Mr Justice Dove :
Introduction
1.
Manor House in Lynmouth is a Grade II listed building which historically was probably a gentleman's residence accompanied by ancillary supporting outbuildings for staff and stabling. It is owned by Lynton and Lynmouth Town Council and let out by them for commercial use. Since the 1980s it was let as a 17 bed care home. By the time of the events with which this action is concerned the property had been marketed for about three years. The owner, Mrs Lovell, was by then in her mid-70's and widowed and wished to sell the care home as a going concern and retire. The marketing of the property commenced about mid 2004, and the offer was accompanied with a new 40 year lease for care home use.
2.
The essence of this case is as follows. The claimant was approached by a Mr and Mrs Watson who wished to borrow money in order to buy the care home. The claimant instructed the defendant to value the property, and following receipt of a valuation by the defendant of £350,000 the claimant loaned money in order to enable Mr and Mrs Watson to acquire the premises. The business then failed over the course of several years and in the end in 2011 Mr and Mrs Watson left the property and the claimant, having taken professional advice, concluded that the only sensible course was to forfeit the lease. The claimant claims the total loss which has occurred as a result of their lending. The claimant claims that that loss resulted from the defendant's negligent valuation of the property. The defendant denies negligence and contends that the valuation which was given was one which fell within an appropriate margin of error, bearing in mind the complexities of valuing this property which are alluded to below. The defendant also raises subsidiary issues in relation to whether or not liability arises in any event. It is contended that the claimant was, by virtue of an offer letter which was sent prior to the receipt of the defendant's valuation, liable to lend the money to the purchasers, and that therefore the valuation caused no loss. They also submit that any liability they might have based upon the valuation which they provided was overtaken by a restructuring of the loan to the purchaser undertaken in 2008. Allegations of contributory negligence are also raised by the defendant against the claimant.
3.
I should state at the outset that I am extremely grateful for the excellent and thoughtfully prepared submissions of counsel for both parties, namely Ms Nicola Rushton on behalf of the claimant and Mr Thomas Grant QC on behalf of the defendant. I would also wish to place on record my thanks to their legal teams who provided well-structured papers for the trial and ensured that the hearing ran smoothly.
4.
The structure of this judgment is as follows. Firstly, the facts surrounding the claim are set out, before secondly rehearsing the expert evidence which each party called. It is convenient to then consider the law in relation to whether the valuation was negligent followed by my assessment of that question on the evidence before me. Finally the judgment turns to the further matters raised by the defendant in this case.
The facts
5.
On 1
st June 2007 the claimant's employee Mrs Maries, who was a Relationship Manager at the claimant's branch in Stoney Stratford, received an enquiry from a mortgage broker in relation to a potential lending opportunity. The enquiry related to two borrowers, Mr and Mrs Watson, who needed to borrow £250,000 for the purchase of the Manor House care home at an agreed price of £350,000. The mortgage enquiry was accompanied by accounts for the Manor House care home for the years ended 30
th April 2003, 30
th April 2004 and 30
th April 2005. Sales particulars in relation to the Manor House care home were also provided. Subsequent to this, Mrs Maries received a CV for Mr Watson to support the application. That CV stated that Mr Watson was 66 years old, and described himself as having professional management skills having worked for many years in the construction industry.
6.
The internal credit management system operated by the claimant was called Zeus. On 21
st June 2007 Mrs Maries created a Zeus credit application which was submitted through the bank's computer system to their credit team in Cambridge. She described the proposal for the lend in the following terms:
"Established 17 bed Nursing Home in Devon, in a Grade 2 Listed Manor House set in Exmoor Park. Accommodation also includes separate staff quarters, which has planning permission for a further 8 beds, and also a 2 Bed Owners cottage adjoining this. Watson will carry out a lot of the work himself and costs to convert will be minimal. Existing owners have run for 20 years, and are now selling up to retire.
Property is leasehold, and Lease has just been renewed for 40 years, with the removal of the Bankruptcy clause. A full Taylor's Business valuation has been carried out, at £360,000.
The Watson's have sold their house in Milton Keynes, and will move down to Devon. Their daughter, who works in residential care homes locally, was to become Manager, but has now decided not to relocate. There is a longstanding employee, assisting the current Manager, who is fully qualified and has applied to be registered by the Local Authority. This will retain links with the Local Authority even under the change of ownership. All the existing staff will remain."
7.
The maximum loan to value ratio contemplated for the lend, in accordance with the claimant's lending criteria, was 70%, and it was envisaged that the lend would be undertaken by means of a Barclays Commercial Mortgage with a loan period of 15 years and a capital repayment holiday of 12 months. Mrs Maries concluded in the Zeus document that the serviceability of the loan was comfortable based upon the trading figures for the existing business with which she had been provided. The lending was to be secured by means of a charge over Manor House. There were additional special conditions to be imposed on the lending which included key person cover for the manager of the home (for the amount and the term of the loan) and the provision of information about monthly occupancy levels so as to demonstrate a minimum occupancy of 90% for the first 12 months.
8.
Within the broker's application there had been mention of a pre-existing valuation by the defendant. This was no doubt relied upon in the broker's enquiry so as to demonstrate that there was sufficient value in the asset being purchased to support the loan requested. On 13
th July 2007 Mrs Maries' assistant emailed the credit manager who was considering whether or not to sanction the loan. The assistant enquired as to whether a re-addressed valuation dated 4
th September 2006 would be acceptable. It appears that the defendant had agreed to re-address the valuation for £100 plus VAT but stated that a fee of £750 plus VAT would be incurred if there had to be a re-inspection of the property and a re-valuation. The reply from the credit manager was that the claimant would not accept re-addressed valuations and therefore a reinstruction of the valuer was required. It appears from the email sent by Mrs Maries' assistant that by 13
th July 2007 the lending had been sanctioned in principle by the credit manager.
9.
A little later on, on the 18
th July 2007, Mr Hayton, a director of the defendant, wrote an email confirming advice which he had given in relation to the proposed Manor House lending on the telephone. The advice which he gave was couched in the following terms:
"Further to our conversation I can confirm as follows.
If the Manor House were to cease to trade for any reason there is a significant risk that the current registration would be lost. If this were to happen, it is possible that the local office of the Commission on Social Care inspection would require the home to meet the standards for a first time registration, if it were to be re-registered. This would almost certainly reduce the registration, relative to the current registration and may even make it impractical to re-open as a care home.
The property is leased at a market rent and therefore with the above in mind, it is very difficult to see how we could attribute any significant value to the lease in the event that the home ceased to be operational."
10.
On 1
st August 2007 Mrs Maries emailed Mr Hayton. Having noted that the defendant would still be awaiting the claimant's email of instruction to undertake the valuation which would take a few days to come through, she told him to take her email as an instruction to carry out a re-valuation of Manor House as soon as possible. On 3
rd August 2007 Mr Babb, a surveyor employed by the defendant, inspected the property for the purpose of the fresh valuation. On 7
th August 2007 an electronic instruction form, known as XIT2, was sent by the claimant to the defendant in respect of the valuation. On 8
th August 2007 the defendant replied accepting the instruction to value Manor House and stating that the instruction would be carried out on their standard terms and conditions. These terms and conditions included the following:
"15.9 The property market is constantly changing and is susceptible to many external factors which can affect business confidence and property values. If any reliance is to be placed upon the Valuation following any changes which could affect business confidence and property values, then further consultation is strongly recommended. In any event, the Valuation shall be invalid after a period of six months has passed from the date of Valuation."
11.
Also on 8
th August 2007 the claimants issued an offer letter to Mr and Mrs Watson, the purchasers and borrowers, which provided as follows:
" 1.1 We are pleased to offer you a loan to purchase the Manor House Residential Home in Lynmouth.
1.2
The terms of the loan are set out below. To take up the loan please complete and sign the Acceptance at the end of the letter and return it by 8
th September 2007 after which this offer will lapse.
...
2.1
The maximum amount you may borrow on this loan is £250,000
...
4.1
You shall repay the loan, interest and any other arrears due in full 15 years from the date when you take up all or the first part of your loan.
...
5.1
You will repay the loan by monthly instalments of £2,571.81 throughout this period. Your first payment will be due 15 months from when you first take up the loan.
...
11.1 As a requirement of the loan agreement with us, you undertake that the business will meet the following financial conditions.
Please note if these conditions are not met we and you will need to understand why the conditions have not been met and what action might be taken to remedy the situation. In these circumstances we have the right to ask for immediate repayment of the outstanding loan, accrued interest and other reasonable costs.
a.
You have undertaken to meet the Special Conditions as detailed below:
The bank is to be provided with monthly occupancy figures within 28 days of each month end and copies of CSCJ inspection reports within 28 days of each inspection. The bank is to be provided with evidence that a suitable insurance policy is in force covering the risk of loss of registration, in addition to usual commercial rules."
12.
This offer letter was prepared by the claimant's Lending Operations Centre in Birmingham. Mrs Maries' assistant would have furnished them with an Asset Submission Form in relation to the security proposed (in this case Manor House) and Mrs Maries would have, she is confident, spoken to the credit manager so as to confirm that the borrowing had been approved and sanctioned subject to a satisfactory valuation of the security. In her evidence Mrs Maries frankly accepted that given the passage of time and number of loan transactions which she processed at around this time she had little independent memory of this particular transaction. Her memory of the claimant's processes and procedures was obviously clear, but her evidence in relation to this particular transaction could only really be reconstructed by her examination of the documentation. She confirmed that she had probably never met the Watsons but that would not have necessarily been very unusual in the context of a loan of this kind. She would rely upon the information which had been requested and furnished by the mortgage broker as the intermediary. Her signature on the offer letter would have been incorporated electronically by the Lending Operations Centre.
13.
