Paratus AMC Ltd & Anor v Countrywide Surveyors Ltd

At the time to which these proceedings relate, the first claimant, Paratus AMC Limited, carried on the business of providing loans secured on residential properties. Until 28^th January 2011 the first claimant was called GMAC RFC Limited. I shall refer to it as “GMAC”.

The second claimant, RMAC 2005 NS1 Plc (“RMAC”), is a Special Purpose Vehicle, created by GMAC for the purpose of buying packages of secured loans from RMAC. I shall set out some details of the arrangement below.

The defendant, Countrywide Surveyors Limited (“Countrywide”), carries on the business of surveyors and valuers specialising in the valuation of residential property. At all times material to these proceedings Countrywide was on GMAC’s panel of valuers and provided valuation services to GMAC pursuant to the terms of a master agreement dated 7^th July 1998.

In these proceedings GMAC and RMAC complain that they have suffered loss and damage as a result of a negligent valuation of residential property carried out on GMAC’s instructions in July 2004 by Mr John Foster MRICS, a valuer employed by Countrywide.

I shall set out the basic facts giving rise to the claim before identifying and discussing the issues that fall to be determined.

On 16^th July 2004 Mr David Mark Stockton (“the Borrower”), who gave his address as 25 Hither Chantlers, Langton Green, Tunbridge Wells, Kent, TN3 0BL, made a mortgage application to GMAC. The application form was submitted by independent brokers called The Mortgage Shop. It stated that the required loan was £166,500 over a term of ten years, on an interest-only basis, to be secured by a remortgage of a residential property at Flat 9, Fulford Place, Hospital Fields Road, York (“the Property”), which was described as a first-floor flat with two bedrooms. The application form stated that the Property had been originally purchased on 2^nd September 2003 for a price of £166,500 and that the estimated value of the Property was £185,000.

Fulford Place was a development of purpose-built flats, which had been built by Taylor Woodrow Developments Limited and completed in stages by late 2003 or perhaps early 2004. It comprised five blocks, each on three or four storeys, and a link block through which ran the access road. The Property was in a four-storey block called Lendal House. Lendal House is shown in the upper photograph on page 616b of the trial bundle and is the block marked as “block 5” on the floor plan on page 616c of the trial bundle, and the layout and position of the Property is the same as that of the flat in the north-west corner of block 5 on page 616c. The Property is shown again in the plan on page 616j, where its floor area is shown as 65.5m².

GMAC instructed Countrywide to provide a mortgage valuation report in respect of the Property. By reason of the master agreement between the parties, Countrywide was required to prepare the report on a standard form provided by GMAC and to advise as to the open-market value of the Property as between a willing seller and a willing buyer on an arm’s length basis, as to the nature of the property and any factors likely to have a material effect on its value, as to its reinstatement cost for insurance purposes, and as to whether the Property constituted an adequate security for the advancement of money by GMAC by way of residential mortgage.

Mr Foster inspected the Property on 19^th July 2004 and provided a Mortgage Valuation Report on 20^th July 2004. The report recorded that the Property was a purpose-built, second-floor flat on the second floor of a block of sixteen similar units. It stated that the Property did not have lift access, that it had two bedrooms and one bathroom, that it had been built in 2003, and that demand for that type of property was good. Section 14 of the report confirmed that the Property was suitable security for mortgage purposes. Section 17 stated that the market value of the Property was £185,000. I shall mention other features of the report later in this judgment, but shall here observe that it recorded the floor area of the Property as 62m². One of Mr Foster’s working papers shows how that calculation was arrived at. It was common ground at trial that the probable floor area of the Property was in fact 65.5m², as shown in the developer’s floor plan, and I am satisfied that the Property had the same floor area as other properties that are shown on another of Mr Foster’s working papers as having a floor area of 65m².

On 12^th August 2004 GMAC made a mortgage offer to the Borrower in the sum of £166,500 plus £395 in respect of fees. The Borrower accepted that offer. On 30^th September 2004 GMAC made a net advance of £166,430 to the Borrower and the remortgage was completed.

