pnBlawg

the professional negligence blog

A collaboration between Rebmark Legal Solutions and 1 Chancery Lane

Is an extension to the SAAMCO principle on the horizon?

Background Property valuation is seldom an exact science; it involves the consideration of both present factors and future contingencies.  With the property crashes of the last two decades came a wealth of litigation considering both the scope of the duty of care owed by valuers to lenders and the extent to which losses caused by negligent valuations are recoverable. One such case which those in the professional negligence field will be familiar is South Australian Asset Management Corporation v. York Montague Ltd [1996] UKHL 10. The House of Lords held, inter alia, that valuers who provide negligent valuations are only liable for the loss caused by the negligent information itself and not for any extraneous events (in the legal sphere this became known as the SAAMCO principle). Subsequent cases sought to distinguish its application, particularly where the duty was to advise rather than to inform and, earlier this month, the principle was again brought to the fore in an interesting judgment delivered in Edward Astle & Ors v CBRE Ltd and others [2015] EWHC 3189 (Ch). The case involved a Government scheme which consisted of both a trust and a partnership. The trust held freehold property and the partnership had an interest in the acquisition and development of five development sites. The Royal Bank of Scotland (“RBS”) sought expert valuations for loan security purposes and approached the Defendant companies (ERL and CBRE) in separate capacities. CBRE advised on the value of the units and freehold property. The units and loan notes were then procured and issued by ERL (the owner of the partnership and trustee company) in an information memorandum (“IM”). The IM contained a section entitled “Investment Overview” and sought to raise £37, 500,000, £25, 775, 000 of which was subsequently invested by the Claimants. Unfortunately, there was a collapse in commercial property values in 2008 and a desktop valuation carried out by CBRE noted a sharp decline in the aggregate value of the freehold and units. As such, the development centres were cancelled in 2010 and the freehold was sold. This meant that the partnership defaulted on its debt and the combined value of the properties was such that the Claimants lost all that they had invested. The Claimants brought a claim against the Defendants alleging that the valuations had been materially overstated and that their losses were attributable to the alleged overvaluation in the IM. The Defendant applied for summary judgment against the Claimants relying on the SAAMCO principle, namely that this was a case of duty to inform and therefore a claim for losses unconnected with the alleged overvaluation could not be pursued. Judgment Judge William Tower QC, sitting as High Court judge, delivered judgment on 5 November 2015. Despite accepting that the duty of the investors in this case was a duty to inform rather than to advise he nonetheless went on to hold that the Claimant had a real prospect of establishing that the loss they had suffered was attributable, at least in part, to the alleged inadequacies in the IM. In summary, the arguments presented on both sides were as follows. The Defendant argued that even if the IM has been entirely accurate, the Claimants would still have lost the totality of their investments because the cause of the loss was only attributable to the following events: commercial property values having collapsed, the project having been abandoned and the partnership refinancing having failed. The Claimants argued that whilst the SAAMCO principle applied in relation to the claims against CBRE, it did not apply to the claim against ERL.  The reason purported was that the SAAMCO case could be distinguished on its facts based on the following. Firstly, that the scope of the duty of care was different. There was no equivalence between ERL’s role and that of a valuer, SAAMCO related to a standard mortgage lender claiming against a negligent valuer whereas, in the present case, investors had acquired units or loan notes on the basis of a prospectus. In this sense ERL was not providing dispassionate objective advice as a valuer but rather it was the promoter of both a valuation and more nuanced information relating to commercial prospects. As such, ERL was also the recipient of a wide range of other benefits which were far removed from a standard fee for the provision of valuation service type scenario. Secondly, the starting point for discerning loss was different. Unlike SAAMCO, it was submitted that in the present case the court was not required to carry out a speculative analysis of what the valuation would have been had the information been accurate. Instead, it was required to assess the damages at the amount advanced less the amount recovered. The Claimant’s reasoning was that they had suffered an immediate measurable loss at the time of their investment because the units and loan notes (the asset in which they had invested) were in fact worth less than they were represented to be and that since they recovered nothing they were entitled to the full amount advanced.   Judge Tower reviewed the relevant authorities and asserted that the exercise which the court is required to carry out when considering these cases is a two-stage process: Firstly, the court must ascertain the basic loss i.e what loss did in fact occur. Secondly, the court is required to assess the maximum amount of the loss capable of falling within the duty of care, which it does by identifying the consequences which are attributable to that which made the act wrongful. Siding with the Claimants, Judge Tower agreed that it was capable of being argued at trial that the Claimants made an investment which was worthless and which they would not have made if they had been informed as to the true value of the investment. Following this, even though ERL had no duty to advise, as an information-provider on an investment rather than a lending decision, it was arguable that ERL knew that the information would be used by the Claimants and their own advisers to decide on the viability of the transaction.  Therefore the maximum loss was, at least in part, attributable to the alleged overvaluation. Comment Ultimately, this was a summary judgment application. The judge was not permitted to have a mini-trial of the issues and the threshold the Claimant had to surmount to prove that the case had a real prospect of success was a low one. It is also important to note that the judge’s decision was caveated. On the evidence before him Judge Tower decided it was quite likely that the Claimants would not be able to prove at trial that an overvaluation caused anything like as much loss as much that alleged and that a trial judge may find that his two-stage formulation is not appropriate. For all these reasons, practitioners cannot infer too much at this stage as to a possible extension of the SAAMCO principle. Nevertheless, the judgment does foreshadow a trial on the substantive issues which will raise poignant questions as to the scope of SAAMCO and one which will have potentially wide-ranging implications for practitioners (as well as valuers/investors). Most notably the door may be opened in similar cases to a third category of duty which carries a different measure of loss, one that sits between the duty to inform and the duty to advise where the tortfeasor is aware than the information will be used to decide the viability of a transactions. Looking ahead, for practitioners this could mean that the SAAMCO principle will no longer be a ‘carte blanche’ in valuation cases where the duty to inform arises and that investment contracts will need to be subjected to meticulous scrutiny. For those practising in this field, the forthcoming judgment will certainly be one to watch.    

