23 September 2011

Valuers at a loss to explain error of judgement

The message: Professionals should not act without the required expertise

The case: The High Court has held valuers liable for damages of more than £18m over a negligent property valuation, but made clear that it is not liable for all losses caused by the purchase proceeding (Capital Alternative Fund Services (Guernsey) v Drivers Jonas, 09.09.11).

The High Court held that Drivers Jonas had been negligent in its 2001 valuation of a 145,000 sq ft factory outlet shopping centre to be developed at Chatham Historic Dockyard, Kent. Capita bought the property for £62.85m based on Drivers Jonas’s valuation, but the court held that the correct valuation should have been £44.8m and that Capita had overpaid by £18.05m.

The factory outlet centre opened in July 2003 but it proved extremely difficult to let units and the net rents were well below those forecast by Drivers Jonas. Capita argued that because the factory outlet was in an enterprise zone, a valuer requires substantial expertise in this field, particularly as the tenants pay turnover rents and the value is dependent on the likely turnover.

To be able to properly predict the level of rental income, it was claimed that Drivers Jonas should have obtained a detailed assessment of likely consumer spend and that it failed to do so because of its lack of necessary expertise, despite charging more than £500,000 for its work.

Drivers Jonas claimed it did possess the relevant expertise and Capita’s losses were mainly caused by the fall of the market and its own failings. It referred to the development as being very speculative in nature and to it being “conceived in a boom but born in a bust”. It also claimed the developer had been at fault and there had been various marketing failures.

The court agreed that the individuals at Drivers Jonas who had worked on the valuation lacked the necessary expertise to value the property, as they did not have any experience of factory outlets.

It held that they failed to make a proper assessment of the location and the competence of the developer. They should have declined the instruction and were particularly at fault in relying on information on likely rental levels from sources that were not independent, such as the developer’s agent.

As a result, the court held they vastly overestimated rental levels at year seven at about £3.6m a year based on £27.50/sq ft. The correct rental level would have been less than half of this figure.

Capita did not restrict its claim to the over-valuation. It said this was a case where the valuer had advised as to the commercial viability of the transaction itself and, as a consequence, should be liable for all losses suffered.

Those losses were claimed to be nearly £64m, based on the current value of the property being only around £7.2m and taking into account financing costs and profits made. The court reviewed cases in which it had been held that the appropriate measure of damages depended on the scope of the valuer’s duty.

If a valuer only had a duty to provide valuation evidence for its client to decide whether to proceed, then a valuer would only be liable for the consequences of his advice being wrong. However, if a valuer had advised on whether the transaction should proceed, then it could be liable for all losses suffered.

The court held that Drivers Jonas did provide investment advice but this was part of providing its valuation. It was the valuation figure that was crucial to determining the price and the scope of its duty was limited to ensuring the valuation was accurate. Accordingly, it was only liable for the £18.05m over-valuation and for none of the other losses.

Summing up: Capita v Drivers Jonas

  • The court found Drivers Jonas staff did not have enough experience to value a factory outlet.
  • It found that Drivers Jonas was responsible for the £18.05m over-valuation.
  • However, it was not liable for any other losses.  

 

First seen in Property Week, 23 September 2011.

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