The judgment of Recorder Halpern QC in Canada Square Operations Ltd -v- Kinleigh Folkard & Hayward Limited (17/09/15)* is interesting for a number of reasons. Firstly on issues of limitation; secondly on the point that a court will not infer points in favour of a party who has the burden of proof and has failed to adduce evidence. It highlights the need for first hand evidence on crucial issues.
“This reinforces the view …that the Lender at the eleventh hour has sought to cobble together a case on reliance which is based largely on speculation with no real foundation. The claim therefore fails because the Lender has failed to establish reliance”
The claimant brought an action against the defendant surveyors. The surveyors admitted that they had been negligent in valuing the property which led to the claimant advancing a mortgage. The claimant obtained two valuations prior to lending the money the first for £475,000. The defendant provided a second valuation which valued the property at £500,000. The claimant advanced £427,500 on the property in March 2006. The borrowers defaulted and the property was sold for £305,000. The claimant sought the shortfall from the defendant.
- The action was statute barred. The cause of action in tort arose more than six years prior to issue.
- The claimant had failed to adduce any direct evidence on the issue of reliance upon the defendant’s valuation.
- The court would not infer reliance on the facts of this case.
- The “evidence” as to reliance had not appeared in the claimant’s witness statements, it had been “cobbled together”
The Recorder found that the action was statute barred. The claim form was issued in October 2013. The claim in contract had expired. The issue was whether the cause of action in tort arose before 23rd October 2007.
The Recorder held that the burden was on the claimant to discharge the prima facie burden of showing that the loss had not occurred prior to the 23rd October 2007. The borrower had missed instalments in February 2007. This failure was significant. The payments were not being duly made. There was a history of poor payments before October 2007. The lender had suffered a measurable relevant loss more than six years before the date of issue.
PROVING THE CASE AT TRIAL
Another interesting aspect of the case is the failure to adduce evidence on a key issue. The burden was on the claimant to prove that it relied on the defendant’s valuation. However no first hand evidence was called on this issue. The Recorder declined to draw any inferences in the claimant’s favour.
60. The burden of proof is, of course, on the Lender to establish that it relied on the Valuer’s valuation. The only witness called by the Lender was Mr Schofield, who was the Lender’s head of credit at all material times and who remains a senior employee of the Lender. No evidence was given by anyone involved in the actual decision-making, nor was any explanation given for the absence of such evidence. Mr de Verneuil Smith submitted that no adverse inference should be drawn from this absence. He said that that it would be surprising for the Lender to have commissioned the valuation unless it intended to rely on it. I accept that this is a reasonable starting point and that in a straightforward case it might not take much evidence to discharge the burden of proving that the lender did so rely.
61. I also accept that there is no rigid rule requiring the individuals who sanctioned or approved the loan to give evidence. It might be thought unnecessary in a case where:
61.1 There is a lending manual which contains clear policies or guidance;
61.2 There are internal contemporaneous notes made by the relevant employees;
61.3 A person employed at the relevant time confirms (i) that the Lender’s usual practice was to follow its own policies and guidance and (ii) that the notes indicate that they were followed on this occasion; and
61.4 There are no indications to the contrary.
62. However, the present case is not a straightforward one because there were two valuations. This immediately raises the question whether the Lender relied on the Valuer alone, or on Connells alone, or on both. Reliance on both would be sufficient, but the Lender must satisfy the court that it did not rely solely on Connells.
63. There is no explanation in the documents I have seen as to why there were two valuations or as to which valuation or valuations were relied upon. The only documents which might possibly assist are the following:
63.1 Internal computerised notes made by the Lender (known as MIPS Case Notes) contain an entry on 19th December 2005 from one Jennifer Dixon saying: “broker note: 2x vals carried out.”
63.2 The MIPS Case Notes also include two further relevant entries. One dated 16th January 2006 from one Laura Paton says: “tried to call robert jaques [the broker] back to let him know that we will instruct a second val due to property [;] line was engaged could not get through”. The other dated 19th January 2006 from Jennifer Dixon says: “Broker note: 2nd val instructed through Quest”.
63.3 The fax sent to Connells on 13th February 2006 (see paragraph 7 above).
63.4 The Lender’s internal underwriting checklist contains a line asking whether the property is “fit for immediate occupation”. Next to this is an illegible squiggle which Mr de Verneuil Smith asks me to infer is a “yes” and which is dated 24/2.
