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Tiuta v De Villiers Surveyors restores law in lenders’ favour

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02/09/2016

Walker Morris has reported previously on the earlier High Court decision in the Tiuta v De Villiers Surveyors litigation.  Professional Negligence specialist Sandip Singh now explains the outcome of an appeal to the Court of Appeal [1], which will no doubt be of welcome interest to building societies and other lenders.

Background law and facts

In order to succeed in a negligence claim against a surveyor, a claimant must establish causation. It must prove, on the balance of probabilities, that but for the surveyor’s negligence, the claimant would not have suffered any loss. Applying the well-established ‘but for’ test involves comparing the claimant’s actual position with the no negligence position (i.e. the position it would have been in if the surveyor had valued correctly) [2].  Where a subsequent loan fully redeems an earlier loan, no loss is suffered and so no cause of action subsists in relation to the earlier loan. In these circumstances, a claimant would only be able to pursue a claim if it had suffered loss and if that loss was caused by negligence, if any, in the valuation upon which the subsequent loan was founded [3].

The High Court’s decision in Tiuta v De Villiers Surveyors [4], however, effectively enabled the surveyor to escape the consequences of his negligence when providing an over-valuation in support of a second/re-financing loan, on the basis that loss had already been suffered in any event, arising out of the original debt.  The High Court’s decision seemed to significantly limit the losses that a lender could recover in surveyor’s negligence cases involving second/re-financing loans.

Court of Appeal clarity

The lender in this case, Tiuta, argued on appeal that the second transaction had discharged the original loan in full and had created a fresh loan, with fresh security, rendering the surveyor liable for all losses flowing from the negligent valuation which had been provided in support of the second loan. The surveyor, on the other hand, argued that the second loan was, in substance, merely an increase in the amount of the original loan and, as such, its liability should be restricted accordingly.  It also argued that if the subsequent loan had not been made, the lender would still have suffered loss as a result of the (over-valued) original loan.

Siding with the lender, and effectively restoring the law as stated in Nykredit and Preferred Mortgages, the Court of Appeal decided that when a lender considered making a fresh loan, part of which was to be used to repay an existing debt, the purpose to which the new loan would be put was irrelevant to the valuer.  The valuer was instructed to provide a valuation upon which the lender would rely when considering whether to enter the transaction, regardless of the purpose to which the loan monies would be put.  If the surveyor negligently overvalued the security, he would be liable for the losses flowing from that valuation which, crucially, will not be limited to the amount by which the re-finance exceeds the original loan.

WM Comment

Lenders and their legal advisors will be pleased both with the clarity provided by the Court of Appeal in this decision and with the fact that it means that, in relation to surveyors’ negligence claims, second loan, re-financing or remortgage transactions will be treated as fresh loans in their own right, such that lenders’ losses will potentially be recoverable in full and will not be restricted to the amount by which the second loan exceeds the first.

Valuers may wish to review the standard terms and conditions upon which they provide second mortgage valuations and to take advice as to whether they may be able to limit or exclude liability. In any event, this decision will impact upon the exposure of valuers and their insurers in second loan, re-financing or remortgage valuation cases and the industry may see an increase in professional indemnity premiums as a result.

If you would like any further advice or assistance in relation to this important decision, please contact Sandip Singh or any member of Walker Morris’ Banking Litigation team.

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[1] Tiuta International Limited (In Liquidation) v De Villiers Chartered Surveyors Limited [2016] EWCA Civ 661
[2] Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] UKHL 53
[3] Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] EWCA Civ 336
[4] [2015] EWHC 773 (Ch)

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