On 9
th August 2007 the Watsons signed the loan offer form accepting it. The money was not advanced at that time as the valuation of the security, namely Manor House, was still awaited. It is necessary at this stage to set out the prior involvement which the defendant had had with Manor House before being instructed to value it on this occasion.
14.
The defendant had valued Manor House previously in 2006 for a potential purchaser, Mr Burns. That valuation exercise formed a significant backdrop to the carrying out of the valuation in August 2007. It had led to the valuation of the 4
th September 2006 which has been referred to above. When Mr Babb inspected the property on 4
th September 2006 he observed that Manor House comprised a 17 bedspace Care Home, of which 13 rooms were single rooms and two were twin rooms. The accommodation was ranged over two storeys with communal areas. There were three bathrooms within the property together with a laundry and a commercially equipped kitchen. The property was described in the following terms:
"Although the building has considerable inherent character, with many rooms providing extensive coastal views, parts of the home are presented to a rather utilitarian standard and in our opinion offer scope for general redecoration and modernisation."
15.
In addition to the main building which was used as a care home the property also comprised Manor House Cottage. Manor House Cottage is a separate building which, at the time of the inspection, comprised two flats (a two-bedroom flat and a four-bedroom flat), one of which was in use by a member of staff, and a further element of accommodation in the form of another two-bedroom flat behind used at the time by Mrs Lovell and her sister. The two two-bedroom flats are at some points in the papers described as the Annexe and the separate two-bedroom flat behind them is often referred to as the Cottage. Separate again from the Manor House Care Home building and Manor House Cottage there was a further two storey building known as the Stables which, at the time of Mr Babb's inspection in 2006, provided storage space.
16.
Mr Babb was provided with accounts for the years ending 30
th April 2003, 30
th April 2004 and 30
th April 2005. Those accounts showed a net profit of £66,530, £71,802 and £55,269 for each of the years respectively. They also indicated wage bills of £85,293, £100,609 and £115,569 respectively. Mr Babb undertook his own separate and independent analysis of staff costs (using required hours and hourly rates which, in the context of the case, have proved uncontroversial). He included within the staff costs the fact that sleep-in cover, which is necessary to ensure the safety of residents during the night when there would be one waking and one sleeping member of staff, was provided by the owner of the property and therefore gave rise to no cost in the calculation. He added into his assessment a sum of £10,000 as an increment to reflect what he considered to be the need for provision of management and deputy management managerial support.
17.
The defendants maintain a nationwide database of care home property market information to assist them in carrying out valuations. Mr Hayton explained that this database was managed by an internal member of staff dedicated to the task of collecting and cataloguing the information. Mr Babb was provided with such information about comparable properties as was available on the database to assist his valuation. Given the fact that the property was a leasehold property and not a leasehold which was equivalent to a freehold (such as one for 125 years) there were a very limited number of potential comparable properties. Indeed the properties which were thrown up as comparables were provided on a nationwide footing as there were none in the area local to the property.
18.
The limited number of examples were in no case precisely similar in terms of the scale of the property, the location or market area within which it was situated or the length of the lease concerned. The comparables which were focused upon during the course of the evidence were, in brief, as follows:
a)
Tynefield Court, Etwall (valued 28
th October 2005): a 40 bedspace care home in a purpose built building approximately 17 years old and available on a lease of 15 years from 1
st January 2001 (with therefore a little over 10 years to run at the time of the valuation). The property included premises which were let as a children's day nursery and also bungalows let to members of staff and private individuals on assured short hold tenancies. The database records an asking price of £125,000 representing a multiplier in this case of 3.4.
b)
The Moorings, Canvey Island (valued 15
th November 2004): a purpose built home approximately 12 years old with a lease which had 14 years remaining on the 25 year term where the understanding was that a new 35 year lease subject to 5 yearly rent reviews was to be granted. The care home accommodated 39 residents and on the basis of the sale or asking price of £480,000 the multiplier in that case was noted as 3.7.
c)
Acorn House, Kenley, Surrey (valued 5
th March 2004): This property comprised two elements, Acorn House and Acorn Lodge, both of which providing the accommodation for in total 70 residents. A 25 year lease was available and on the basis of the sale price of £500,000, which the database noted appeared to be advantageous bearing in mind the author of the entry of the data base considering market value to be £625,000, the multiplier in the case of that property was 2.4.
d)
Orton Manor, Water Orton (valued 4
th April 2006): This property was an extended and adapted former large detached house providing accommodation for 40 residents. The property had the benefit of a 35 year lease and on the basis of a projected operating profit of £140,000 the valuer of the property applied a multiplier of 3 to produce a market value of £420,000.
19.
Mr Babb took his own wage costs into a detailed calculation and arrived at a figure of £125,000, which he adjusted when he constructed his projection to a figure of £120,000. The difference between these figures is to be explained by the two different exercises that Mr Babb was performing in his valuation assessment. He firstly took £125,000 in his assessment of the Current Trade Assessment ("CTA") which examined the current trading position of the business. He took a figure of £120,000 when setting out his projection which was the figure to be used for the valuation exercise in a manner which is set out in greater detail below. Similarly, he took for the purposes of the CTA a fee income of £250,000 which he adjusted to £270,000 in his projection. The projection reflected what he considered would be an uplift in the potential fees that could be commanded by Manor House. His projection of profit after the deduction of other costs amounted to £67,000.
20.
Mr Babb then made some notes recording his thinking in relation to the approach to valuation. These were as follows (as fleshed out and transcribed in Mr Babb's witness statement):
"[The Property] [h]as been marketed for over 2 years by various agents.
This deal negotiated by David Mirow, who is a local predominantly residential agent.
There have been 3 sales previously agreed. Initial [asking price] £495,000. Then sales agreed at £490k then 395 & 395.
Agent says that it has been overpriced, and 2 deals floundered at valuation.
Currently another party interested at £370k. Our app[licant] is agreed at £360k.
Says new lease now agreed which should help.
No comp[arable] evidence available.
Simon Harvey Christies - see my note on rear of site notes
Exmoor Property Lynton 08452238072 Sue.
See evidence on Rightmove search re resi[dential] values.
[Sue] reckons 275-300K [Cottage]
200 - 225 [Stables]
125K [Flat]
I think that this valuation is difficult to assess.
1) The lease from [the Council] appears to afford greater security than a standard commercial agreement from a private freeholder.
2) There is considerable development potential (on the assumption that tenant's improvements are disregarded)
3) The prop[osed] rent @ 35K = £2058 pa per reg[istration] or 48.27% of freehold CTANP.
However there is extensive residential accommodation here also to consider.
It looks fair.
The [Cottage] could be [subdivided] to say 2 x 3 bed houses @ say £450pcm each = 900pcm.
The [Stables] £350pcm.
The [Flat] £275pcm
_____________
1,525pcm
x 12
____________
£18,300 pa
say 18,000
35,000 prop[osed] rent
- 18,000
______
17,000 rent for care home
= 1,000 pa per [registration]
OR 23.4% of freehold CTANP.
Theoretically the divorce basis would give
Home: 72.5K CTANP
+ wages
add back 20.0
_____
92.5
YP 6.5
_____
601,250 freehold MV1 home
[Cottage] 275K
[Stables] 200K
[Flat] 110K
_____
585K alt[ernative] res[idential] use
- costs say 150k
ญญญญญ______
435,000 [freehold] as is
1,036,250 freehold MV1
rent
35,000
YP say
Perp[etuity] @ 6%
(secure)
16.66
583,333
453,000
- 10% divorce 100,000
________
£353,000
This appears a little contrived however:
1. Marketing history supports this.
2. Overall YP doesn't support, however clearly considerable expansion potential - could be a 25 - 30 bed unit in the end.
3. Lease appears beneficial.
[Therefore] overall YP is, on a leasehold basis circa.
360,000
______ = 5.0 YP
72K
I think we have to run with 360,000 MV1 as is."
21.
This assessment arrived at by Mr Babb was reviewed by Mr Hayton. He had to review the valuation and based upon his own independent analysis ensure that he was satisfied that the valuation was appropriate. He also provided hand written notes on the valuation as follows (again as transcribed in his witness statement):
"This is an unusual deal - profits method based on adjusted YP after adding back for owners accom[odation] & under used accom[odation].
On this basis the projected [Adjusted Net Profit] would be £92-93k.
Mainstream leasehold [comparables] suggest anywhere from 3-4 YP.
Let's say 3.5 YP which gets to [£]320-325[,000].
Could see [Sale Price] based on clear scope to take "up market".
I also think that the type of landlord adds to the appeal - [Local Authority (ie the Council)] will take a soft line on rent review and never oppose new lease. Possible issues over condition of property and cost to repair - need to caveat this in the valuation."
22.
In his evidence Mr Hayton explained that the £92,000 to £93,000 referred to above is derived from adding the notional rental value identified by Mr Babb of £18,000 to the adjusted net profit achievable by the business of £74,000 to £75,000. He used a projected profit of £74,000 to £75,000 on the basis that he was satisfied that further savings could be made to the wages figure over and above the £5,000 which had been assumed by Mr Babb (the difference between £125,000 and £120,000), and in particular he considered that savings of £12,000 to £13,000 were realistically achievable. Having derived this multiplicand for the calculation of value he then adopted a multiplier of 3.5 to arrive at his valuation.
23.
Ultimately in the valuation report which was produced for Mr Burns on 4 September 2006 a wage figure of £120,000 was adopted in the projection, leading to an adjusted net profit of £67,000. This reflected the exercise set out above (prior to the file notes from both Mr Babb and Mr Hayton). To put matters into the context of the valuation guidance provided by the RICS set out below, in the report the adjusted net profit is in effect synonymous with what is known within the guidance as the EBITDA, which stands for earnings before interest, taxation, depreciation, amortisation and rent. The adjusted net profit figure which was derived in the projection for valuation purposes was identified as £67,000.
