Legal News

    Failure to Adopt Sound Business Principles Proves Costly

    Cases involving negligent valuations have been passing through the courts steadily over the years – many triggered by the financial meltdown in 2008. A recent decision involved the reliance of a bank on a valuation provided in support of a £1.8 million loan secured on three arcades in Great Yarmouth.

    The loans were advanced in 2007, the arcades having been valued at a total of £4.2 million. Things rapidly turned sour and the borrower fell into administration in 2011. The arcades were subsequently sold for some £500,000 less than the loan.

    The valuers had used an unusual valuation method, and the High Court considered that had a more usual method been used, the valuations would have been some £700,000 less and the bank would not have supported the lending proposition on that basis.

    However, the Court was critical of the bank, because the borrower had misused a loan it had received from the bank on an earlier occasion. The bank had ignored the borrower's history because it saw the potential to make a profit on the arcade deal.

    The Court found in favour of the bank, but reduced the amount of damages recoverable by 40 per cent for contributory negligence.

    The case shows the importance of having a very good reason indeed to depart from accepted valuation methods when valuing a property and also the lack of sympathy which may be shown to an institutional lender that fails to adopt a sufficiently objective approach to a transaction.

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