 2019 were broadly the same for the non-residential value of the Property‘. It follows from this that, but for other factors considered below, the value of Cedar House, and the security for the Claimants’ loan, remained at £2,475,000 on a 180 day valuation basis through until around the spring of 2019.
    1. Accounting for the eventual sale price, the Claimants’ valuation expert, Mr Mackernan, put it this way following his description of the effects of COVID:
I am therefore of the opinion that the Market Value would be reduced dramatically, in what I would colloquially call a ‘fire sale’, i.e. at a very discounted price and to a cash buyer only. The market would be extremely limited.
At the time, I was somewhat surprised with the low price achieved (£1,400,000) compared to Savills’ marketing, rental offers and our valuations undertaken in 2016. However the market had unprecedently collapsed and, but that point in time, Cedar House had a chequered history….
Market conditions were clearly much worse in 2020 and I noted that the property was placed into an auction at the end of March 2020 with an asking price of £2,000,000. However the Property was withdrawn due to the lockdown on the advices of the Claimants’ advisor as it was considered that as the property was not openly marketed for sale, the property could not be inspected by prospective purchasers because of lockdown and the ‘auction was online only with acceptance from only pre-registered bids. …
    1. The Defendant’s valuation expert, Mr Rusholme, broadly agreed (albeit in the context of describing the drop in value to £1,400,001 from a different starting point to my determination of the valuation):
The main difference has occurred because of the COVID pandemic which severely restricted the property market from early 2020 onwards. Any property sold at auction – the most restrictive of sale methods – in 2020 was doomed to achieve only bargain prices. This is because of the unwillingness of banks to lend on real estate projects and the general negative market sentiment. There were few potential buyers in 2020 and those that were prepared to […] would do so only at hugely discounted prices.
The Property itself became more difficult to sell as time went by. The repeated efforts by the owners to sell from 2017 onwards must have put off many potential buyers. The failure to achieve a renegotiation with the National Trust, the uncertainty as to whether the Property was a restaurant/hotel proposition or a residential conversion opportunity was compounded by the owners change of use to restaurant whilst still marketing the Property as a residential prospect did nothing but confuse and restrict the market.
The Property underwent some works after the s146 works in 2017 had been completed. This I suspect lead to the National Trust requiring flooring to be remediated. And other works in November 2018 to rectify works which had been unlawfully completed. It probably also prejudiced the good relations needed in order to amicably negotiate a revised lease. An action which was vital to securing the best price for the Property.
I have of course acknowledged that the unprecedented events around the COIVD—19 situation have impacted the ability of many Property owners to sell in the current climate. It is clear that throughout 2019, residential developers were prepared to commit and lose substantial option deposits on a range of options at prices at and around £2,375,000 without, as I understand it, any discount to allow for the National Trust lease.
The lack of a sale during 2018 and 2019 effectively blighted the property. My conversations with local selling agents confirm this view. Most local develops and agents were aware that this had become a ‘problem property’. There was little appetite for a straightforward unconditional sale’.
    1. At the point of default, Cedar House was, as a matter of fact, not readily realisable as security within 180 days (the assumption behind the relevant valuation) because of the unlawful works which had been undertaken by Mr Pieri and the resulting second s.146 Notice. Whilst it would be wrong in my judgment to criticise the Claimants for the reasonable decisions they took post-default in trying to sell Cedar House for the best price (and without the benefit of hindsight), the chronology serves to demonstrate, as set out above, that the factual reason the value of security was not realised in the sum of £2,475,000 within 180 days of the default was the conduct of the borrower.
    1. This is recognised by the Claimants’ own lending expert, Mr Penman, whose evidence was that ‘The subsequent notice from the NT and received by the receivers later in November 2018 effectively, in my opinion, limited the ability of the Receiver and Hope as the main credit to pursue a quick exit.’
    1. In turn, the delays caused during 2019 to the sale of the Cedar House whilst the position with the National Trust was sought to be regularised led directly to the Property still being on the market when it crashed in dramatic form due to COVID. It is likely that the difficulties with the National Trust would have reduced the value irrespective of COVID, and also contributed to the property’s perception by 2020 as one with a ‘chequered past‘ or one blighted as a ‘problem property‘. On the basis of the valuation experts’ evidence, which I accept, it is these issues coupled with the ‘unprecedented collapse’ of the market due to COVID which led to the drop in value from the 2018 position (in my judgment, £2,475,000) to the sale price of £1,400,001.
    1. But for the combination of these factors, and in light of the joint expert evidence as to the lack of movement in the market between February 2018 and March 2019, I find as a matter of fact that there is no reason why, upon default, Cedar House would not have realised its 180 day value as I have found it to have been at February 2018, namely £2,475,000. The capital loaned was £2,215,440, lower than both the correct OMV valuation of £2,750,000 and the 180 day valuation of £2,475,000. It follows that had it not been for the combination of the borrower’s conduct rendering the security incapable of quick realisation and the subsequent effects of COVID on the market, the Claimants would not have suffered any loss of capital advanced. The actual net costs of extraction/realisation were £461,805.04, but this was so high because of the complexity and duration of the sale process, caused by the combination of factors identified above in respect of which no duty was owed. I accept the evidence of Mr Penman that, in general terms, one might pro-rate these costs so that, but for the complexity and duration of the sale process, the cost of extraction/realisation would have been around £100,000. The capital advanced and extraction/realisation costs would, together, still have been less than the amount of security based upon the true 180 day valuation.
    1. By analogy with the reasoning of the Privy Council in the case of Charles B Lawrence which I accept, as Mr Asquith submits, is apposite, the loss caused by the breach of relevant duty is nil, as it would have been in Charles B Lawrence if the value of the land (excluding the title issue) had been, say £3,500,000 instead of £2,375,000. 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.
    1. Mr Nicol urges upon the Court an analysis based upon a counter-factual. He contends that the whole driver for Hope’s loss is making a loan against a negligent valuation of £4,000,000. If that had been the true value of Cedar House, the drop in value caused by the lack of readily realisable security and COVID could have occurred and, given the low LTV, Hope would still have been left with security which exceeded the loan and no loss would have been caused. As a counter-factual scenario, that is quite possibly correct (although given the COVID effects on the market as described by the valuation experts, it is far from certain). However, the authorities make clear that this is not the correct analysis where, as here, the lender’s duty extends, by reference to its purpose, only to protecting the lender against the true value of the security. In this case, as in Charles B Lawrence, the counter-factual is an unhelpful siren call which, if followed, leads the analysis onto the rocks. This is because it ignores the importance of focussing on questions (2) and (5) set out by the Supreme Court in MBS. In particular, question 5 requires the Court to ask whether there is a sufficient nexus between a particular element of the harm for which the 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 coupled with COVID).
    1. For these reasons, the Claimants’ actionable loss is nil.