24.
The valuation report also noted following an unannounced inspection on 9
th November 2005 by the Commission for Social Care Inspection ("CSCI"), who were at the time the relevant regulator of care homes, they had published a report on the Manor House. They had noted outstanding requirements which still existed following a previous inspection of the home. The defendant's report noted in connection with the 9
th November 2005 inspection report the following:
"The report identifies that there are a number of outstanding requirements from the last inspection which have not been met and listed six statutory requirements, as follows:
1. Make arrangements by training staff, or by other measures, to prevent service users being harmed or suffering abuse.
2. The person managing the care home should have the qualifications, skills and experience necessary for managing the care home.
3. The registered person shall ensure that persons working at the care home are appropriately supervised.
4. The registered person shall, having regard to the size of the home, a statement of purpose and the number and needs of the service users to ensure that the person employed by the registered person receive training appropriate to the work they are required to perform.
5. The registered person shall consult service users about the programme of activities arranged by or on behalf of the care home.
6. The registered person shall not provide accommodation until the needs of the service user have been assessed by a suitably qualified or trained person.
There were also two recommendations as follows:
1. The registered manager ensures that the management approach to the home creates an open, positive and inclusive atmosphere.
2. A programme of routine maintenance and renewal of the fabric and decoration of the premises is produced and implemented, with records kept.
The report highlighted a number of relatively significant issues. We have been advised by Mrs Lovell that these have not, as yet, been fully addressed. We recommend that confirmation is obtained from the CSCI as to the nature of the changes now required to be implemented."
25.
In respect of the valuation which was derived from the EBITDA the report concluded as follows:
"1. The Market Value of the Leasehold Interest in The Manor House, Lynmouth is £360,000 (three hundred and sixty thousand pounds) as a fully equipped operational entity, valued having regard to trading potential but subject to the following Special Assumptions:
a) that a schedule of condition reveals no significant or material defects.
We would stress that there is very limited direct comparable evidence of the values achieved by leasehold care homes. It (
sic) this particular case the situation is made more complicated by the availability of The Cottage and the relatively un-used Stable building. In view of this we would suggest that wider than normal valuation parameters apply."
26.
The proposed sale to Mr Burns did not progress to completion. The defendant was subsequently requested to provide a re-addressed report for Lloyds Bank in January 2007 for new purchasers who were Mr & Mrs Watson. The report which they furnished contained essentially a re-statement of the findings and views which were expressed in the report for Mr Burns. For whatever reason the sale to Mr and Mrs Watson intended to be funded by Lloyds Bank did not proceed either. The next instruction which the defendant received in respect of Manor House was the one that was noted above from the claimant in August 2007.
27.
As set out above Mr Babb re-inspected Manor House on 3
rd August 2007. The physical circumstances of the property and the manner of its use remained essentially unchanged from his previous inspection. He was provided with further financial information to assist him in his task, including accounts for the years ending 30
th April 2004, 30
th April 2005 and 30
th April 2006. These showed the total wage costs in the accounts of £100,609, £115,569 and £136,423 respectively. Mr Babb's note recorded that since his last visit neither the wage rates nor the staffing levels required at the home had altered. He noted nonetheless the wage costs had increased significantly in the most recent accounts to circa £136,000 and he therefore adjusted the CTA, and not the projection, to a wage cost of £130,000.
28.
In respect of the increase in wage costs and also the way in which the home was being run, the report which was prepared noted as follows:
"Our interview on site took place with the vendor, Mrs Lovell, in the presence of her son, Mr C Lovell. The business was acquired by Mrs Lovell and her late husband some 15 years ago. At that time it was a closed, former care home. Mr Lovell died approximately seven years ago and Mrs Lovell, who is now 75, is selling in order to retire. It would appear that her interest in the business has been waning for some time.
We have outlined in the following paragraphs the way in which the home is presently being operated.
..................
Owners' Involvement
Notwithstanding her age, Mrs Lovell continues to be involved in the day to day running of the business, largely in a supervisory capacity. She also provides sleeping night cover. There are also three further family members on the payroll, including Mrs Lovell's sister, who also resides in The Cottage.
Since the time of our previous visit, a manager has been appointed. He is 'full time', and paid £21,000 per annum.
............
The accounts for the year ended 30 April 2006 record a total gross wage bill of £136,423.
Based on the way in which the home is being operated, the current levels of occupancy and existing staffing ratios, we are of the opinion that the gross annual wage bill is in the region of £130,000 per annum. This allows for Mrs Lovell to provide all the sleep cover at night."
29.
The CTA assessment produced an adjusted net profit or EBITDA figure of £55,000 after the wage costs of £130,000 were allowed for alongside what Mr Babb calculated as the current weekly average fee for residents of £329.47. Having undertaken the CTA, Mr Babb again prepared a projection of EBITDA. He allowed for an improvement to the property to be undertaken by the operator in this calculation and as a consequence assumed that the weekly average fee would increase to £349. Mr Babb adjusted the projected wages from the £130,000 of the CTA to £115,000 on the basis of a two person owner/operator team running the home. From these assumptions the projected profit figure was identified by him as being £75,000.
30.
As before Mr Hayton had to undertake a review of Mr Babb's work and arrive at his own independent view. When he did so he made two adjustments to Mr Babb's projection. Firstly, he reduced wage costs to £110,000 but secondly, he reduced fee income to £270,000. The effect of these alterations cancelled each other out leaving the projected EBITDA at £75,000. He commented on the valuation which resulted as follows:
"This is still a bit of a 'one off' but market still strong and no reason to take a different view. Price agreed at £350k so no reason to be above that."
31.
The defendant's report noted that a further unannounced inspection by CSCI had occurred on 6
th June 2007. It was this more up-to-date report from CSCI which formed the basis of the report's valuation. The defendants noted that the CSCI report identified that of 21 criteria there were 11 which were identified as having Minor Shortfalls and one which was characterised as a Major Shortfall. In terms of the statutory requirements of the CSCI the following were identified as issues:
"Statutory Requirements
1. To ensure all persons employed to work at the care home receive training appropriate to the work they perform.
2. To ensure that at all times suitably qualified, competent, and experienced persons are working at the care home (this refers to the proprietor's continued lack of commitment, staff training and development).
3. To provide adequate forms of identity for staff working in the care home.
Recommendations
1. When the manager visits a potential resident this should be recorded.
2. Residents would benefit from being more involved in the development of their care plans.
3. To ensure the privacy and dignity of residents is upheld,
4. To ensure that records are kept of food prepared.
5. That the complaints procedure includes the correct contact details of the CSCI.
6. Staff need further training to ensure they are aware of what constitutes abuse.
7. The home should produce a programme of maintenance and renewal of fabric and decoration of the premises.
8. To ensure that residents are in safe hands be encouraging staff to undertake NVQ Level 2 training.
9. To set out a schedule to enable the manager to achieve changes he wants to put into place.
10. Care staff should receive regular formal and recorded supervisions.
We have been advised by Mrs Lovell that these issues have not, as yet, been fully addressed and we recommend that confirmation is obtained from the CSCI of the nature of the changes now required by them."
32.
There was a section of the report which dealt with demographic material on a relatively generic basis, and identified the potential rise in the number of elderly persons, together with statistics demonstrating that at a national level the number of beds available in care homes had declined. This section also addressed prospects for the future, again on a generic basis, and concluded that whilst there would be different impacts in different parts of the country it was considered that profitability should remain firm over the coming years. In terms of the market, it was noted that in the recent past care home sales had been buoyant but that values were now starting to plateau.
33.
In the section of the report dealing with the proposed borrowers, Mr& Mrs Watson, the Defendants passed the following observations:
"PROPOSED BORROWERS: Mr & Mrs G Watson
Background and Experience
We have spoken to Mr Watson. We understand that he has previous experience of providing care for disabled people. Both he and Mrs Watson are proposing to work in the business, although neither of them hold the Registered Managers Award or NVQ 4. They will therefore need to employ a suitably qualified manager. The current deputy manager has the necessary qualifications.
Mr and Mrs Watson are to live in the cottage and will therefore be able to provide the cover at night.
Proposals - Property
We understand that Mr and Mrs Watson will initiate a programme of redecorating and refurnishing the bedrooms, as and when they become vacant.
They also propose to re-apply for planning consent to build a link between the main home and The Cottage. This will make it possible to convert The Cottage into additional registered accommodation.
Proposals - Business
Mr and Mrs Watson are to be fully involved in the day to day operation of the home. Both will contribute to the staffing rota.
We assume that every effort will be made to address all of the concerns expressed by the local office of the CSCI. This will involve not only physical improvements but also an improvement in staff training.
The home would probably benefit from improved marketing, particularly if it were to be done in conjunction with improved physical and operational standards."
34.
Having set out the projection in the report which showed wages projected at £110,000 per annum and fee income of £270,000 per annum an adjusted net profit or EBITDA was identified as £75,000. The final valuation was given in the following terms:
"VALUATIONS
1. The Market Value of the Leasehold Interest in The Manor House, Lynmouth is £350,000 (three hundred and fifty thousand pounds) as a fully equipped operational entity, valued having regard to trading potential but subject to the following Special Assumptions:
a) That a schedule of condition reveals no significant or material defects.
We would stress that there is very limited direct comparable evidence of the values achieved by leasehold care homes. In this particular case the situation is made more complicated by the availability of The Cottage and the relatively un-used Stable building. In view of this we would suggest that wider that normal valuation parameters apply."
35.
