Snakes and Ladders
It is a truism to say that benchmark surveyor litigation has generally arisen in
economic troughs following a boom period. The reasons for this are threefold.
First, valuation, as far as its science goes, is by its very nature backward
looking.
The comparable method of valuation in particular relies on evidence created by prior transactions to value the subject property, the artistry of it being in the application of that evidence to the subject.
Thus, in a rising market, the trend is for undervaluation which rarely gives rise to litigation. When that market starts to fall however, the trend is the opposite.
Second, in boom years, a negligent overvaluation will often be masked by an increase in value meaning that, once a lender’s security comes to be enforced, the property is worth more than the valuation in any case.
And third, during boom times, the simple fact is that more people borrow and less default so by the time the trough comes around there are more vulnerable borrowers ready to default and more negative equity which gives rise to claims.
It is usually only when lenders suffer a shortfall on sale that claims arise and those valuations from happier times come under renewed scrutiny.
Of course, it takes time for claims to reach trial and we are only now seeing an increase in law making cases from the last boom.
Three recent cases, both against E.Surv, and one against Countrywide should assist both the Courts and parties when deciding if a valuation is negligent or not.
Combined, the cases further clarified the law in 3 main areas:
Margin of error
The Courts reaffirmed the guidelines previously provided on permissible margins of error in K/S Lincoln v CB Richard Ellis Hotels Ltd (2010):
• For a standard residential property; the margin of error could be +/- 5%
• For a one off property, the margin of error could be as low as +/-10%
• For a property with exceptional features the margin could be +/-15 % or higher
Where a property sits on the scale of uniqueness and the precise bracket to apply remains an issue of valuation for experts to consider, not one of law however.
Methodology or result?
There has traditionally been some academic debate over whether a valuation ‘in the bracket’ is necessarily non negligent or merely that no loss can be evidenced from it. The Courts have indicated that they prefer the former although the difference in practice is almost always, well, academic.
However, it is the end result of the valuation that should be the focus and not always how the valuation was arrived at. This means that even if a valuation figure is non-negligent, it does not matter that the methodology was perhaps incorrect.
There remains a view, though, that a valuation outside the ‘bracket’ is only prima facie negligent and a claimant must show it was actually negligent to succeed.
Contributory negligence
In perhaps the biggest boon to non conforming lender claimants, the Courts found that, with hindsight somewhat risky lending practices adopted by large sections of the lending market in the mid 2000’s could not per se be used by Defendants to limit damages, as self-certified, high loan to value products were abundant at the time. However, lending over and above the already perilous normal practice at the time would constitute contributory negligence, as would any failure to follow internal underwriting and approval procedures.
What is and isn’t within permissible margins will still depend on the facts of the case; the guidelines set out above are not set in stone but will provide a further welcome element of certainty to all parties.
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