GMAC asserts, and I find, that it made the offer and the advance in reliance on Mr Foster’s valuation.

By a Mortgage Sale Agreement dated 2^nd March 2005, GMAC sold to RMAC the beneficial ownership of a package of mortgage loans and their related security; these included the loan to the Borrower and the mortgage over the Property. Some of the details of the transaction will be relevant in considering issues of loss and damage. For present purposes it suffices to say that the transaction was part of GMAC’s repackaging of its portfolio and that at law GMAC remained the mortgagee of the Property and entitled to receive from the Borrower the payments in respect of the loan.

The Borrower made the payments falling due in respect of the loan until the late summer of 2007, when he fell into arrears. In May 2008 GMAC obtained possession of the Property, and in September 2008 it sold the Property for a price of £123,500. After repossession and sale fees were deducted, GMAC received net sale proceeds in the sum of £118,103.20.

The main issues that arise for determination are as follows:

At trial, expert valuation evidence was given in writing and orally by two chartered surveyors: Mr John Hornsby MRICS for the claimants, and Mr Peter Walker FRICS for Countrywide. Both experts have considerable experience of valuing residential properties in York, including properties of the same kind as the Property. I shall summarise the opinions which they advanced, before considering the major points to emerge in the course of their respective cross-examinations and then turning to a consideration of the valuation issues.

Mr Hornsby said that the best indication of the value of a property was often the price at which it had been purchased, at least if the purchase were relatively recent and at arm’s length. As well as considering that information, the accepted practice was to take a dual approach to the valuation process: the valuer should consider comparable properties, having regard either to sale prices recently achieved or, in the absence of sales evidence, to the asking prices for similar properties currently on the market; and he should also speak to local estate agents to obtain information concerning the state of the local market for such properties.

Contrary to what the Borrower had stated in his remortgage application form, the price at which he had purchased the Property in November 2003 was £139,400. Mr Hornsby considered that the market had risen by approximately 10% between November 2003 and July 2004 and that accordingly the original purchase price of the Property would suggest a value of approximately £153,340 in July 2004.

As for comparable properties, Mr Hornsby first considered the comparables used by Mr Foster in the preparation of his valuation report. The standard form on which the valuation report had been written required particulars of three comparable properties. Mr Foster gave particulars of three two-bedroom flats at Fulford Place that had been sold since late 2003; the report does not identify the precise addresses of the three flats, but a list of properties on Mr Foster’s file makes clear that they were numbers 69, 24 and 72 Fulford Place. The report shows the respective sale prices of the flats as £184,450, £182,750 and £168,000, but the evidence suggests that the actual sale prices were £189,875, £182,750 and £178,500. On the list of properties on his file, Mr Foster had marked two further properties at Fulford Place, namely number 28, which was sold in November 2003 for £177,650, and number 71, which was sold in November 2003 for £179,350.

Mr Hornsby’s opinion was that all five of the properties known to have been considered by Mr Foster as comparables differed from the Property in at least three material respects. First, Mr Foster’s comparables were all substantially larger than the Property: they had floor areas of 79m², 90m², 77m², 80m² and 93m², whereas the floor area of the Property was either 62m² or 65.5m². (If the floor area of the Property was 65.5m², the amount by which the floor areas of the five comparables exceeded that of the Property was, respectively, 20%, 37%, 17%, 22% and 41%.) Second, all of Mr Foster’s comparables had en-suite bathroom facilities, whereas the Property did not. Third, all of Mr Foster’s comparables were in blocks with lift access, whereas the Property was in a block that did not have a lift. In Mr Hornsby’s opinion, each of these differences was significant and they indicated that the value of the Property was likely to be lower than that of Mr Foster’s comparables. Mr Hornsby attached particular significance to the difference of the size of the Property from the sizes of Mr Foster’s comparables. The average price pm² of the three comparables mentioned in Mr Foster’s report was £2,181 and the average price pm² of the five comparables marked on his working papers was £2,138. If those average prices were updated to take account of price inflation at 10% and then applied to the Property, they resulted in approximate and rounded valuations of £148,750 and £145,800 respectively (if the floor area of the Property was 62m²) or £157,000 and £154,000 (if the floor area of the Property was 65.5m²). Of Mr Foster’s five comparables, the highest price pm² was £2,334; even if that rate were applied to the Property and allowance were made for price inflation, the resulting valuation would be no more than approximately £159,150 or £168,150, depending on the floor area of the Property.

