Legal casebook: Negligent valuations
Marianne Jarvis, partner in the dispute resolution department at Moore & Blatch Solicitors, reports on the Paratus v Countrywide negligent valuation case, which has broad implications for the market
The Paratus AMC Ltd & RMAC 2005 NS1 PLC v Countrywide Surveyors Ltd (2011) ruling last December was good news for lenders, despite it going against them, as it established guidelines that could save both court time and cost.
For those unfamiliar with the case, Paratus (formerly known as GMAC) and RMAC (a related specific purchase vehicle), brought a claim against Countrywide Surveyors. They complained that they had suffered loss and damage as a result of a negligent valuation by a valuer employed by Countrywide.
In summary, in July 2004 the borrower’s broker made a remortgage application to GMAC for a £165,500, 10 year interest-only loan on a two-bed flat with an estimated value of £185,000, at 90 per cent loan-to-value.
GMAC instructed Countrywide, which confirmed the £185,000 value. In March 2005 GMAC securitised a tranche of its loans, including this loan.
The borrower paid until the summer 2007, then fell into arrears. In May 2008 GMAC obtained possession and sold the property for £123,500.
GMAC then obtained expert evidence which indicated that the original value was negligently overstated, and thus commenced a claim.
The issues
The main issues that arose for determination by the Judge were:
- Was the valuation negligent?
- What are the effects of securitisation on loss?
- Should the award of damages be reduced on account of contributory negligence?
1. Was the valuation negligent?
The claim failed because the Judge concluded that the original valuation did not deviate sufficiently from the true property value to have amounted to a breach of the valuer’s duty to GMAC. Nonetheless, his analysis of the extent of permissible deviation is encouraging.
Having reviewed other precedents, the Judge concluded: “It seems to me that, as a matter of general principle, the position to be taken from the authorities is as follows: (a) for a standard residential property, the margin of error may be as low as plus or minus 5 per cent; (b) for a valuation of a one-off property, the margin of error will usually be plus or minus 10 per cent; (c) 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.”
On this basis, and having reviewed the opinions of expert witness, the Judge found that the margin of error for this property would have been 8 per cent. The Judge’s approach in applying a robust 8 per cent, rather than the often-cited 10 per cent, is encouraging.
It was unfortunate for GMAC that on the valuation evidence available, its claim needed a tighter margin for Countrywide to have been found in breach of its duty, but that was simply a matter of the evidence in that case.
2. What are the effects of securitisation on loss?
One of the arguments put forward by defendants in recent cases, has been that the lender has not suffered any loss due to the securitisation of the loan. Countrywide argued that as the securitisation involved an assignment by GMAC to RMAC, a special purpose vehicle, of its cause of action against Countrywide, GMAC could not claim as it had assigned its cause of action, and RMAC could not claim as it had suffered no loss – the loss, it argued, remaining with GMAC.
Judge Keyser QC said, by way of comment, that he would have rejected this argument: “It would in my judgment be a sorry state of affairs if an unexceptional form of securitisation, such as was employed in the present case, meant that losses for which a negligent valuer would otherwise have been liable became irrecoverable. If I had seen more merit than I do in Countrywide’s argument, I would nonetheless not have acceded to it, as to do so would lead to both injustice and commercial inconvenience. Accordingly, if I had accepted GMAC’s case on valuation and negligence, I would have awarded it substantial damages.”
This seems to be a strong indication that the courts will have little patience for technical arguments about securitisation of loans, if valuations are found to have been negligent. Some defendants have refused to engage in claims, preferring instead to spend time and costs on the issue of securitisation.
We hope this judgment will encourage parties to consider the real issues, namely valuation and margin of error.
3. Contributory negligence
It is often alleged by defendants that, regardless of whether there has been negligence on the part of the valuer, losses were in fact caused both by imprudence in the underwriting of the loan, and imprudence in lending policies.
Had Countrywide’s valuation been in breach of its duties, it would have been relevant to consider whether any reduction to the claim should have been made due to negligence on the part of the lender.
Countrywide made two arguments: the first that the lender had failed to carry out sufficient enquiries and investigations into the borrower’s honesty and reliability; the second that the lender’s lending policy was imprudent, as it allowed lending of 90 per cent loan-to-value.
The court considered the position at length and heard from expert lending witnesses. What is of interest to lenders is that, while the court concluded it would have made a finding of contributory negligence in the order of 60 per cent, this was on the basis that, on this occasion, there had been a failure to comply with the lending policy in the course of the underwriting of the loan. Notably, the court refused to make a finding that the policy itself was negligent.
Judge Keyser QC concluded: “On the basis of the evidence before me, I reject the contention that GMAC’s business model of 90 per cent LTV loans on a self-certified basis was negligent.”
Furthermore, it is useful to draw attention to the effect of such a deduction. The loss suffered by the lender was around £66,000, but this was subject to a cap of £31,000, being the total recoverable loss. As the deduction for contributory negligence is applied to the total loss, the court would have awarded damages in the sum of £26,384.30. The 60 per cent reduction to the total loss translates as a deduction of only £4,600 on the recoverable sums, or just 15 per cent of the sum actually claimed. In many cases, such a deduction will have no effect on the recoverable losses at all.
Lessons for lenders
1. The court was prepared to accept that 5 per cent was the margin of error in ordinary residential transactions, albeit it extended the margin in this instance to 8 per cent. It is, however, important that expert evidence as to value and margin is thoroughly tested on a case by case basis.
2. Defendants are likely to continue to raise issues of securitisation, and lenders should be as open as they can, having regard to commercially sensitive information; and may even consider whether this issue can be disposed of as a preliminary issue to keep costs down. Defendants should have regard to costs consequences in raising the issue.
3. The court did not find the lending policy itself negligent, which is good news for lenders. Lenders and their advisors should nevertheless have regard to whether the policy has been appropriately applied in the context of each individual loan.
4. Success at trial is never guaranteed, and while the judgment might be helpful to lenders, the claim was ultimately unsuccessful. Ongoing review of strategy by both parties is therefore required.