63.5 The Lender’s underwriting manual as at 1st November 2005 includes the following:
(a) Paragraph 5.2.1 has the heading: “Additional Valuation for High Value Property”. In the column headed “Policy” it states: “Any property valued at £500,000 or more will require a second full valuation including internal inspection to be completed.” In the column headed “Normal Policy Procedures” it states: “If the second valuation is outside a 10% tolerance from the first valuation, the lower of the two valuation figures will be used when calculating LTV”.
(b) Paragraph 5.4 has the heading Unacceptable Security. This includes “Properties determined by the valuer as ‘unacceptable security” and “properties built up to 10 years previously without a NHBC Certificate or suitable Architect’s Certificate’”. 63.6 It appears from the Lender’s internal documents that the mortgage application was processed by Jennifer Dixon and Laura Paton and that it was reviewed on 24th February 2006 by two more senior underwriting officers, Kelly Lister and Kathryn Dargan. The MIPS Case Notes also have an entry by one Kelley Boyle on 16th February: I was not told whether she is the same person as Kelly Lister.
64. I accept that Mr Schofield gave credible evidence about the Lender’s usual practices. However, I found his evidence considerably less satisfactory when applied to the particular facts of this case. He readily admitted that he had no involvement in sanctioning or approving this loan and had not spoken to anyone who had been involved. He was able to throw some light on the abbreviations used in the internal notes, but he could not interpret all of them. He was unable to satisfy me as to precisely who approved the loan and when, and in particular, whether that approval was made in reliance on the Valuer’s valuation.
65. He did not know why the Lender sought a second valuation from the Valuer, instead of going back to Connells. He suggested that the reason was that the Connells’ valuation was unsatisfactory, given that this was a self-build development which had not yet been completed, so that the Property was not suitable as mortgage security at the date of the Connells’ valuation. His reasons for reaching that conclusion were unsatisfactory, and they confirmed my concern that this part of his evidence was little more than speculation. In particular:
65.1 He relied on paragraph 5.2.1 of the lending manual which gives guidance to the effect that the Lender should adopt the lower of two valuations where there was a difference of more than 10%. He said that this demonstrated that the Lender relied at least in part on the Valuer’s valuation, even though the letter of offer gave a value of £475,000. I reject this as pure speculation. The lending manual gives no assistance, since (i) it applies only where the lower valuation is lower by 10% or more (in this case it was only 5%) and (ii) it is merely guidance and not policy.
65.2 He relied on paragraph 5.4 of the lending manual which referred to (i) unacceptable security and (ii) properties which did not yet have their NHBC certificate. In his evidence in chief he said that these were both good reasons for needing a fresh valuation. However, the latter cannot have been the reason, since the NHBC certificate was not obtained until 3 rd February 2006 (after the date of the Valuer’s valuation) and yet (according to Mr Schofield) that did not prevent the Lender from relying on that valuation. In cross-examination he sought to distance himself from reliance on the lack of a NHBC certificate.
65.3 As for the former reason, this is pure speculation. I note that Connells had said that the Property was suitable for mortgage purposes and that its valuation was subject to satisfactory completion of the development. If one takes the Connells’ valuation at face value, it was satisfactory. It was merely subject to a condition which the Lender might reasonably have regarded as satisfied when it saw the NHBC certificate.
65.4 He relied on Laura Paton’s note of 16th January 2006 saying that the second valuation was being sought “due to property”. He said that this indicated that the reason was because of the nature of the Property, rather than the valuation, but that is pure speculation. As Mr Carpenter points out, it is undermined by the earlier note of 19th December (which preceded the Connells’ valuation) saying that two valuations would be carried out.
65.5 He referred to the fax of 13th February but this does not say what “policy” is being referred to.
65.6 He relied on the confirmation dated 24th February 2006 that the Property was fit for immediate occupation, saying that this was a conclusion that could only have been reached in reliance on the Valuer’s valuation. I do not accept this evidence: it is equally possible that this conclusion was reached in reliance on the Connells’ valuation together with the NHBC certificate. I regard it as significant that the loan offer stated the value as being £475,000 (the amount of the Connells’ valuation) rather than £500,000. This is a prima facie indication that the Lender relied on the Connells’ valuation, and possibly on that valuation alone. It is certainly possible that the Lender relied on both valuations, but I cannot properly draw that inference on the evidence before me.
66. I also regard it as significant that Mr Schofield’s evidence, to the effect that the loan was made in reliance on the Valuer and not simply on Connells, was given for the first time in the witness box and is not to be found in his witness statement dated 15th March 2015. This reinforces the view (which I would have reached independently) that the Lender at the eleventh hour has sought to cobble together a case on reliance which is based largely on speculation with no real foundation. The claim therefore fails because the Lender has failed to establish reliance.”
*Transcript available on Lawtel.
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