The list of properties used by Mr Foster mentioned several properties in the development at Fulford Place other than the five that Mr Foster had marked. One of those was a property at Plot 4, Lendal House; the list showed that it had a floor area of 67m² and a similar specification to that of the Property and had been sold in February 2004 for £149,950. Mr Hornsby expressed the opinion that, of all the properties shown on the list, this was unquestionably the best comparable and that there could have been no justification in July 2004 for valuing the Property at a figure greatly in excess of the price that had been paid for Plot 4, Lendal House, only five months previously.

Mr Hornsby mentioned other flats on the development that were for sale prior to the date of Mr Foster’s report, with prices ranging from £177,000 to £205,000. All of these, however, were larger than the Property and had en-suite facilities. Only one of these properties was on the market at an asking price higher than Mr Foster’s valuation of the Property. The property with the highest asking price, number 24 Fulford Place, had a floor area of 90m², equating to an average price of £2,277 pm². If applied to the Property, that would result in a valuation of £141,175 or £149,150, depending on the floor area of the Property.

Having regard to the original purchase price of the Property, to the available comparables, including the asking prices of properties on the market in the months leading up to July 2004, and to the specification of the Property, Mr Hornsby expressed the opinion that the value of the Property in July 2004 was £154,000. I ought here to observe that he described that valuation as the most optimistic value that could reasonably be ascribed to the Property as at that date. This might appear to indicate that £154,000 was at the outer limit of the margin of error. But Mr Hornsby accepted, and the case was presented to me on the basis, that the acceptable margin of error, whatever it might be, should be applied to that figure, giving an acceptable range of valuation extending some way below and above that figure.

For the defendant, Mr Walker said that in July 2004 the property market was regarded as steadily rising; prices generally had risen by at least 10% since November 2003, and for modern residential flats in York the figure was more like 13%. The market continued to rise until about the early part of 2007, but by the time GMAC sold the Property in September 2008 the market had fallen on account of the general economic downturn and the effects of “the sub-prime lending saga”.

By reference to information held at HM Land Registry, in section 9 of his report Mr Walker produced a schedule of thirty-five sales of flats in the same development, though not necessarily the same block, as the Property recorded between January and July 2004; these included the three comparables shown on Mr Foster’s report. The prices on the schedule ranged from £149,950 to £204,000; nineteen were in the range £170,000 to £180,000; eight exceeded £180,000; four were below £160,000. Mr Walker disregarded the highest and lowest sale prices, leaving a range of comparables of £157,500 to £190,000. The average sale price of the remaining comparables on the schedule was, in round figures, £175,000. Mr Walker took the information on the schedule and the figures for particular and average prices as providing evidence of the true value of the Property in July 2004.

One of the properties on Mr Walker’s schedule was 8 Fulford Place, which on 14^th April 2004 was sold for £172,500. That flat is at the south-west corner of the first floor of Lendal House and has the same specification as the Property, of which it is a mirror image. It was one of six flats purchased by the Borrower in November 2003, and its purchase price then was £137,700 as compared to £139,400 for the Property. In Mr Walker’s opinion, the history of the sale of 8 Fulford Place tended to confirm that the true value of the Property in July 2004 was £175,000. The difference between £172,500 and £175,000 was to be explained by the original difference in price in November 2003 and the rising market between April and July 2004.