The valuation report was sent to the claimants on the 17
th August 2007. In her evidence Mrs Maries stated that she believes that she would have received it at that time, and having received it would have noted that it provided a market valuation of £350,000 or £10,000 less than had been anticipated. On the 22
nd August 2008 she revised the Zeus documentation in respect of Mr and Mrs Watson's application because the valuation at £350,000 gave rise to a loan to value ratio of 71.4%. As that exceeded the 70% provided for by the claimant's lending criteria it needed to be sanctioned by the credit sanctioning team. In her request that the higher loan to value ratio be approved Mrs Maries indicated that she did not wish to reduce the extent of the offer of lending which had been made and she sought sanctioning of the loan at the higher loan to value ratio of 71.4%.
36.
In the event the lending was sanctioned and a draw down of £250,000 occurred on the 31
st August 2007 in favour of Mr and Mrs Watson. As a consequence of that lending occurring the following legal arrangements were entered into by Mr and Mrs Watson. Firstly, a new lease of the premises was entered into with Lynton & Lynmouth Town Council. Secondly, a business sale agreement was entered into with Mrs Lovell. Thirdly, an all monies charge by way of mortgage was entered in the claimant's favour over the Manor House so as to secure their lending. Fourthly, and just prior to the draw down of funds it appears from correspondence contained in the papers that loss of registration insurance was entered into by Mr and Mrs Watson.
37.
By March 2008 Mr and Mrs Watson had made no payments to the claimant either as capital repayments or interest on the lending. As a consequence an overdraft had accrued on their current account (which they had had to open with the claimant at the same time as the loan account was created). It appears that a dispute had emerged with Mr and Mrs Watson contending that they had been told there would be not simply a capital repayment holiday as set out above, but also an interest payment holiday for the first 12 months of their business. In any event, this situation led to a report being created by Ms Dawn Murphy who was Mr and Mrs Watson's Relationship Manager with the claimant. By this stage Mrs Maries had moved on to another role within the claimant. Ms Murphy requested as follows:
"- £12k to be added to loan to cover excess and next amount of interest to be debited to the current account of approx £6k. loan to start 1/10/2008 with revised repayment of £2720.78 for 14 years."
38.
She acknowledged this created a loan to value ratio of 76%. Her request was passed to Mr Siddiqui who was a Risk Manager within a department of the claimant's organisation called Early Warning List 1 and who gave evidence. On the basis that Mr Siddiqui was assessing or reviewing four or five applications of this kind each day he, entirely understandably, explained in his evidence that he had little independent memory of this application given the passage of time beyond that which he could reconstruct from the available documentation. As is clear from those documents the situation presented to the claimant was not ideal. The claimant could have insisted on repayment of the lending bearing in mind that Mr and Mrs Watson were in breach. In the event, Mr Siddiqui decided to sanction the increase in the loan. He observed in the Zeus documentation the following by way of explanation of his sanction of the additional lending on the 18
th March 2008:
"Dawn, thanks for discussing this case with me. As discussed can you please source a copy of the facility letter and fwd to me.
We agree the increase in loan of 12k to cover off the account xs and march 08 interest. Customer maintains actual trading account at RBS and we would this loan to be [sic] with RBS as well. Please discuss with customer and obtain repayment proposal asap. Depending on loan documentation, we are not likely to cover any futher interest as LTV is already out of criteria. This sanction also confirms EWL2 status for this customer on desktop basis. Please submit your next report by 18/05 to BBS Risk mgmt inbox."
39.
In his evidence Mr Siddiqui explained that he was not concerned in relation to the adequacy of the security which safeguarded the lending. The valuation which had been undertaken was relatively recent and he did not revisit it. Whilst there is reference in subsequent documentation to the security being checked, he explained that this would be in relation to ensuring that the necessary legal arrangements were in place in respect of the security. He was also not responsible for how the additional lending was documented as he explained in his evidence it could have been documented by means of a new facility letter or by way of a letter of variation in respect of the original facility. How the lending was documented and arranged was a matter for the Relationship Manager. In the event Ms Murphy chose to issue a new facility letter in respect of the lending. That facility letter was dated 5
th April 2008 and provided as follows:
"1.1 We are pleased to offer you a loan to refinance your existing borrowing.
1.2 The terms of the loan are set out below. To take up the loan please complete and sign the Acceptance at the end of the letter and return it by 14 June 2008 after which this offer will lapse. Throughout this letter all references to "you" and "your" mean Mr Gordon Winifred Watson and Mrs Waltraut Charlotte Watson as partners of The Manor House and all reference to "we" and "our" means Barclays Bank PLC and anybody else who has the right to receive repayment of the loan from time to time...
5.1 You shall repay the loan by monthly instalments of £2,578.48 throughout the period. Your first repayment will be due 6 months from when you first take up the loan...
6.3 The interest owing will be charged to your account number 90519588 on our normal charging dates for 6 months and thereafter to your loan account quarterly on our normal charging dates...
11.1 As a requirement of the loan agreement with us, you undertake that the business will meet the following financial conditions.
Please note if these conditions are not met we and you will need to understand why the conditions have not been met and what action might be taken to remedy the situation. In these circumstances we have the right to ask for immediate repayment of the outstanding loan, accrued interest and other reasonable costs.
a) You have undertaken to meet the Special Conditions as detailed below:
Upon drawdown of this Loan the existing Loan on 04506812 shall be repaid in full. We are to be provided with monthly occupancy figures within 25 days of each month end."
40.
The new facility letter was signed as accepted by Mr and Mrs Watson on 28
th May 2008. The Claimant's internal records show that on the 9
th June 2008 £267,400 was drawn down into Mr and Mrs Watson's current account. Following that £259,469 was transferred from that current account into their loan account. The effect of that transfer was to extinguish all monies owing within the loan account and to leave that account in credit in the sum of £4,069.61. The credit of £4,069.61 was then transferred back from the loan account into the current account. The loan account which had been opened in order to give effect to the draw down of monies which had occurred on the 31
st August 2007 was closed on the 28
th November 2008.
41.
As has been alluded to above in the event the Manor House care home did not prosper, and the business that Mr and Mrs Watson attempted to continue ultimately failed. It is unnecessary for the purposes of this judgment to enter into any detailed consideration or explanation as to how that happened. It suffices to say that when the business found itself in considerable difficulties the claimant sought expert advice on their options. The advice which was provided assisted them in reaching their decision that the only tenable approach was to forfeit the lease and return the premises to Lynton and Lynmouth Town Council. As a consequence they suffered a total loss of their lending.
The Expert Evidence
42.
Although on paper the disputed issues lying between the expert for the claimant, Mr Mark Ebo and the expert for the defendant, Mr Graham Coulter appeared extensive, those differences which have any importance in terms of the ultimate outcome of this case are within a relatively narrow compass. As became evident during the course of the trial there were a limited number of matters upon which the case actually turned. It is unnecessary therefore to rehearse each and every potential difference between the experts, and more fruitful to focus upon the key areas of dispute upon which the outcome of the case turns for the reasons which are set out below.
43.
Both experts made reference to the RICS Appraisal and Valuation Standards which were effective at the date of valuation in this case, namely the 3
rd August 2007. This documentation is also known colloquially in valuing circles as the Red Book. For the purpose of the valuation of this property two aspects of the Red Book are pertinent. The first is the material which bears on the definition of market value. The definition is couched in the following terms:
"Market Value
Valuations based on Market Value (MV) shall adopt the definition, and the conceptual framework, settled by the International Valuation Standards Committee.
Definition
'
The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgably, prudent and without compulsion.' "
44.
In the notes and commentary the text provides a number of helpful elaborations on the definition. The following in respect of what is commonly referred as "hope value" is observed:
"5. Market Value will include elements of value, usually known as 'hope value', arising from any expectation that circumstances affecting the property may change in the future. Examples include:
•
The prospect of development where there is no current permission for that development;
•
The realisation of 'marriage value' arising from merger with another property or interests within the same property.
6. However, the amount of hope value must be limited to the extent that it would be reflected in offers made by prospective purchasers in the general market."
45.
The second element of the Red Book which is of particular relevance to the valuation of this property is the guidance which is provided in GN1. This is a guidance note entitled "GN1 Trade related property valuations and goodwill". Extracts from that document which are of particular importance in the present case are as follows:
"1. Introduction
1.1
The commentary to PS3.2 indicated that special consideration must be given to the application of Market Value to certain categories of property that are normally bought and sold on the basis of their trading potential. Examples of this type of property include hotels, bars, restaurants, movie theatres or cinemas, gasoline or petrol station. The essential characteristics of properties that are normally sold on the basis of their trading potential is that they are designed, or adapted, for a specific use and that ownership of the property normally passes with the sale of the business as an operational entity.
1.2
This Guidance Note considers the additional criteria that need to be considered by the valuer in these cases. It does not concern itself with methodology, which will vary depending upon the trading property to be valued.
3. Application of Market Value
3.1 The valuer should distinguish between the Market Value of an operational entity, and the value to the particular operator (its Worth to that operator). The operator will derive Worth from the current and potential net profits from the business operating in the chosen format. While the present operator will be one potential buyer in the market, to come to an opinion of value the valuer will need to understand the requirements and the achievable profits of all other potential bidders, and the dynamic of the open market.
3.2 It is necessary to qualify Market Value in order to make clear what is included in the valuation, and the Assumptions that have been made as to the property's trading status.
3.3 Where the property is trading the correct basis would be:
'Market Value as a fully-equipped operational entity, having regard to trading potential.'
4. Trade-related potential and goodwill
4.1 A Valuation on the basis of Market Value should only reflect the goodwill that related to the trading potential of the business, which is commonly referred to as 'Inherent Goodwill' or 'Transferable Goodwill'. The Valuation should exclude any Personal Goodwill to the present owner or operator which would not be passed to a purchases of the property.
