A surveyor has escaped a claim for negligent valuation after the Court decided that the case was brought too late. It is increasingly difficult for lenders to successfully bring claims against surveyors for losses incurred during the 2007-08 global financial crisis.
Mr and Mrs Slee applied for a mortgage for a self-build project. The lenders, who subsequently assigned the debt to Canada Square Operation Ltd (Canada), appointed Connells who valued the property at £475,000. The lenders also instructed Kinleigh Folkard & Hayward (KFH) to undertake a second valuation. This valued the property at £500,000.
Mr & Mrs Slee were advanced a mortgage of £427,500 in March 2006. They initially made regular payments, but soon started making late and missed payments. They surrendered the property in 2008 and were subsequently declared bankrupt.
Canada made a claim for negligent valuation against KFH in October 2013, more than six years after the loan was advanced. The time elapsed meant that Canada was too late to make a claim in contract. Instead it claimed in tort arguing that it had only suffered loss in 2007, within the six year time limit.
Time bar: The court needed to decide when Canada had actually suffered a loss. It did this by assessing when the value of the property plus the value of the borrower’s ability to repay the loan (the “borrower’s covenant”) became less than the total debt. This measure is known as the Nykredit test, after the case of Nykredit Mortgage Bank plc v Edward Erdman Group Ltd.
KFH’s defence team brought in a forensic accountant as an expert witness to prove that Mr and Mrs Slee’s covenant was weak when the loan was granted. After hearing the expert’s evidence, the judge concluded that the borrowers’ covenant was so low that Canada had actually suffered loss as soon as it had made the loan in 2006. This meant that its claim was outside the six year time limit.
Reliance: The also court concluded that Canada had relied on Connell’s valuation and not KFH’s when it had made the loan. It therefore decided that KFH was not liable for Canada’s loss. Canada, brought no witnesses who were involved in making the original loan, to argue against the Court’s conclusion.
“This case brought clarity to the Nykredit test,” said James Burgoyne, Director – Claims & Technical, Brunel Professional Risks. “The Judge provided clear guidance about the valuation of the security and the borrower’s covenant. This will help valuers to defend claims of negligent valuation where the six year time limitation period is a factor.”
Details about the case have been published by Law Now, Hailsham Chambers and Clarke Wilmott. Also see Brunel ‘Limitation of claims’ article, published in May 2015 for further background reading.