Mr Walker accepted that the rising market between November 2003 and spring/summer 2004 would not entirely account for the difference between the prices at which and 8 Fulford Place the Property had originally been purchased and the subsequent price of £172,500 and valuation of £175,000. His opinion was that it was likely that the original purchase price had been significantly discounted to reflect the Borrower’s purchase of six flats together.

The following were in my judgment the most significant points to emerge from the cross-examination and re-examination of Mr Hornsby.

The main points that I take from Mr Walker’s cross-examination are as follows.

In my judgment, both experts were genuinely attempting to assist the court in a manner consistent with their duties. However, I was unable to accept the evidence of either of them without qualification. I shall set out at some length the views that I formed on the evidence.

In considering the question of the true value of the Property in July 2004, I am concerned not with what Mr Foster did or did not do, nor even with what information was and was not available to him, but with what the evidence before me shows to have been the true value of the Property. In addition to the expert opinions, the relevant evidence includes the comparables produced by the experts and those found on Mr Foster’s working papers. All of these comparables need to be used with a degree of care. This is particularly true of Mr Foster’s list of properties (page 669), because there was no evidence from Mr Foster as to what all of the entries on that list meant.

In this regard, particular questions have arisen concerning the use to be made of certain pieces of information: first, the entry on Mr Foster’s list in respect of two properties described as “Flat 12 Hospita” and “Flat 42 Hospita”; second, details of the sale of Flat 8 in April 2004; third, the original purchase price of the Property. I have come to the conclusion that none of those pieces of information can safely be used in valuing the Property.

As for Flat 12 and Flat 42, both experts seemed to accept that they were flats at Fulford Place, though Mr Hornsby was considerably less sure on the point than was Mr Walker. The main objection to that view is said to be that Mr Foster’s list of properties ascribes to both a “build” date of 2004, whereas Fulford Place is said in fact to have been completed in late 2003. However, the fifth marked comparable on the list, “Plot 4 Lendal H[ouse]”, also has a “build” date of 2004; this undermines the objection. Anyway, the date of completion of the construction at the development has not been securely established on the evidence. I accept the evidence of Mr Walker, hesitantly supported by Mr Hornsby, and the submission of Mr Evans that these are flats on Fulford Place; they are, I find, two of the six flats that the Borrower purchased in November 2003. Despite this conclusion, however, I place no reliance on the properties as comparables. The second column on Mr Foster’s list is unexplained but seems to me probably to represent the “appointment date” on which a valuation was carried out. The three columns on the right of the list marked respectively “Purchas”, “Val Bef” and “Val Aft” have not been explained, but I do not think it safe to assume that any one of them necessarily relates in all cases to the price at which a transaction was subsequently concluded as distinct from information as to agreed sale prices and estimated and confirmed valuations. Indeed, if the second column relates to valuation dates it is clear that there can have been no sale of Flat 12 or Flat 42 within two days of the valuation. I am therefore not satisfied that the information in respect of those flats shows useful comparable evidence. Although I do not rely on this further speculation, I think it likely that the reason why Mr Foster did not rely on Flat 12 or Flat 42 among his comparables was that they represented valuations and not sales. If as is likely those flats were owned by the Borrower, he was probably seeking to remortgage all three flats—that is, these two and the Property—at £185,000 each, and a valuation had been carried out on Flat 12 and Flat 42 only days previously. It may also be that the column marked “S” indicates whether or not a concluded sale had subsequently taken place—no property with an “appointment date” less than two weeks before the date of the list is marked with a “Y” in that column. Certainly, the information in section 9.5 of Mr Walker’s report shows that Flat 12 and Flat 42 were not sold until December 2007 and July 2009 respectively. At all events, I place no reliance on Flat 12 or Flat 42 as a comparable. In fairness, Mr Walker’s report did not do so either.

