No recourse for lender who relied on a negligent valuation

Hope Capital Limited v Alexander Reece Thomson LLP [2023]

Introduction:

In the recent decision of Hope Capital Limited v Alexander Reece Thomson LLP [2023] EWHC 2389 (KB), the High Court has determined a lender to have no actionable loss against a negligent valuer following the Borrower’s default, despite relying on its overvaluation of the key security asset.

Although there was no question that the lender would not have proceeded with the transaction if the value had been accurately reported, the court determined in this case that the lender’s losses arose from multiple commercial risks coming to fruition which had not been the responsibility of the valuer.

Whilst the decision may be welcome news for valuers (and their professional indemnifiers), it offers fresh warning to lenders against overestimating the scope of responsibility assumed by professional advisors instructed merely to provide an opinion feeding into a business decision; albeit one unquestionably relied upon and where heavy losses are at stake.

Case Background and Facts:

In 2018, Hope Capital Limited and Hope Capital 2 Limited (“Hope”), a bridging loan provider, agreed to lend £2.448 million including interest and fees (the “Loan”) on a 6-month term to St Anselm Heritage Properties Limited (the “Borrower”). The Loan was secured against a Grade II listed Elizabethan Hall known as Cedar House (the “Property”) owned by the Borrower’s shareholder, Evangelos Pieri, on a long lease from The National Trust. Alexander Reece Thomson LLP (“ART”) was instructed as property surveyor to provide a valuation of the Property “based on its existing planning/condition excluding any ‘hope’ value or goodwill”. After they returned this at a value of £4 million (the “Valuation”) in February 2018, Hope proceeded with the Loan.

However, the Borrower thereafter defaulted and Hope appointed receivers to take possession of the Property in November 2018. In a course of events which delayed its sale substantially, a second notice for remedial works was served by The National Trust owing to rogue, unapproved and unsatisfactory works on the Property conducted by Mr Pieri, as well as the unprecedented market shock caused by the COVID-19 pandemic. The Property was not sold until October 2020 at which point a sale price of only £1.4 million was obtained.

The Arguments: Valuer responsibility for any and all losses after providing a ‘green flag’?

Hope brought proceedings against ART for negligence and breach of contract. In a nutshell, it asserted that if the Valuation had been competently undertaken, “the transaction would have ground to a halt” and all its losses were therefore necessarily the responsibility of ART.

It was conceded by ART that its Valuation had overvalued the property outside of a possible bracket within which a reasonably competent value should have fallen. As such, there was no question that they had breached their professional duty to Hope. However, it disputed both the extent of its original overvaluation and that it should be held responsible for Hope’s losses. It argued Hope had ultimately made the decision to proceed with the Loan on the balance of all associated risks and ART had not been responsible for the latter issues which had affected the Property’s sale price so substantially.

As a starting point, the Court-assessed true market valuation of the Property at the February Valuation date was found to be £2.75 million and the 180-day accelerated sale value for both the Valuation and default dates was £2.475 million. This clearly surpassed the eventual sale price by some distance.

Therefore, the legal question for the court was what damages can be recovered by a reliant party where (i) but for the negligence of their professional advisor the relevant course of action would not have been taken at all, but (ii) part or all of the resultant losses suffered arise from an accumulation of risks which the professional advisor had no duty to protect against.

Decision:

In reaching his decision, Constable J reflected on the existing authorities on the role assumed by professional advisors towards those who rely on their advice. Per South Australia Asset Management Corp v York Montague Ltd [1997], the distinction between losses which have been factually caused by a negligent act of a professional advisor and losses which are actually recoverable from that party has been recognised for some time. BPE Solicitors v Hughes Holland [2017] UKSC 21 supposed that the question is whether a professional advisor has actually assumed responsibility for the risk of the whole transaction or just part of it (which, Constable J noted, would be “fact sensitive”).

In this case, the Constable J determined the most correct approach was to assess the scope of ART’s duty by reference to the specific purpose for which that advice is provided, leaning on the Supreme Court judgments in Manchester Building Society v Grant Thornton UK LLP [2021] and Meadows v Khan [2021]. In Manchester Building Society, the judge had pinpointed a valuation’s purpose as providing a lender with “an opinion” on which it may choose to rely; but only in respect of one of a number of relevant commercial considerations with which it should satisfy itself before proceeding. Illustrating this point, Constable J noted that Hope would have been aware of the risk that the Property would fetch less than the Valuation if sold in a future insolvency scenario, which would be true even if the Valuation had been accurate.

The judge also criticised Hope’s failure to properly consider dishonest responses in the customer’s loan application and the absence of an exit strategy. These matters should logically have raised red flags and were not within ART’s remit as the appointed valuer.

As such, whilst accepting the crucial nature of the Valuation in Hope’s ultimate decision to proceed, ART was not to be held responsible for the losses suffered by Hope on the Borrower’s default.

An appeal application was denied on 8 December 2023, but it is yet to be seen if a further application will be made to the Court of Appeal.

Key Take-Aways:

This case serves as a caution to those instructing professional advisors for information or opinions in the commercial transactional context.

The role played by such advisors is undeniably a vital one and an opinion offered may even amount to a crucial ‘green flag’ to proceed. However, this should not be interpreted as an assumption by that advisor of responsibility for any and all consequences flowing from an ill-fated transaction where these relate to matters clearly falling outside of their role.

It is important therefore for lenders to be mindful of the scope of their professional advisors’ instructions and to fully review any assumptions and exclusions listed against the factual background of each case. The principle of course remains that the transaction parties themselves should exercise an appropriate degree of caution in sufficiently identifying, reviewing and balancing the inherent risks of any lending transaction before proceeding.

If you would like any further information or advice, please contact Katherine Grant from our Banking team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.