No duty owed by a valuer for a developer’s loss of profit or loss of a chance on subsequent sale

Freemont (Denbigh) Ltd v Knight Frank LLP [2014] All ER (D) 165 (Oct)    On 14 October 2014 Stephen Smith QC sitting as a Deputy High Court Judge in the Chancery Division handed down judgment on five preliminary issues concerning a multi-million pound dispute over an allegedly negligent valuation of a development site.    HELD, although a valuer owes concurrent duties in contract and tort to a developer, the developer's claim for loss of profit or loss of chance of a subsequent sale, were outwith the scope of the valuer’s duty.    The Facts    The Defendant valuer Knight Frank LLP (“KF”) had been instructed to value a plot of land, approximately 17 acres in size, on the outskirts of Denbigh, North Wales. The landowner was seeking finance to develop the land.   The valuation report was prepared for the purpose of supporting the landowner’s application for finance from the proposed lender. The valuer was aware of this purpose. The valuation was subsequently relied upon by the Claimant, Freemont (Denbigh) Limited (“Freemont”), as a minimum price to accept when selling the land.   A number of offers to purchase the land were made to Freemont. These fell below KF’s minimum valuation and so were rejected. The failure to obtain an offer in excess of the minimum valuation caused a delay in the sale of the land and as a result, the land fell into disrepair and significantly reduced in value.   Loss claimed   Freemont claimed that it suffered loss of profit (by not accepting one of the developer's offers) and claimed damages for the same, together with damages for all subsequent marketing costs and costs of future disposal of the Development (giving credit for any future sale). Further or alternatively, Freemont claimed that it had suffered the loss of a chance to sell the Development.    The Decision    Stephen Smith QC gave judgment on five preliminary issues directed by Master Price on 12 August 2013. The common law position on the duty of care owed by a valuer was summarised as follows:   (1)   A duty of care in tort is likely to be owed to the person for whom the report was prepared (even though a contractual duty may also be owed to the same party);    (2)   The duty of care in tort is likely to be limited to the purposes for which the report was prepared;    (3)   A duty of care in tort may also be owed by a valuer valuing premises for mortgage purposes (at least if they are modestly valued residential premises), to the purchaser of those premises, if        a.     The valuer knows that his report is likely to be shown to the purchaser, and      b.    The purchaser intends to use the premises for his own residential purposes, and not let them, and      c.     The valuer knows that his report is likely to be relied upon by the purchaser for the purpose of deciding whether to purchase the premises; but    (4)   A duty of care in tort is unlikely to be owed by a valuer instructed to produce a report for a lender for security purposes, to an investor who relies on the report for other purposes.   Of the above four propositions, the first three were well-settled. The fourth however, could not be regarded as settled before the Court of Appeal’s decision in Scullion v Bank of Scotland plc [2011] 1 WLR 3212. In Scullion, Lord Neuberger MR held that a valuer acting for a lender did not owe a duty of care to a borrower where the loan was for a buy-to-let investment property.   Applying the reasoning of Lord Neuberger in Scullion, Stephen Smith QC held that questions regarding the valuation of the land for sale purposes were “tricky” and he rejected Freemont’s contention that KF knew or ought reasonably to have known that it would rely on the report when considering whether to sell the land in the future. In this instance therefore, the duty of care extended only to the provision of a report for the purposes of securing finance. KF had not negligently valued the land at such a low figure that Freemont had been unable to obtain the financing it had negotiated (paragraph 148).   This case is welcome news for valuers and their insurers and shows that the Court will look to the purpose behind the valuation report and that reliance upon the report will be limited to the purpose of the valuation report.

Scullion appeal abandoned

News reaches us that Mr Scullion abandoned his appeal to the Supreme Court the day it was due to be heard.  This means that the law remains as set out by the Court of Appeal [2011] EWCA Civ 693 - that is to say, that the principle in Smith v Bush  [1990] 1 A.C. 831 only applies to ordinary residential property purchases and not to buy-to-let investments.