I also feel unable to rely on the recent sale of Flat 8. Although the evidence of a connection between the vendor and the purchaser post-dates the sale, the information that I have summarised makes it reasonable to suppose that a connection may well have existed at the date of the sale and that the transaction may not have been at arm’s length. (It may be that the fact that Mr Foster did not rely on Flat 8 as a comparable is an indication that that property was not sold on the open market; though I do not rely on that speculation.) In itself, the fact, if it were such, that the transaction was not at arm’s length would not compel the conclusion that the sale price was inflated; it might just as well have been reduced. But the real possibility of a connection between vendor and purchaser does make it unsafe to rely on the transaction as a comparable. In that regard, I agree with Mr Hornsby’s position and I do not think that Flat 8 provides reliable support for Mr Walker’s opinion.

On the other hand, and for rather similar reasons, I do not consider that the original purchase price of the Property materially supports Mr Hornsby’s opinion or counts against Mr Walker’s opinion. Both experts considered it likely that the developer had given the Borrower an incentive to purchase several flats at the same time. Mr Hornsby’s reason for thinking that this would not have taken the form of a reduction in the purchase price, namely that such a reduction would have tended to depress the selling price of other properties on the development, does not appear convincing, because at the material time the sale prices would not have been in the public domain on the Land Register and because the relevant sales were directly from the developer to the purchasers. The most effective way of giving a significant incentive would have been to reduce the price for a transaction involving several properties. I prefer Mr Walker’s evidence on this point. In the circumstances, although it is not known whether or not an incentive was given, it would in my judgment be unsafe to rely on the original purchase price of the Property as setting a base to which the effects of the rising market should be applied. I note that, according to Mr Walker, my approach accords with the advice of the Royal Institution of Chartered Surveyors to the effect that the possibility of incentives should lead to caution in the use of purchase prices of new property.

I accept Mr Walker’s evidence that the amount of the increase in residential property values between November 2003 and July 2004 was 13%. This is the figure indicated by the Land Registry data, which Mr Hornsby accepted in cross-examination constituted a more complete and useful resource than that on which he had relied to support his figure of 10%.

Turning to valuation method, I reject Mr Hornsby’s approach to valuation, inasmuch as it was based primarily, albeit not exclusively, on the application of a price pm². In my judgment the evidence does not support the existence of such a correlation between area and price. Mr Hornsby, indeed, accepted that the evidence from his own comparables did not support such a correlation and even contradicted it. He said in cross-examination that a smaller property would have a higher price pm² than would a larger property; that was not his written evidence. I accept Mr Walker’s evidence that, although size may be a relevant matter, it is only ever one factor among many that may inform the judgement of the valuer in any given case and that it does not do so by any arithmetical exercise of the kind envisaged by Mr Hornsby’s evidence.

Further, I find that valuers would not normally have detailed information about the floor areas of comparable properties. Such information would not generally be on their files, although it was on Mr Foster’s file. Enquiries of estate agents would not furnish valuers with such information. I reject Mr Hornsby’s contention that the reasonably careful valuer would therefore obtain the information from the developers. First, it is implausible that developers who have completed developments will respond with floor areas whenever valuers enquire in connection with a sale—which they will do in connection with the vast majority of sales, if Mr Hornsby is correct. Second, it is implausible that the ability of a valuer to carry out a competent valuation will turn on whether he can obtain this information about floor areas in respect of comparables. It would, indeed, mean that the method of valuation would differ depending on whether the information were available. Mr Walker’s opinion avoids that conclusion. Third, it is implausible that the method of valuation should impose such an onerous duty on the valuer. The fees paid in respect of valuations are modest. It is of course right to say, as Mr Walker accepted, that a valuer is not excused from doing what is necessary to provide a competent valuation merely by the low level of his remuneration; in a given case he might have to spend a significant amount of time on the valuation exercise. But I accept Mr Evans’ submission that the fee sets some parameters to what is reasonably to be expected; in particular, I think that the modest nature of the fee for a valuation of this sort counts against the methodological contention that the valuation exercise turns on the need for the valuer to make enquiries of developers who have completed their developments and moved on. Fourth, the contention that valuers should contact the developers and obtain information as to floor areas from them would in my view only be credible if values correlated with areas; as they do not so correlate, the contention loses any force it might otherwise have.

