Blog - 16/01/2017
Lenders and Surveyors: Margins Could Cost
The recent decision in Barclays Bank Plc v TBS & V Ltd  EWHC 2948 (QB) is regarded as a positive result for valuers but it also highlights developing areas of law where there has been very little or no previous authority.
Barclays pursued TBS & V Ltd (TBS) for the alleged negligent property valuation of a listed building operated as a care home on a 40 year local authority lease in Devon. Barclays relied on TBS’s valuation to make a loan advance to the borrower. Essentially, some years later, the borrower’s business failed, the lease was forfeited and the borrower defaulted on the loan. In an attempt to recover its losses, Barclays pursued TBS.
TBS had reached the valuation using the earnings before interest, taxation, depreciation, amortisation and rent (EBITDA) method and applying a multiplier. The court used previous case law to conclude that it was for the valuer to analyse objectively the circumstances of the property and the business operating from it. TBS used a broad guide to help determine the appropriate multiplier; the judge, however, used more specific criteria in its own determination (the floor space; the length of the lease and its provision of security for the investment; that the property was Council owned and Grade II listed with a seafront location; and the market and demographic factors which collectively had the effect of increasing the applicable multiplier). The judge’s decision making process in this case reinforces the fact that the judge will form his or her own view in relation to the real value of the property based on all the expert and factual evidence, and not simply prefer the evidence of one or another expert. The key issue, therefore, was not the type of methodology used but rather whether the valuation figure is within the bracket of the reasonable margin of error.
Essentially, a property valuation can be negligent if it is outside a ‘permissible margin for error‘. At present, case law sets this margin at about 5% for simple residential property valuations, 10% for one-off commercial property valuations and 15% where there are ‘exceptional features’. That said, there have been instances where an even higher margin may be argued in ‘an appropriate case’ (i.e. difficult and challenging circumstances). The court concluded that in light of the unusual facts of the case (for example, the property featured several outbuildings, which could not be used for care home purposes and a leasehold interest for 40 years in a care home is rare) that the applicable margin of error was 15%. TBS’s valuation fell within that permitted margin and consequently, the valuation was not negligent.
The surveyors attempted to argue that if it had in fact been negligent any liability was superseded by a later restructuring of the loan by Barclays. The borrowers had defaulted on interest payments and so Barclays had restructured the lending but with the same legal charge remaining in place throughout. Even despite internal accounting adjustments made by Barclays, the very fact that the mortgage had not been redeemed was enough for the judge to dismiss the surveyor’s argument; the scope of duty owed by TBS remained extant. Commercial lending restructuring is commonplace and this case marks the first expression of a judicial view on this very point.
For further information regarding this topic or any other property and construction matter, please contact Joanne McIvor – Partner, Hayley Cloherty – Associate, or any member of the Edwin Coe Property or Construction teams.
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