Negligent Valuations In The Property Space: Lender Contributory Negligence

This case concerned the overvaluation of a leveraged property portfolio and resultant losses to a bank on enforcement. The defendant valuer was found to have been negligent in preparing the valuation. However, failures by the bank in ignoring its customer's apparent lack of integrity led the Court to rule that its recovery should be capped at 60%.

FACTS

In 2007, Thurston UK Limited (Thurston) approached Barclays Bank PLC (Barclays) for a loan of £1.8 million. Thurston had been a customer of the bank since 1982. This loan was to fund the acquisition of an arcade, The Flamingo, and to carry out works so that The Flamingo and two arcades already owned by Thurston (Circus Circus and The Golden Nugget) could be operated together.

Barclays engaged Christie & Co (Christie) to value the arcades on a trading basis. Christie used a turnover multiplier based methodology in order to value Circus Circus and The Golden Nugget at £2.7 million and The Flamingo at £1.5 million.

Barclays proceeded to make the loan against the arcades on the basis of a maximum total loan to value ratio (LTV) of 67%, and the acquisition and alterations went ahead as planned. In 2010, Thurston fell into financial difficulties and was placed into administration. The arcades were sold for £1.35 million, leaving Barclays significantly out of pocket.

Barclays brought a professional negligence claim against Christie claiming that Christie had negligently overvalued the arcades and that Barclays had relied on this negligent valuation in making the loan.

JUDGMENT

Valuation

The Court noted from RICS guidance that arcades, like pubs, hotels and care homes are typically valued by reference to their trading potential. The valuer should, in the absence of special circumstances, calculate the EBITDA of a reasonably competent operator of the property and apply a multiplier based on recent sales of comparable properties. In contrast, turnover is a cruder indication of value - in the Judge's words, 'there is no consistent relationship between turnover and profit'. Using the EBITDA method, the court determined that the actual value of Circus Circus and The Golden Nugget at the relevant date was £2.3 million and the actual value of The Flamingo was £1.2 million: in total, £700,000 below Christie's valuation.

The court considered Christie's submission that there was a lack of good comparable evidence for EBITDA multiplier purposes but dismissed this.

Negligence

The court noted that valuation is...