Once Mr Hornsby’s primarily, albeit not exclusively, arithmetical method of valuation is rejected, it is inevitable that the valuation exercise will become primarily a matter of the exercise of judgement involving the assessment of numerous factors. As Mr Walker accepted, that results in some methodological crudeness. But that observation does not seem to me to be a compelling objection. If an exercise is in large measure an art rather than a science, it is better to acknowledge the fact than to attempt to impose a pseudo-scientific veneer. Mr Hornsby said in cross-examination that an experienced valuer will have sufficient instinct to know within the first thirty seconds of his inspection what a property is worth and that the subsequent consideration of information relating to other properties will serve to confirm or modify that initial opinion. That broadly accords with Mr Walker’s evidence. It is in respect of the manner in which the further information is to be used that, in my judgment, Mr Hornsby’s evidence cannot be accepted.

I also prefer Mr Walker’s evidence regarding the significance of features such as en suite bathrooms and lifts. I accept that, in respect of a modern block of flats, the presence or absence of a lift will be insignificant as regards the valuation of a second-floor property. En suite bathroom facilities will be of more significance, but they are less likely to be an important amenity in a property that is not designed as, in the traditional sense, a “family home” and that is popular in the buy-to-let market; and a favourable aspect and view will be likely to be as if not more important.

In conclusion, I prefer the evidence of Mr Walker to that of Mr Hornsby as regards the valuation of the Property. Having regard to the overall tenor of his evidence, and despite my rejection of some of the matters he relied on as confirmatory of his initial opinion, I regarded him as having fundamentally sound judgement in assessing property values. His consideration of comparables broadly bears out his initial assessment of the value of the Property. Although it is validly observed that he did not take account of comparative floor areas in using those comparables, the evidence as to the lack of useful correlation between floor areas and values in broadly similar two-bedroom flats and my conclusions as to the relevance of floor areas in valuation method lead me to the view that this omission does not materially detract from the value of Mr Walker’s valuation exercise.

The result is that I find that the true value of the Property in July 2004 was £175,000.

It was common ground that the contract between GMAC and Countrywide contained an implied term that Countrywide would exercise reasonable skill and care in carrying out the valuation work. Similarly, at common law Mr Foster owed to GMAC a duty to exercise reasonable care and skill; and Countrywide would be vicariously liable for any breach of that duty in the course of Mr Foster’s employment.

It was also common ground that the issue of breach of duty resolved itself in practical terms into the question whether Mr Foster’s valuation was within the range of values that might have been given by a competent valuer exercising reasonable care and skill. I was not invited to make findings regarding any possible shortcomings in the report that, though not resulting in a valuation figure outside the permissible limits, might have resulted in a finding of breach of duty without loss in tort or a finding of breach of contract with purely nominal damages. The parties were content to approach the case in the manner reflected in Buxton LJ’s dictum in Merivale Moore plc v Strutt & Parker [1999] 2 EGLR 171 at 177: “To find that [the defendant's] valuation fell outside the ‘bracket’ is … a necessary condition of liability.” As for a valuation falling outside the bracket, the position has been well stated by H.H. Judge Langan Q.C. in Legal & General Mortgage Services Ltd v HPC Professional Services [1997] PNLR 567 at 574:

“As soon as it is shown that the impugned 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.”

A number of authorities have considered what is commonly called the appropriate “margin of error”. There is much to be said for some consistency of approach, and I see no good reason why a judge considering this matter may not inform himself from the collective experience and wisdom of the courts. But in my judgment it can hardly be right to regard the matter as one of law. The law is simply that the valuer owes a duty to exercise the care and skill of a reasonably competent valuer. In each particular case it is a question to be decided on the facts whether or not he has discharged that duty. Subject to this qualification, I am assisted by the dictum of Coulson J in K/S Lincoln and others v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC), a case that did not concern residential properties, where after mentioning some of the decided cases he said at [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 of error may be as low as plus or minus 5%;

(b)

For a valuation of a one-off property, the margin of error will usually be plus or minus 10%;

(c)

If there are exceptional features of the property in question, the margin of error could be plus or minus 15%, or even higher in an appropriate case.”