4.4 Specialized Trading Related properties are considered as individual trading concerns and typically are valued on the basis of their potential earnings before interest, taxes, depreciation and amortisation (EBITDA) on the Assumption that there will be continuation of trading.
4.5 The task of the valuer is to assess the fair maintainable level of trade and future profitability that could be achieved by a Reasonably Efficient Operator, of the business upon which a potential purchases would be likely to base an offer.
4.6 A Reasonably Efficient Operator is defined as a 'market-based concept whereby a potential purchaser, and thus the valuer, estimates the maintainable level of trade and future profitability that can be achieved by a competent operator of a business conducted on the premises, acting in an efficient manner. The concept involves the trading potential rather than the actual level of trade under the existing ownership so it excludes personal goodwill (IVS GN 12).
4.7 When assessing future trading potential, the valuer should exclude any turnover and profit that is attributable solely to the personal skill, expertise, reputation and/or brand name of the existing owner or management. However, in contrast, the valuer should include any additional trading potential which might be realised under the management of a Reasonably Efficient Operator taking over the existing business at the date of Valuation.
4.8 The valuer should endeavour to establish the accuracy and reliability of trading information provided for the purpose of the valuation. If any doubt of its accuracy exists, or of the underlying Assumptions supplied, the valuer should recommend verification.
4.10 A secondary basis of comparison may be by reference to physical factors, for example, when comparing one hotel with another using a value per bedroom approach. However, when using such a method it is essential that the basis for comparison is truly relevant, as regards style, location, trading circumstances, and so on."
46.
Against the background of this material it was agreed between the experts that in principle the valuation should be approached using an EBITDA/multiplier method where, as set out above, EBITDA is the projected net profit of the Reasonably Efficient Operator ("REO") and the multiplier represents a number of years purchased to generate a value. It is notable that there is no detailed guidance in respect of identifying the multiplier. Both experts accepted that the fixing of the multiplier was a matter which involved the exercise of judgment in relation to relevant factors which would not be directly reflected in the EBITDA. Mr Coulter, who had played a role in drafting GN1, indicated that the exclusion of any detailed guidance on the selection of a multiplier was deliberate so that, as I understood his evidence, it would avoid the identification of a value becoming entirely mechanical and would ensure that the specialist judgment of the valuer still had an important role to play.
47.
Although this approach in principle was a matter of agreement, there was a significant issue between the experts as to whether or not any account could properly be taken of the additional floor space above and beyond the care home itself which was present at the property. Mr Ebo contended that no adjustment or allowance could be made for this additional property beyond that of the operational care home on the basis that it did not generate any revenue or more particularly profit. Within his report he put the matter in stark terms as follows:
"I do not consider that a reasonably competent property valuer would attribute any value to the additional buildings in this (
sic) circumstances that existed with this property. These additional buildings could only reasonably used as ancillary to the care home due to the circumstances of this property."
48.
This view was based on the fact that the lease only permitted a care home use to take place at the property. As such only the profits to be derived from that use could properly give rise to any capital value at the property and be taken into account in identifying the level of that capital value. Mr Ebo was heavily critical of the defendant's calculations set out above which were based upon residential rentals and freehold values related to the additional floor space at Manor House. He contended that these residential uses were excluded by the lease and would have involved potentially obtaining planning consents and incurring costs which were not capable of being properly identified in any event. Furthermore, deductions for management and voids between lettings were left out of account. As a consequence no regard could be paid to the additional calculations that the defendant appeared to have relied upon in incorporating additional value generated by the additional floor space.
49.
By contrast Mr Coulter considered that the multiplier needed to be adjusted, and adjusted upwards, to reflect the presence of the extensive additional accommodation beyond that which was operationally used as the care home. He noted the additional floor space amounted to no less than one third of the overall floor space at the property. Measurements existed within the papers to show that the Manor House Care Home itself had been measured at 4,920 sq ft and that the Manor House Cottage element of the property (including the two flats one of which was used by staff at the time of the valuation and the cottage used by Mrs Lovell and her sister together with a store in that building) comprised 2,567 sq ft. The Stables had been measured at 1,266 sq ft. Mr Coulter considered that this extensive additional floor space had the potential for income generation from, for example, staff accommodation (whereby staff would pay a rent for living on site), holiday lets to those in the care of relatives and by way of under letting or developing the ancillary storage space. These points were part of Mr Coulter's argument that the multiplier to be used should be higher than that contended for by Mr Ebo.
50.
In terms of the calculation of the EBITDA, whilst there were differences between the experts in terms of their approach to fee rates and occupancy rates, the ultimate outcome of their differing calculations was that Mr Ebo considered that the annual fee income should be assessed at £276,689 and Mr Coulter contended that they should be identified as £275,000. In reality therefore, there was little between the experts on the fee income aspect of the EBITDA calculation.
51.
Further, although Mr Ebo relied in his calculation on a rental figure of £32,500, which he said reflected the rent increases provided for by the lease over the first five years of the lease term, in cross-examination he accepted that in fact the average cost should be £32,000 and that in any event it was not negligent to take £30,000 as the appropriate figure for rent. In the final analysis Mr Ebo's costs excluding wages were assessed by him as being in the sum of £81,914 whereas by contrast Mr Coulter's were £82,500. Again, therefore, there was in reality little difference between the figures arrived at by both experts for costs in the EBITDA calculation excluding the cost of wages.
52.
Both Mr Ebo and Mr Coulter undertook their own wage cost calculations in the form of a build up of the required hours in various activities including, for instance, care, managerial supervision and other related activities such as catering. They both arrived at a gross wage cost from their analysis of about £150,000. The difference which exists between them is that Mr Coulter contends that a downward adjustment of £40,000 needs to be made to the wage costs in order to reflect the fact that as the Manor House is a smaller care home his experience suggests that it would be operated by a two person team of owner/occupiers. Thus his view of the wage costs to be incorporated in the EBITDA calculation was that they should be put in at £110,000. He arrives at his view in relation to this deduction on the basis that the involvement of a two person team of owner/occupiers would obviate the need for the employment of a manager and therefore remove the cost of employing a manager from the wage cost calculation. Furthermore, he contemplates that the owner/occupiers would provide sleep-in cover also removing that element of staff cost from the calculation. Mr Coulter also considers that the owner/occupiers would be involved in providing care on the rota in addition.
53.
Mr Coulter's assumptions in this respect are supported in his evidence not only by the form of the property itself, incorporating live in accommodation for the owner operator, but also by two further pieces of evidence. Firstly, within his evidence he produces a study of care homes with up to 20 beds derived from his firm's in-house database. The database contains information in relation to financial information furnished for the purposes of valuations and other work undertaken by the firm. The detailed analysis shows, Mr Coulter contends, that a wage bill of £110,000 is in line with wages at the comparable care homes generally amounting to 40% of fees, and as such is consistent with that evidential database.
54.
The second piece of evidence involves further analysis of the material from the database, but in particular data associated with the 15/16 bed homes which are comprised within his sample of up to 20 bed homes. That data, he states, shows that one of the 15/16 bed homes is operated with nil input from its owner but all of the others demonstrate input from their owners ranging from 46 hours (all of which were on the care rota), 40 hours (of which 10 hours were on the care rota), 80 hours (of which 64 hours were on the care rota), and 50 hours (of which 20 hours were on the care rota). These homes where owner occupiers were working in the home had total staff costs ranging from £86,000-£112,000. This second analysis of the in-house database provides further comfort and reassurance for Mr Coulter in respect of his view that the appropriate figure to be incorporated for wage costs in this case was one of £110,000.
55.
Mr Ebo did not accept the legitimacy of this deduction. He relied upon the fact that at the time of the valuation the care home employed a full-time manager as justifying the view that the costs of a manager needed to be included in the wage costs for the assessment of the EBITDA. His calculation thus proceeded on the basis of the way in which the home was in fact operated when the valuation occurred. He also drew attention to the fact that any owner/operator who purchased the care home might not have the necessary qualifications to manage the home in accordance with the regulatory requirements under which it had to operate. This would be another reason for the need to incur the cost of a suitably qualified manager. Again this was the position in relation to the transaction which was taking place, as Mr and Mrs Watson did not have the necessary qualifications.
56.
A key area of significant dispute between the experts related to the multiplier which should be incorporated for the purposes of the calculation of value. Mr Ebo
adopted a multiplier of 3 in his evidence. He regarded that multiplier as being supported firstly, by the average of the multipliers to be derived from the defendant's comparables set out above, which he calculated as being 3.12. He further justified the use of that multiplier on the basis that it was just under one half of the lowest range of freehold comparables which at the time in his experience ranged from multipliers of 6.25 to multipliers of 9 depending on the particular circumstances of the property being valued. In his evidence he identified limiting factors in respect of the multiplier to be applied to this property as including the size and location of the property together with its state of repair and the short lease which was being offered for purchase.
57.
By contrast Mr Coulter advocated the use of a multiplier of 4.25. He identifies further comparables from his own firm's database in respect of leasehold care homes valued between January 2006 and August 2007 which he takes into the appraisal. He focuses on three potential comparables (excluding those properties on leaseholds of 80 years and longer and focusing on those leaseholds of 20-30 years duration). His comparables, which are additional to those set out above and provided by the defendant were as follows:
i)
A purpose built care home constructed in 1989 with 34 bed spaces together with 14 one bedroom flats in a separate two-storey block generating a rental income of £60,000 per annum. Property was held under a 30 years lease and valued by Mr Coulter's firm based on a multiplier of 4.4 in January 2006;
ii)
A care home in a rural setting east of Southampton with 33 bed spaces held on a 20 year lease which at the date of valuation in May 2006 had 16 years to run. A multiplier of 2.3 was used by Mr Coulter's firm in their valuation;
iii)
A care home in Bridlington with 29 bed spaces held under a 24 year lease from April 1988 valued in May 2006 on the basis of a multiplier of 2.5.
