If Others Are Doing It, Does That Make It Ok

In the current economic climate, it is not surprising to see a number of lenders raising court actions against surveyors in order to try to recover losses which they claim to have suffered as a result of the negligent over-valuation of properties used as security for loans. In December 2012, Coulson J handed down his decisions in Webb Resolutions Limited v E.Surv Limited and Blemain Finance Limited v E.Surv Limited. This provided useful reminders in relation to the permissible margin of error and issues of contributory negligence.

Background

Webb concerned the valuation of two properties for two separate borrowers, Mr Ali and Mr Bradley, which would act as security for loans advanced. Mr Ali purchased a 2 bedroom flat in Birmingham, which E.Surv valued at £227,995. Mr Bradley sought a remortgage of his property in Whitstable, Kent, which E.Surv valued at £295,000. The correct valuations of the properties should have been £204,658 and £260,000 respectively.

In Blemain, Mr and Mrs Sherman obtained a second mortgage on their house in Putney, London which E.Surv valued at £3.4 million, but the correct valuation should have been £2.8 million.

Margin of error

The court reaffirmed the position set out in K/S Lincoln and others v CB Richard Ellis Hotels Limited. A valuation may fall within these margins without it being negligent:

For a standard residential property, the margin may be as low as +/-5%; For a "one off" property, the margin will usually be +/-10%; For a property with exceptional features, the margin could be +/-15%, maybe more. A 5% margin of error was applied to both valuations in Webb and a 10% margin in Blemain. The original valuations were deemed to be negligent and damages awarded to the lenders.

Contributory negligence

In the event that a surveyor's valuation is deemed to be negligent, it is common for the surveyor to advance arguments of contributory negligence on the part of the lender in order to reduce the damages payable to the lender. No reduction was allowed in Blemain as the defendant's lending expert could not say that no reasonably competent lender would have made the loan to the Shermans in July 2007. In the Webb case, guided by the suggestion that "the approach is to see what was happening elsewhere in the lending market because, if the claimant was doing what its competitors were doing, negligence was unlikely, unless it could be shown that it was irrational or illogical", Coulson J found that no reduction should...