Mr Hornsby’s opinion was that, in valuing a property of the kind involved in this case, the acceptable margin of error was about 4% either side of the correct valuation. When applied to his valuation of the Property, namely £154,000, this margin would give a figure of £160,000 as the highest valuation that could possibly be justified. When applied to a valuation of £175,000, it would give a figure of £182,000. On either basis, Mr Foster’s valuation of £185,000 fell outside the acceptable margin of error.

Mr Walker, on the other hand, expressed the opinion that, on account of difficulties in obtaining good comparable evidence and in accurately assessing the impact of discounts or incentives for off-plan or bulk purchases, the acceptable margin of error was certainly no less than “the standard 10%” figure and “should in all probability be higher, at say 12.5%”.

An immediate difficulty with Mr Hornsby’s approach is that, as he accepted in cross-examination, the available comparables did not show great consistency or, I might add, any clear pattern. This fact makes it hard to see why Mr Hornsby should favour a margin of error that is lower than that normally advanced in the courts in respect even of the most standard properties. At the very end of his cross-examination, Mr Hornsby attempted to justify his figure by arguing that a small margin of error was appropriate for a low-value property. But it became apparent that he had as much difficulty as I did in understanding his own argument; and in the end he accepted that the low value of a property had nothing to do with the appropriate margin of error in percentage terms.

Mr Walker’s suggested margin of error in percentage terms was very much at the top end for modern “mass-produced” residential properties. In cross-examination he said that he preferred to think in terms of a range of values rather than in percentages, and he suggested a permissible range for the Property of £155,000 to £195,000—which in fact comes to a range of 11.4% above and below his suggested valuation figure. I make three initial observations on this evidence. First, even that modified percentage is higher than is often accepted. Second, the range in monetary terms is large and might lead the inexpert and sceptical observer to think that a guess by a reasonably sensible man in the street would have as much value as an expert valuation. Third, as Mr Walker readily accepted, the Property and the comparables were not geographically remote from each other and were all built at roughly the same time and none of them could be said to be unique or unusual.

Despite these observations, if forced to choose, without qualification, one or other expert opinion on the margin of error, I should prefer Mr Walker’s opinion, for a number of reasons. First, intuitive scepticism as to the suggested bracket should be tempered by the facts that in appropriate cases margins of 10% or more have been agreed in evidence or accepted by the courts and that any such margin will necessarily result in a relatively wide range of monetary figures. Second, despite the foregoing observations about the nature of the properties in question, the comparable evidence lacked consistency and clarity. Third, the market was buoyant, even volatile. There had been a very substantial rise in property prices in the preceding year and the market was still rising. This presented a valuer with difficulties that would not exist in a stable market—see Singer & Friedlander Ltd v John D Wood & Co [1977] 2 EGLR 84, per Watkins J at 85-86—and in my view justifies a greater margin of error than might otherwise be appropriate in the case of modern residential flats. Fourth, on the basis of Mr Walker’s evidence, I consider that the general buoyancy of the market was heightened in respect of this particular development in the summer of 2004, in circumstances where the glut of desirable properties there in late 2003 was over and the opportunities to acquire a property there were now more limited. Fifth, there is some force in Mr Walker’s remark in cross-examination to the effect that, when assessing comparable properties, a valuer’s task is likely to be harder in respect of flats contained in blocks than in respect of standard houses on newly built estates, because the latter are more susceptible of meaningful external inspection than are the former; though the general style of the flats means that this is not a very weighty point.

