Negligence and contributory negligence: Valuer and lender conduct mattersPrint publication
In Barclays v Christie & Co  the claimant bank had a longstanding banking relationship with its customer, the borrower. When the borrower, the owner of a seaside arcade, applied for a loan to purchase a neighbouring arcade and to carry out building works so that the adjacent businesses could be operated together, the bank instructed the defendant to value each of the trading properties. The bank then made the loan and the borrower went ahead with the purchase and the works. Following the borrower’s subsequent administration, the arcades were sold and the bank suffered a significant shortfall. The bank sued the valuer, alleging that the arcades had been negligently overvalued. As part of its defence, the valuer alleged that the bank had been contributorily negligent in its lending and that any damages should be reduced as a result.
The following key takeaways arise from the judgment:
- Trading property valuations should be conducted on an EBITDA basis  unless there is evidence of an accepted alternative methodology.
- The judge did not depart from the experts’ consensus that the appropriate margin of error for the properties was 15% .
- Although no specific finding was necessary in this case (as valuations of the properties both separately and on a combined basis fell outside the 15% margin of error), the court indicated that in portfolio lending it is the aggregate value of all properties which matters most.
- Reliance and causation were established in this case because the bank proved that it had relied on the valuations when making the loan; and that but for the valuations the transaction would not have proceeded, the loan would not have been made and the bank would not have suffered loss.
- When deciding to lend, the bank relied (alongside the valuations) both on its longstanding commercial relationship with the borrower and on its consideration that it could still make money out of that relationship. In doing so, the bank overlooked the fact that the borrower’s integrity had been impugned when it had dishonestly misused a prior loan. The bank was therefore contributorily negligent and damages awarded to it were reduced by 40%.
- In determining damages the court was prepared to accept a common sense approach to a claim for interest as damages and the judge was in little doubt that an award for cost of funding was appropriate in the case of this commercial lender.
Although this case concerned the somewhat unusual scenario of commercial lending secured against two seaside arcades, the majority of issues addressed are of general application and will be of interest to lenders, valuers, professional indemnity insurers and legal advisors alike.
The case is further High Court authority that a property will have to be very unusual indeed if a margin of error of more than 15% is to be appropriate. The judge’s clear view that, where lending is to be secured against multiple properties, it is the aggregate value which is to be of utmost importance when it comes to any subsequent negligent overvaluation allegation is important for valuers and claimant-lenders to note.
Whilst the bank’s substantive claim succeeded because it was able to establish the all-important (but often overlooked) elements of reliance and causation in respect of the negligent valuation, the case is a salutary reminder of how essential it is for a claimant also to consider its own conduct. Although the judge in this case acknowledged that the bank/customer relationship is a commercial one, and that a successful longstanding relationship may reasonably count for something when it comes to the lending decision, the message is clear that that is not enough. The court considered that a reasonably competent lender would not have made the loan in light of the borrower’s historical dishonesty or, at the very least, it would have required closer scrutiny of the borrower’s finances, proposals and projections. As such, a very significant 40 % reduction in damages was made.
Whilst there is ever-present pressure on mutuals and other retail financial services providers to make loans and thereby to facilitate growth both in terms of internal commercial success and in relation to the wider socio-economic, business and property market context, this case suggests that lenders and valuers will be well advised to ensure that their underwriting criteria and valuation procedures respectively specifically address (and challenge if necessary):
- the appropriate valuation methodology, depending on the property-type on a case-by-case basis;
- aggregate values in portfolio lending; and
- borrower history and integrity, even where there is a longstanding/ongoing customer relationship.
 Barclays Bank plc v Christie Owen & Davies (t/a Christie & Co)  EWHC 2351 (Ch)
 i.e. trading properties should be valued by assessing earnings before interest, tax, depreciation and amortisation of a reasonably competent operator and then applying a multiplier derived from considering the EBITDA of comparable properties (RICS Appraisal and Valuation Standards (“the Red Book”) and the RICS Guidance Note 1 concerning Specialised Trading Property Valuations and Goodwill).
 Ibid paras 55 and 85. See K/S Lincoln v CB Richard Ellis  PNLR 31 (TCC): for a standard residential property, the margin of error may be as low as plus or minus 5 per cent; for a valuation of a one-off property, the margin of error will usually be plus or minus 10 per cent; if there are exceptional features of the property in question, the margin of error could be plus or minus 15 per cent, or even higher in an appropriate case.