58.
These comparables established in Mr Coulter's view a range for a multiplier of 2.3-4.4. His analysis suggested that the new 40 year lease which was being provided to the tenant gave the tenant a prospect of making long term investment in the property. It also provided increased security for potential lenders against the property bearing in mind its length. As set out above, Mr Coulter took account of the additional property, and the fact that it provided the owner with a home as well as a business and had the potential for further income generating use set out above, as being a factor increasing the multiplier. He also accepted the defendant's view that when valuing the property the nature of the landlord as a public authority who would be likely to be less hardnosed than a commercial landlord was a positive factor to be placed into the assessment. Taking account of these features in the main, and other relevant factors material to setting a multiplier such as his view of the relative buoyancy of the market, Mr Coulter arrived at the conclusion that the appropriate multiplier in this case would be one of 4.25. Both experts gave consideration to market factors in the context of assessing the multiplier. Mr Coulter's view, broadly speaking, was that at the time of the valuation the market for care homes was buoyant and bearing in mind the demographic information which was available that was a factor which further supported a higher value for the multiplier. Whilst Mr Ebo accepted the supportive nature of the generic demographic information that was available, and also appeared to accept that generally speaking the market was positive, he drew attention to the fact that this evidence provided little specific support for the valuation of this property in its particular location. He pointed out that the market across the country was variable and that simply because the market was positive in some areas was not an indicator that it was positive everywhere.
59.
Thus the end point reached by each of the expert witnesses is as follows. Mr Ebo arrived at a projected EBITDA of £42,412. He applied a multiplier of 3 to arrive at an overall valuation of £127,236 or, sensibly rounded, £130,000. By contrast, Mr Coulter's EBITDA, using his alternative approach to wage cost, was £82,500. To that EBITDA he applied a multiplier of 4.25 to arrive at a valuation of £350,000.
60.
Mr Coulter undertook an additional crosscheck in relation to his valuation. This was not his primary approach to determining value but a means of providing some form of triangulation in respect of the figure at which his primary valuation had arrived. In this exercise Mr Coulter effectively disaggregated the property for valuation purposes into the operational care home part of the property and the additional floor space in the Manor House Cottage and Stables. His valuation for the operational care home alone took his EBITDA of £82,500 and applied a multiplier reflecting the care home alone without the additional property of 3.5. The product, therefore, of the valuation of the care home alone was £290,000. Turning then to the additional floor space Mr Coulter identified a notional rent for the owner's cottage (£475 per month), the two staff flats (£350 per calendar month each) and the Stables (£225 per calendar month) and calculated a notional rent for all of this property at £1400 per calendar month. The annual rental value he therefore established as £16,800 which he then capitalised by the application of the same 3.5 multiplier that he used in respect of the care home element. The value of the additional floor space he therefore identified as being £60,000, which together with the £290,000 identified as the value of the care home gives rise to a valuation of the totality of the property at £350,000. In short, therefore, based upon this cross check Mr Coulter is satisfied that his primary valuation on an EBITDA/multiplier basis is reliable.
61.
Mr Ebo (consistent with his conclusions in relation to the calculations performed by the defendant) rejects this approach. He contends that the approach is illegitimate because the rent which is being paid by the tenant is rent paid for the whole of the premises, and value can only be measured and attributed by reference to profit generated from the use of the premises. As set out above, Mr Ebo's opinion was that no allowance at all could be made in the valuation of this property for the existence of the additional floor space.
62.
Finally, although a matter ultimately for the court, the experts offered a view in respect of the appropriate margin of error to be taken into account in the valuation exercise in this case. Both experts accept that a leasehold, as opposed to a freehold, care home is a relatively rare property. They also accept, and it is evident from the paucity of the number of comparables available in the evidence, that it was unusual to be valuing a leasehold property on a lease term of the length concerned in this case. Mr Coulter adds to these unusual characteristics the additional feature in this case that there was extensive additional floor space to be considered. Noting that in their report the defendant had suggested that "wider than normal valuation parameters apply" he concludes that a margin of error of 20% would be appropriate in this case. By contrast, Mr Ebo contends that the margin of error to be applied in this case is 15%.
The legal principles applicable in relation to valuer's negligence
63.
The law in relation to how the court is to tackle the question of whether or not a valuer has been negligent is agreed between the parties and essentially uncontroversial. The defendants owed the claimant a duty to exercise reasonable care and skill in the work which they carried out in accordance with their instructions. The standard of care which was required of them was that which would ordinarily be exercised by a reasonably competent member of the valuation profession. The approach to be taken in respect of this type of case was established by the Court of Appeal in the case of
Merivale Moore PLC v Strutt and Parker [2000] PNLR 498. In his judgment Buxton LJ stated as follows:
"
Negligent valuation: authority
It has frequently been observed that the process of valuation does not admit of precise conclusions, and thus that the conclusions of competent and careful valuers may differ, perhaps by a substantial margin, without one of them being negligent: see for instance the often quoted judgment of Watkins J. in
Singer & Freidlander Ltd v. John D. Wood [1977] 2 E.G.L.R. 84 at 85G; and the House of Lords in the banquet Lambert case [1997] AC 191 at 221F-G. That has led to the courts adopting a particular approach to claims of negligence on the part of valuers.
In the general run of actions for negligence against professional men
"It is not enough to show that another expert would have given a different answer... the issue... is whether [the defendant} has acted in accordance with practises which are regarded as acceptable by a respectable body of opinion in his profession:
Zubaida v. Hargreaves [1995] 1 E.G.L.R. 127 at 128A-B per Hoffman L.J., citing the very well-known passage in
Bolan v. Friern Hospital Management Committee [1957] 1 W.L.R. 582 at 587."
However where the complaint relates to the figures included in a valuation, there is an earlier stage that the court must be taken through before the need arises to address considerations of the
Bolaml type. Because the valuer cannot be faulted in any event for achieving a result that does not admit some degree of error, the first question is whether the valuation, as a figure, falls outside the range permitted to a non-negligent valuer. As Watkins J. put it in
Singer & Friedland, at 86A,
"There is, as I have said, a permissible margin or effort, the 'bracket' as I have called it. What can properly be expected from a competent valuer using reasonable care and skill is that his valuation falls within this bracket."
A valuation that falls outside the permissible margin or error calls into question the valuer's competence and the care with which he carried out his task: ibid. But not only if, but only if, the valuation falls outside that permissible margin does the inquiry arise. That is what I take to have been the view of Balcombe L.J., with whom the remainder of the members of this court agreed, in
Craneheath
Securities v. York Montague [1996] 1 E.G.L.R 130 at 132C, when he said:
"It would not be enough for
Craneheath to show that there have been errors at some stage of the valuation unless they can also show that the final valuation was wrong."
As it was put by H.H Judge Langan Q.C. in
Legal & General Mortgage Services v. HPC Professional Services [1997] P.N.L.R 567 at 574F, in an analysis that I have found helpful, once it is shown that the valuation falls outside the "bracket":
"The plaintiff will by that stage have discharged an evidential burden. It will be for the defendant to show that, notwithstanding that the valuation is outside the range within which careful and competent valuers may reasonably differ, he nonetheless exercised the degree of care and skill which was appropriate in the circumstances."
Various further considerations follow. First, the "bracket" is not to be determined in a mechanistic way, divorced from the facts of the instant case. We were shown a list of figures giving either the bracket determined or the percentage divergence from the true value found nonetheless not to have been negligent, in a series of recent cases. I did not find that of assistance, save as a graphic reminder that it is not enough for a plaintiff simply to show that the valuation was different from the true value. Second, if it is shown even at the first stage that the valuer did adopt an unprofessional practice or approach, then that may be taken into account in considering whether his valuation contained an unacceptable degree of error. I think that that is what is meant by Mr Robin Stewart Q.C. in his judgment in
Mount Banking Corp. v. Cooper [1992] 2 E.G.L.R 142 at 145D. Third, whether the valuation is shown to be outside the acceptable limit, that may be a strong indication that negligence has in fact occurred. That is said in Mount Banking at 145. The judgment in this case was commended in general terms by Balcombe L.J. in
Craneheath, but it is not clear how far that commendation extended to all the specific elements in it. Some caution at least has to be exercised in this respect, because the question must remain, in valuation as in any other professional negligence cases, whether the defendant has fallen foul of the
Bolam principle. To find that his valuation fell outside the "bracket" is, as held by this court in
Craneheath and also, I consider, by the House of Lords in
Banque Lambert, a necessary condition of liability, but it cannot in itself be sufficient."
64.
In practical terms what this approach requires is as follows. Firstly, the court must form its own view, based on the evidence before it and its own evaluation, of the correct value as at the valuation date applying professional practice standards which applied at that date. Secondly, having formed its own view the court will then have to consider what the appropriate margin of error applicable to the valuation judgment should be, in order to determine the bracket within which a non-negligent valuation would have fallen. The appropriate percentage margin of error will depend upon the facts of a particular case. It is to be noted that having reviewed the authorities then available, Coulson J in
K/S Lincoln v CB Richard Elis Hotels [2010] PNLR 645 concluded at paragraph 183 as follows:
"183. It seems to me that, as a matter of general principle, the position to be taken from the authorities is as follows:
a) For a standard residential property, the margin or error may be as low as plus or minus 5 per cent;
b) For a valuation of a one-off property, the margin or error will usually be plus or minus 10 per cent;
c) If there are exceptional features of the property in question, the margin of error could be plus or minus 15 per cent, or even higher in an appropriate case."
65.
