Menu

Trading property valuations: Approach for assessing negligence

Terraced Houses and Colourful Shopfronts Print publication

02/02/2017

Walker Morris has reported previously [1] on professional negligence in the context of valuing trading properties.  The subject has recently hit the legal headlines again in Barclays Bank Plc v TBS & V Ltd [2].  Rejecting the lender’s overvaluation claim, the High Court has confirmed the correct approach for assessing negligence.

Facts and duty of care

The claimant bank had loaned £250,000 to enable a couple to buy, as a going concern with a 40 year lease, a listed building with adjoining cottage and ancillary buildings.  The property was being used as a care home.  The bank made the loan in reliance upon the defendant valuer’s £350,000 valuation of the trading property.  When the care home business failed, the bank forfeited the lease and sued the valuer for negligence on the basis of its expert’s valuation of the property at just £130,000.

The court acknowledged that the valuer’s duty to the bank was to exercise reasonable care and skill in carrying out the valuation; and that the standard of care required of the valuer was that which would ordinarily be exercised by a reasonably competent member of the valuation profession.

The case centred on the correct approach for the court to take when assessing whether or not a valuer has breached that duty of care when valuing a trading property.

Trading properties: Court’s approach

The judgment addresses the following key points:

  • The court must form its own view of the correct valuation of the property – it must not simply prefer the evidence of one expert over another. In doing so, the court will consider the evidence before it and its own evaluation.
  • Valuation is not an exact science and there will an appropriate margin of error to determine a bracket within which all valuations will be non-negligent. The court must form its own view as to the appropriate percentage margin of error.  In doing so, the court will take into account the facts of the individual case – in particular the nature of the property in question.
  • 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 [3].
  • Only if the valuation complained of falls outside the bracket of potential non-negligent valuations will the court consider whether the valuer acted in accordance with practices regarded as acceptable by a respected body of opinion in the profession [4].
  • Applying those principles to this case, the starting point to determine the correct valuation was the RICS Appraisal and Valuation Standards (“the Red Book”) and the RICS Guidance Note 1 concerning trade related property valuations and goodwill. Those principles required the court to establish the business’ earnings before interest, taxation, depreciation, amortisation and rent (the EBITDA) and then to apply an appropriate multiplier derived from considering the EBITDA of comparable properties.  The court’s methodology and calculations are explained in the judgment, and the correct valuation was found to be £330,000.
  • The property in question was unusual and a leasehold interest of 40 years in a care home was a rare, if not unique occurrence. Comparable evidence as to valuation was therefore limited, and a margin of error of 15% was found to be appropriate.
  • The valuation of £350,000 was within the 15% margin of error and was therefore non-negligent.

WM Comment

The decision does not make any new law but does provide another example of the courts’ willingness to accept a margin of up to 15% in the valuation of unusual commercial properties. It also demonstrates the courts’ approach to expert evidence in that the judge in this case did not prefer one expert over the other, but formed a view taking into account all of the evidence in the case.

__________________

[1] Please see our earlier briefing.
[2] [2016] EWHC 2948 (QB)
[3] K/S Lincoln v CB Richard Ellis [2010] PNLR 645
[4] i.e. the ‘Bolam’ test as explained in Merivale Moore Plc v Strutt and Parker [2000] PNLR 498