Negligence

Citation

(1998), "Negligence", Property Management, Vol. 16 No. 3. https://doi.org/10.1108/pm.1998.11316cab.031

Negligence

Negligence

Lewisham Investment Partnership Ltd v. Morgan [1997] 51 EG 75

This case concerned the determination of the rent on a unit in a shopping centre in London let to Marks & Spencer on seven-year rent reviews.

The defendant was a director of DTZ Debenham Thorpe who were appointed as independent expert in the rent review. The landlord contended for a market rent of £835,000, the tenants for £212,000 and the defendant determined the figure at £250,000. The landlord sued him for negligence alleging his figure was too low.

The surveyor was ultimately found not negligent since the judge held that his assessment of the market rent could not be regarded as so low as to be below the figure which a reasonably competent and careful surveyor could have determined.

However, the case repays careful reading and is most interesting for the views expressed in it by Neuberger, J on the question of how negligence can be established in valuations. He seems to have supported the "margin of error" or "bracket" approach to determining a valuer's negligence.

"If I were to conclude that the defendant was negligent in respect of one or more of the specific allegations, it would still be necessary to consider whether his valuation fell within the permissible bracket because if it did, then the defendant would still escape liability: see the observations of Balcombe, LJ" [in Mount Banking Corporation v. Cooper [1992] 2 EGLR 142 ].

However, more interesting was Neuberger's remark that:

"... even if the defendant was not negligent in respect of any specific allegations, the plaintiffs could still succeed on the basis that his overall figure was outside the permissible bracket. One can imagine a case where the valuation involves a number of those components, but his valuation is nonetheless outside, even well outside, the permissible bracket."

This must surely be questionable. Most people would accept that a valuer who manages to arrive at the correct valuation, no matter how flawed the methodology used, has caused the plaintiff no loss. The plaintiff is in the same position as if the valuation had been carried out with reasonable skill and care. Thus the valuer cannot be held to be guilty of negligence.

However, it does not follow that a valuer whose method is flawed but who nevertheless reaches a figure which falls within the bracket, cannot be negligent. In this case, the valuer may still have caused some loss to the plaintiff. As Murdoch states (1997) to argue otherwise is to confuse a duty of reasonable care and skill with one of achieving a prescribed degree of accuracy, something that is not required of any other professionals.

Furthermore, it does not follow either that a valuer who is shown to have used reasonable skill and care in producing a value can still be held negligent because the end result falls outside the bracket. If the steps taken on the way to the end result were reasonable it is hard to see how the end result can be judged to be anything other than reasonable.

A valuer warrants only to use reasonable skill and care in performing the task. He or she does not warrant that the end result will be correct. To require this is to require a higher standard of valuers than that which is generally required of other professionals. Doctors, for example, do not warrant that they will effect a cure, only that they will use proper skill and care in treating the patient. If the patient is not ultimately cured or is only partially cured, no one would hold the doctor guilty of negligence. Logic and consistency would seem to require that valuers be treated in the same way. It remains to be seen how the " bracket defence" will fare in future cases.

Nycredit Mortgage Bank plc v. Edward Erdman Group Ltd [1998] 05 EG 150

Readers may remember that the issue of the measure of damages payable to lenders by valuers who negligently over valued property provided as security for a loan was decided in this, and two other cases, by the House of Lords in 1996 (South Australia Asset Management Corporation v. York Montague Ltd, 1996).

In that case, the House of Lords adjourned the question of what interest should be payable on the damages. This was the issue now to be decided. It required that the court should first decide when the cause of action arose.

S35A Supreme Court Act 1981, empowers the court to award simple interest on "all or any part of the debt or damages in respect of which judgment is given ... for all or any [art] of the period between the date when the cause of action arose and ... the date of judgment."

The important question in this hearing was therefore the date when the plaintiff bank's cause of action arose. The bank claimed that the cause of action arose in March 1990 when the loan was made and it therefore suffered an immediate loss. By December 1990, the bank had suffered its full allowable loss of £1.4 million due to the continuing cost of providing the money lent and the diminishing value of the property as the market fell.

The defendant valuers claimed the cause of action did not arise until the property was sold in February 1993, because it was only then that the bank suffered the consequences of the valuation being wrong.

The House of Lords held that simple interest should be paid on the £1.4 million from December 1990. The measure of loss caused by the defendant's negligence is the difference between what the plaintiff's position would have been if the defendant had fulfilled his duty of care and the plaintiff's actual position. This is ascertained by comparing, (a) the amount of money lent by the plaintiff which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the over-valued property.

In the substantive case, the House of Lords had decided that the valuer is not liable for all the consequences that flow from the lender entering into the transaction. He is not liable for consequences which would have arisen even if the advice had been correct because they are the consequences of risks the lender would have accepted himself if the valuation advice had been sound. Thus they are not within the scope of the valuer's duty.

The cause of action arises when the plaintiff suffers loss and proof of such loss is essential. Their Lordships felt that this was when the lender can show he is worse off than he would have been if the security had been worth the sum advised by the valuer. It is not necessary for the lender first to realise the security before he can show that he has suffered a loss. In this case, loss occurred in December 1990.

Cavendish Funding Ltd v. Henry Spencer & Sons [1998] 06 EG 146 CA

This case involved a loan of £846,501 (net advance £750,000) made by the plaintiffs to a couple and secured on a first mortgage of their house. The defendants supplied the plaintiffs with a valuation of £1.525 million (forced sale value of £1.342 million). The plaintiffs had a second valuation at the same time from another firm of £1 million (£750,000 forced sale value). The plaintiffs took the higher valuation and made the advance. The borrowers defaulted on the loan and the plaintiff sued the defendants for negligence.

The trial judge awarded the plaintiffs damages of just over £1 million. The defendant appealed on the grounds that their valuation did not cause the plaintiff's damage or alternatively, that the plaintiff was contributorily negligent.

The appeal was allowed in part. The court was satisfied on the evidence that the plaintiffs had relied on the defendant's valuation and that it was thus a cause of their loss.

As to the defence of contributory negligence, the plaintiffs contended that their loss was caused only by their reliance on the defendant's valuation not anything done by the plaintiffs.

This argument was rejected by the Court of Appeal. Their Lordships were unanimous in their view that the plaintiffs were put on notice by the differences in the two valuations they had received. Thus, their failure to review them was negligent even if, as the defendants admitted, the revised valuation they would have made if asked, would still have been grossly negligent. Their Lordships felt that the plaintiffs had failed to act in the way a prudent lender would have acted and that it would be just and equitable to reduce the damages by 25 per cent.

References and further reading

Lee, R. (1997),"Valuers do not need a crystal ball", Property Management, Vol. 15 No. 1, pp. 25-29.

Murdoch, J. (1997), "The margin of error approach to negligence in valuations", Professsional Negligence, Vol. 13 No. 3, pp. 81-88 at 85.

South Australia Asset Management Corporation v. York Montague Ltd; United Bank of Kuwait plc v. Prudential Property Services Ltd; Nycredit Mortgage Bank plc v. Edward Erdman Group Ltd, [1996], 3 All ER 365.