Thirdly, if the valuation in question is within the relevant margin of error of the court's valuation, then it is within the bracket of potential non-negligent valuations and thus negligence would not have been established. Liability is to be established by reference to the results of the valuation, not purely and simply by reference to the details of how that result was arrived at. Fourthly, if the valuation is beyond the margin of error in relation to the court's valuation and therefore outside the bracket, then the valuer's competence and the care used in his or her valuation is called into question. The court will examine at this stage the question of whether in reaching a valuation outside the bracket the valuer has acted "in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession". These are the
Bolam type considerations identified by Buxton LJ in
Merivale. For the sake of completeness, as the House of Lords observed in
Bolitho v City and Hackney Health Authority [1998] AC 232, it is open to the court to submit the body of professional opinion to its own logical analysis and hold that it is not reasonable or responsible in the circumstances (see Eder J in
Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas [2011] EWHC 2336).
66.
This approach was followed in
K/S Lincoln in examining whether the valuers in that case had acted negligently. In doing so Coulson J pithily observed that "the law properly focuses on the end result, not the way in which that end result may have been achieved". The overall approach set out in the preceding paragraphs was also taken by Mr Richard Spearman QC sitting as a Deputy Judge of the High Court in
Barclays Bank v Christie Owen and Davies Ltd [2016] EWHC 2351 (Ch).
Was the valuation negligent?
67.
In addressing the first issue which arises under the legal approach set out above, namely the court's view of the correct value of the property at the date of valuation, I wish to express my gratitude to the assistance which I have derived from both of the expert witnesses who gave evidence in this case. Both of the witnesses were the subject of criticism as to their independence and/or objectivity by the opposing side.
68.
It was contended by the claimant that Mr Coulter was not properly to be regarded as an independent witness on the basis that Mr Babb now worked for his firm, Pinders, as a valuer in the South West Region and was therefore Mr Coulter's colleague. Various contentions were advanced on behalf of the claimant ranging from the concern that Mr Coulter might be unconsciously biased towards supporting Mr Babb's views, through to the suggestion that if a finding was made that Mr Babb had been negligent then that might affect Pinder's insurance. On the latter point Mr Coulter reassured the court during the course of his evidence that there was no substance to that contention. The defendant was heavily critical of Mr Ebo and contended in the light of a number of criticisms of his evidence, in particular his evidence given during cross-examination, that no weight should be attached to it at all.
69.
Having heard both experts give evidence, and having assessed their written and oral testimony to the court, I am entirely satisfied that both experts gave impartial, professional and thoughtfully considered evidence to assist the court in its task. That evidence was fairly and properly tested by cross-examination, and having heard the testing of the evidence I am certainly wholly unprepared to reject either of the expert witnesses' contributions to the evidence on the bases that were suggested to me. Having received their evidence I consider that it is appropriate to assess the weight which can be given to it and I have taken all of the expert evidence I received into account when forging the findings which I have made.
70.
Although, as set out above, not strictly speaking within the scope of the valuation exercise, each of the experts proffered a view as to the appropriate margin of error to be applied in this case. It is in my view beyond argument that the defendant valuers in this case faced a challenging set of circumstances. There were on any view a very limited number of comparables, and a leasehold interest of this length in a care home was a rare, if not unique, occurrence. Furthermore, there were features of the property which were idiosyncratic such as the fact that it was a listed period property and included a significant element of additional floor space. All that said I do not consider that the circumstances of valuation here were so exceptional as to justify a larger margin of error than 15%. Whilst Coulson J did not rule out the possibility of a higher margin of error than 15% that in my view is bound to be reserved for the most exceptional cases. Whilst difficult and challenging, the valuation exercise in this case did not justify a margin of error of 20%. I therefore accept the evidence of Mr Ebo in this respect and propose in due course to apply a 15% margin of error in this case.
71.
I turn then to the question of what the correct valuation was as at the date of valuation in this case namely 3 August 2007. It is necessary to start with the guidance provided by the relevant professional body, the RICS, in respect of a task of this sort. The guidance is provided by GN1 in the context of the overall definition of market value provided by the Red Book which has been set out above. In principle the approach is to be governed by establishing the EBITDA and the appropriate multiplier. The EBITDA depends upon an understanding of the REO. As paragraph 4.6 of GN1 recognises this is a valuer's conceptual construct: "a competent operator of a business conducted on the premises acting in an efficient manner". That may mirror the actual operation of the business taking place in the premises at the time of the valuation, but it may not. In paragraph 4.7 GN1 makes clear that the valuer should exclude from the understanding of the REO any turnover or profit "attributable solely to the personal skill, expertise, reputation and/or brand name of the existing owner or management". This endorses the notion that the EBITDA will not necessarily be the CTA. The REO may trade more or less profitably than the CTA. The valuer must objectively analyse the circumstances of the property, and the business within it, in order to establish the EBITDA. Only changes from the CTA which can be confidently predicted to be achieved by an REO can properly be reflected in the EBITDA as a sustainable trading and profitability position.
72.
As set out above many elements of the calculation of EBITDA are not in substantial dispute, in the sense that both of the experts have arrived by different routes at figures which are essentially comparable or where the difference between them is inconsequential. In particular for the purposes of valuation a figure for fee-income of £275,000 per annum is essentially uncontroversial. Similarly a figure of £82,500 to represent costs other than wages to be included within the calculation is, again, essentially uncontroversial. It includes a figure for rent which was in detail disputed but which on the basis of the evidence which is set out above, I am content to accept is properly to be included as £30,000.
73.
The key question is therefore what figure for wage costs should be included within the EBITDA? The questions which arise are whether or not the property would be purchased by an owner/operator; if the property would be purchased by an owner/operator would they work in the business so as to reduce the wage costs; if they would work in the business and reduce its wage costs what is the scale of deduction which is appropriate? I address each of those questions in turn.
74.
I have no doubt on the evidence which I received that the property would be purchased by an owner/occupier in the form of a two-person team and that therefore the REO in this case should be modelled on the basis of a two-person owner/occupier. The reasons for reaching that conclusion are as follows.
75.
Firstly, the property with which this case is concerned, and in particular the care home operation which it supported, was a small one and one which was obviously suited and attractive to an owner/occupier as a business proposition. Secondly, the property itself included within the additional floor space the opportunity for the owner/occupier to live in the premises thereby providing a home as well as a business, alongside the opportunity to be close at hand for the purposes of supervision of the business. Thirdly, in my view Mr Coulter's evidence of comparable operations supports a conclusion that this property and business would have been purchased by an owner/occupier. The evidence which he provided of comparable care homes involving 20 beds or less supports the proposition that these are overwhelmingly the subject of owner/occupier operation. In truth this proposition was not in dispute on the evidence received. Mr Ebo accepted in cross-examination that it would be unlikely that a corporate operation would be interested in acquiring this property to form part of its organisation, but that it was likely that it would be purchased by an owner-operator.
76.
The next question which arises is should a deduction to wage costs be made on the basis of an owner/occupier purchasing the property and the business? Again, I have no doubt that the owner/operator who acquired this business and who should form the basis of the REO model in this case, would be actively involved in the business, and the home would not be purchased by someone intending to be economically active elsewhere. In my view it is clear given the nature of an owner/occupier purchase that such would be with a view to working within the business and taking a hands-on approach to husbanding the investment represented by the purchase.
77.
Mr Ebo in his evidence considered that no deductions should be made because the owner/occupier might not be qualified to the appropriate level to enable them to manage the home and thus a manager would need to be employed to run it. He reinforced this view on the basis that at the time of valuation Manor House did have an employed full-time manager running the operation as set out above. I am unable to accept Mr Ebo's evidence in this respect. I do not consider that either of his assumptions are properly reflected in an understanding of the REO in this case. Even if the purchaser was not at the time of the purchase qualified that would certainly, in my view, be a purely temporary and short-lived circumstance. The operator would quickly seek and achieve qualification. Further, and in any event, the fact that a manager was employed at the time at Manor House was mainly it seems a symptom of Mrs Lovell's desire to retire, and not a reflection in my view of the definition of the REO which is to be used in valuing this property.
78.
The next question which arises is what deductions should be made bearing in mind the nature of the business and the premises, to account for the input of the owner/occupier? Firstly, it is obvious given the availability of accommodation on the site that any owner/occupier would provide sleep-in cover and thereby avoid that element of wage cost. When considering an REO there is really no sensible basis to conclude that sleep-in cover would not be provided given the circumstances of the business and the availability of the accommodation. Secondly, I am satisfied that the owner/occupier would not employ a full-time manager. In my view the REO in this case would be an owner/occupier who would seek to fulfil the role of the manager both with a view to saving wage costs and also with a view to safeguarding their investment in the business. The owner/occupier would fulfil the managerial role which would include such functions as supervising staff and constructing the staff rota, marketing the home and liaising with agencies that may be able to provide the home with residents, dealing with regulators and complaints and ensuring that the business remains profitable.
79.
Is Mr Coulter right that a deduction of £40,000 is appropriate to represent the input of the owner/operator? During Mr Coulter's evidence a calculation was performed stripping out of his wages build-up the costs of a full-time manager and also sleep-in cover. It is unnecessary to go through that calculation step by step for the purposes of this judgment, but in substance what it demonstrated was that after the actual costs for employing a manager and providing sleep-in cover have been taken out of his build-up a wage cost of £115,788 remained. This, of course, is somewhat larger than the £110,000 which is to be derived from his deduction of £40,000 from the agreed gross wage bill of £150,000. The calculation performed during the course of the evidence illustrated that the difference amounted to around 18 hours of care staff time at the national minimum wage. It may be possible that, like Mr Coulter's examples, some of this time might be reflected in the owner/occupier reducing some of the care staff costs. There is an element of speculation about this suggestion however, which leads to the conclusion that whilst I accept the costs of a full-time manager and sleep-in cover would be saved, to allow for any further deductions in wage costs would not give rise to a robust figure for wage costs. Clearly an assessment of this kind has to deal, as both experts have throughout their evidence, in round figures. In my view an appropriate assessment for the wage costs in this case would be £115,000.
