Back to basics: valuations, negligence and the law of damages in the real estate space

Background

In April 2011, the claimant lender (T) entered into a loan facility agreement with a borrower for £2,475,000 for a term of nine months. The loan was made in connection with a residential development and advances under the facility were secured by a legal charge over the real estate. The loan was made on the basis of a valuation of the development prepared by the defendant surveyors (D), which confirmed that the development provided adequate security for the loan.

In December 2011, shortly before the facility was due to expire, the parties entered into a second facility agreement for £3,088,252 for a term of six months. This loan was made in connection with the same development. Of this sum, £2,799,252 was applied to refinance the indebtedness under the first facility and £289,000 was new money advanced for the completion of the development. A fresh charge was taken over the development to secure the sums due under the second loan. The second loan was advanced on the basis of a further valuation provided by D, which again confirmed that the development provided adequate security for the new loan.

The second loan expired in July 2012, a few weeks after T went into administration. None of the indebtedness under the second loan had been repaid. T's receivers sought to enforce the security. However, this proved inadequate and T issued a claim in negligence against D in respect of the second valuation. T argued that but for the negligent valuation, the advances under the second facility would not have been made. T made no claim in relation to the first facility or the first valuation.

D applied for summary judgment in respect of that part of the claim which arose out of the refinancing element of the advances under the second facility, namely, the sum of £2,799,525. D contended that if T had not made the advances under that facility, the first loan would have remained outstanding and unpaid. Therefore, that part of T's loss would have been suffered in any event. The deputy Judge granted the application.

The Court of Appeal, by a majority, allowed T's appeal and held that the advances under the second facility stood "apart from the first and the basic comparison for ascertaining the claimant's loss is between the amount of that second loan and the value of the security".

The Supreme Court rejected the Court of Appeal's findings and confirmed that when assessing the quantum of damages in a case where a defendant had been negligent, the starting point was to apply the ordinary principles of the law of damages.

Judgment

The leading judgment was delivered by Sumption LLJ. He reaffirmed that the "basic measure of damages is that which is required to restore the claimant as nearly as possible to the position that he would have been in if he had not sustained the wrong". Hence, if D had not been negligent in reporting the value of the property for the purposes of the second loan, T would not have entered into the second facility. However, the first facility would not have been affected and the funds under it would still have been advanced and would have remained outstanding.

In response to the Court of Appeal's findings that the second facility stood apart from the first loan, Sumption LLJ stated that the fact the borrower used the funds under the second facility to discharge its obligations under the first did not mean that the Court was obliged to ignore the fact that T would have lost the loan monies under the first facility in any event. Sumption did concede that if the first valuation had also been negligent, T would in principle have had a right to bring an action in respect of the loss attributable to the extinction of that liability which resulted from the refinancing of the existing indebtedness. As T did not claim negligence in respect of the first valuation, the Court did not consider this further.

A benefit is collateral if its receipt arises independently of the circumstances giving rise to the loss.

T's counsel argued that:

• the fact that the monies drawn in December 2011 were used to repay the first loan was a collateral benefit to T, which T did not have to take into account when computing its loss.
• if the repayment of outstanding indebtedness was disregarded, T's damages could be assessed as if the whole of the second loan was an additional advance. That additional advance would not have been made but for the negligent valuation.
• therefore, the entirety of the second advance should be recoverable in damages.

The Court took the view that "the discharge of the existing indebtedness out of the advance made under the second facility was plainly not a collateral benefit in this sense". It was an express term of the second facility that the monies advanced thereunder would be used to discharge the indebtedness under the first.

The Supreme Court allowed D's appeal and restored the order of the deputy Judge.

Comment

This judgment clarifies that the 'but for' test remains the general method to assess the quantum of damages in negligence claims.

It is also a poignant reminder about the need for lenders to carefully consider the role of third party advisers in the context of a loan transaction, particularly where a lender has an ongoing relationship with a borrower and requires multiple valuations for security purposes. This is especially relevant where a surveyor has produced two successive valuations for the same property. In this case, it was assumed that the first valuation was not negligent. However, since both valuations were produced only nine months apart by the same surveyor, and were likely to be based on very similar facts and analyses, it is reasonable to conclude that this assumption was wrong. In a scenario where a lender argues that two successive valuations were negligent, it will be easier to argue that the losses flowing from the first valuation were foreseeable.

It appears that the Supreme Court will continue to take a strict approach when considering the principle of collateral benefit. As such, lenders are reminded to consider this when structuring transactions.

Tiuta International Limited (in Liquidation) (Respondent) v De Villiers Surveyors Limited (Appellant) 2017 UKSC 77