80.
Having reached those conclusions it is possible to arrive at the appropriate EBITDA in this case. The fee income as set out above is £275,000. In order to arrive at the profit figure, deductions of £197,500 need to be made. The EBITDA is, therefore, on the basis of my conclusions, £77,500.
81.
The next question which arises is whether or not account should be taken of the additional floor space at the property. As set out above Mr Ebo's contention was that only elements of the property which gave rise to revenue, and therefore profit, could feature in the valuation on the basis that the rent was paid for the whole of the property and only those elements which generated profit could form part of any capital value. Whilst I am entirely content to accept that that is an appropriate starting point in the valuation of a trading property of this kind, bearing in mind the particular circumstances both of this business and of the premises concerned I have difficulty in accepting that the existence of the additional property in this case is irrelevant to the valuation exercise. The additional floor space facilitates the saving of costs of sleep-in cover and is also relevant in providing the opportunity for managing the business, which is a 24-hour operation, on the spot. I accept the evidence given by Mr Coulter that the additional floor space gives rise to potential for expansion of the business and its revenue by, for instance, the use of the accommodation by staff and by other uses ancillary to the care home which bring with them the possibility of raising revenue without any departure from the use clause in the lease. Whilst the additional floor space might also be said to offer the possibility of development (for example, planning permission had previously been granted for a link block and conversion of Manor House Cottage to provide additional bed spaces) in the absence of any indication of cost or projected revenue I do not consider that any weight could attach to this prospect. It follows that I do not accept the position advanced by Mr Ebo that no account can be taken of the additional floor space and it is irrelevant. The additional floor space is, in my view, a factor which must be taken into account. It appeared to me that both experts accepted that if the additional floor space was relevant then the way in which it was to be taken into account was through an adjustment of the multiplier which, in my view, would be a positive increase in the multiplier to be applied.
82.
Against that background, what is the right multiplier to be applied in this case? As set out above the comparables in relation to this property are few in number and differ considerably from the subject property in respect of the lengths of the lease concerned, the type of the property and age of its construction and its location. As such those comparables can only provide a very broad guide as to where the multiplier should be placed in this case. I see good sense in the evidence of Mr Coulter that the length of the lease which was involved in relation to this property of 40 years justified a higher multiplier. The 40 year lease proposed provided scope and security for investment by the owner in the business. This is a factor to which, in my view, considerable weight should be attached in making the assessment.
83.
It is, of course, to be noted that there were issues in existence with CSCI in relation to the operation of the Manor House at the time. Nevertheless it is clear that those issues, as set out above, were capable of resolution and in large measure related to the management of the care home rather than the fundamentals of the property within which it was operating. Favourable factors in support of an increase in the multiplier of lesser significance than the lease length were legitimately, in my view, the identity of the landlord (who could reasonably be taken to be likely to adopt a supportive attitude towards sustaining the business in the property in terms of their attitude to rent reviews and extending the term of the lease), the seafront location of the property and the fact that it was an elegant listed period home. A further positive factor to be taken into account is the state of the market at the time and the demographic evidence relied upon to show continuing demand for facilities of this sort. As Mr Ebo pointed out this evidence in relation to the state of the market and demographic evidence must be tempered by the fact that the property existed in a relatively remote north Devon location and it could not be assumed that market conditions were homogeneous across the country. Nevertheless, market conditions and demographic factors were positive influences on the multiplier.
84.
Overall I have formed the view that the condition of repair of the property is largely a neutral factor. From the inspections carried out by Mr Babb, which have not been the subject of serious criticism, it appears that the property was in reasonable condition at the time, and whilst listed buildings carry with them both repairing obligations and the likelihood of potentially higher costs of repair, that is offset by the opportunity they present, in this case to provide an attractive location for potential residents. For the reasons which have been set out above, the existence of the additional floor space was a factor which supported a material increase in the multiplier.
85.
On balance there were a greater number of factors supporting a higher multiplier than suggesting it should be reduced. When measured against the comparables and such weight as could be given to them, the upwards shift in the multiplier from the average derived from the defendant's comparables would on any view in my judgement be substantial. Taking the matter in the round I can ultimately see no reason to depart from Mr Coulter's view that the appropriate multiplier in this case would be one of 4.25. I note that Mr Ebo was of the view in cross examination that if the additional floor space was excluded from the equation, then a multiplier of 3.5 could be regarded as reasonable. To that extent his evidence was similar to that of Mr Coulter when assessing the element of the care home on its own. This agreement provides some helpful context to the evaluation of the appropriate multiplier. In my view a multiplier of 4.25 is in all the circumstances entirely appropriate.
86.
Having identified therefore both the EBITDA and the multiplier the correct value in this case can then be identified. Using an EBITDA of £77,500 and a multiplier of 4.25, the value arrived at is £329,375 or £330,000 rounded. The valuation provided by the defendants of £350,000 is therefore within the margin of error in this case. In the light of this I am satisfied that the defendant's valuation was not negligent.
87.
As I have set out above, the approach taken in the authorities is to focus on the result rather than the approach or methodology adopted in arriving at the valuation. The claimant was heavily critical of the report produced by the defendant on the basis that it did not make explicit the multiplier which had been used. The claimant further contended that, on the basis of the calculations noted on the file and the contents of the report, the defendant had not undertaken a proper EBITDA/multiplier valuation but had rather become distracted by notional freehold values and an attempt to justify the sale price which had been agreed. The authorities show that those issues cannot be determinative of whether there has been negligence once it has been established that the result of the valuation was within the margin of error of a valuation correctly conducted.
88.
In any event I should make clear that I accept the evidence of Mr Babb and Mr Hayton that they did approach valuing this property in accordance with GN1, and an EBITDA/ multiplier approach. After all that was the purpose of the projection of adjusted net profit that was undertaken by Mr Babb and adjusted by Mr Hayton. True it is that they could have been clearer in the report and indeed in their workings out as to the multiplier they had selected, and the reasons for that selection, but in the event the absence of that reasoning did not affect the legitimacy of their judgment as to the appropriate value of the property. I also accept that the calculations which were undertaken in relation to, for instance, a notional freehold or notional rental of the additional floor space were performed by way of a cross-check for the principal valuation exercise. These calculations were not a surrogate for the EBITDA/ multiplier approach. I have not, however, relied upon them in reaching my own assessment of the correct value which I have explained above. Similarly, I have not relied upon Mr Coulter's cross-checking exercise. I am satisfied that applying the EBITDA/multiplier approach with the inputs which I have described above arrives at a correct valuation as at the 3
rd August 2007 of £330,000.
Other matters
89.
The conclusion which I have reached in relation to the defendant's valuation effectively disposes of the claimant's case. It follows that the subsidiary points raised by the defendant as to why they might not be liable even were the valuation to be found to be negligent do not arise. I do not propose to deal with those issues in any detail but simply propose to indicate in summary form my conclusions in respect of them, excluding the question of contributory negligence, having heard argument.
90.
The first issue raised by the defendant is the contention that on the basis that the first facilities letter unconditionally offered to loan Mr and Mrs Watson the money, and that Mr and Mrs Watson had accepted that offer before the valuation report was received, there could have been no reliance upon the defendant's valuation, and further that in any event the claimant was bound to lend Mr and Mrs Watson the money regardless of the outcome of the valuation.
91.
I am of the view that the claimant's answer to this point, namely that there would in the circumstances be an implied term which defeated the defendant's proposition based upon the principles set out in
Marks and Spencer PLC v BNP Paribas [2015] UKSC 72 is correct. Whilst the defendant submitted that the implied term contended for in the pleadings was too vague, and further that a term could not be devised to overcome the many potential issues that might be thrown up by valuation, I do not consider these submissions realistic. I see no difficulty on the basis of the appropriate and established principles why a term would not have been implied to make clear that the loan offer was conditional upon receipt of a valuation which satisfied the bank's lending criteria. Such a term, in my view, would provide appropriate certainty and would in the circumstances be so obvious as to go without saying. Clearly it would also meet the requirement of business efficacy. Thus, I am not persuaded by the defendants' arguments in this respect.
92.
The second point raised is related to the events in 2008. It is submitted on behalf of the defendant that the claimant had suffered no loss in this case on the basis that the refinancing of the borrowing, which occurred in 2008, obviated the loss by means of the repayment of the borrowing which had occurred in 2007 underpinned by the valuation of Manor House provided by the defendant. The movement of the money has been set out above. Further, reliance was placed upon the decision in
Preferred Mortgages v Bradford and Bingley PLC [2002] EWCA Civ 336.
93.
Again, stating the matter in brief, I would have been minded to accept the submissions of the claimant in respect of these matters. The key issue which distinguishes, in my view, this case from the
Preferred Mortgages type of situation, is that the security of the all monies charge by way of mortgage entered into in reliance on the valuation provided by the defendant had not been redeemed as was the position in the
Preferred Mortgages case. Thus, in my view, the scope of the duty owed by the defendant remained extant notwithstanding the internal accounting adjustments which had been made by the claimant in 2008 following Mr and Mrs Watson's default.
94.
The final additional submission made by the defendant involves allegations of contributory negligence. Again, on the basis that I am not satisfied that there has been negligence by the defendant, the question of contributory negligence is academic. It is therefore unnecessary and inappropriate to reach any conclusions on the allegations of contributory negligence made by the defendant.
Conclusion
95.
For the reasons set out above, I am not satisfied that the defendant's valuation in this case was negligent and as a consequence the claimant's case must be dismissed.