Conscious though I am of the dangers of attempting to become one’s own expert, however, I am reluctant to follow Mr Walker all the way on this matter. While I am entirely satisfied that the factors I have mentioned require a margin of error significantly greater than Mr Hornsby’s 4-5%, they do not clearly point to a margin of error in excess of the relatively generous figure of 10% that Mr Walker, somewhat inaccurately, regards as “standard”; and, assessing the weight of his arguments on their own merits and with regard to the experience of the courts in many cases, I should be of the opinion that a competent and careful valuer would produce a valuation within a slightly narrower band than Mr Walker suggests. In percentage terms, I consider that the acceptable margin is of the order of 8%. Like Mr Walker, I should prefer to begin from actual values, which after all are what is in question, and to translate those values into percentages, rather than to begin from the percentages themselves; and on that basis I should place the acceptable range of valuations as being from £160,000 to £190,000.

In the light of my findings as to the true value of the Property and the acceptable margin of error, it follows that Mr Foster’s valuation of the Property at £185,000, though too high, was not negligently high.

In those circumstances, the claim must be dismissed.

It is unnecessary to my decision to consider the remaining issues, of loss and damage and of contributory negligence. However, as I have received extensive evidence and submissions on those issues, I shall deal with them briefly.

The discussions of the questions concerning loss and damage and, below, of contributory negligence will proceed on the basis that, contrary to my previous findings, Mr Hornsby’s evidence as to valuation should be accepted.

On that basis, the quantum of the claim appears to be £31,000, which represents the difference between the true value of the Property (£154,000) and the negligent valuation (£185,000). That measure, which was established by the decision of the House of Lords in Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co Ltd [1997] A.C. 191, is frequently described as a “cap”, and indeed it has been so described at the highest level. That description is misleading, for reasons stated by Lord Hoffmann in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No. 2) [1997] 1 W.L.R. 1627, inasmuch as a claimant is entitled to recover the full amount of the loss that is legally attributable to the wrong complained of. What is meant by talk of a “cap” in this context is simply that further losses, though actually sustained and factually caused by the negligent valuation, are irrecoverable because they are not legally attributable to the wrong.

Regarding the quantum of the claim, Mr Evans for the defendant submits that Mr Hornsby’s evidence would produce a figure not of £31,000 but of £22,306, because the correction of the floor area from 62m² to 65.5m² (see paragraph 9 above) would give a valuation not of £154,000 but of £162,694. There is some attraction in that argument. However, although Mr Hornsby’s approach was largely arithmetical, it was not entirely so and he proposed £154,000 as itself a generous valuation; further, he did not in terms accept the validity of the higher figure. As I reject Mr Hornsby’s evidence, it is rather artificial to state in what terms I would have accepted it. I shall content myself with saying that I am doubtful whether I would have felt compelled to reduce the quantum of the recoverable damages in line with Mr Evans’ argument.

As the law now stands, it is necessary to quantify the entire loss, both recoverable and irrecoverable, because any reduction of an award of damages on account of contributory negligence is calculated by applying a percentage discount to the entire loss, both recoverable and irrecoverable; see below. At one stage it appeared that there might be an issue between the parties as to the quantum of the entire loss. By the end of the submissions that issue had proved illusory and it was agreed that the entire loss was £65,960.76 at the commencement of the trial, representing the difference between the total expenditure in respect of the advance, interest and costs, and the total receipts in respect of payments by the Borrower and proceeds of sale. Had it been necessary, an updated figure to the date of this judgment could have been provided.

The remaining issue concerned a submission on behalf of Countrywide that neither GMAC nor RMAC was able to maintain a claim for the recovery of such loss as had in fact been suffered. That conclusion was said to be a consequence of the assignments effected by the Mortgage Sale Agreement dated 2^nd March 2005 (see paragraph 12 above). I shall turn to this issue.

GMAC’s method of financing its mortgage-lending business was broadly as follows. Initially it would fund the loans with the use of funds from the money markets. From time to time it would package a bundle of its mortgages into a portfolio and, though retaining legal title to them, transfer them in equity to a limited company. That company was a special purpose vehicle (“SPV”): it had no business other than in respect of the transfer and had been established by GMAC specifically for the purpose of the transaction. The financial positions represented by the portfolio of mortgages were in turn transferred by the SPV to investors by the issue of notes. The reason for the use of SPVs is that the credit-rating of the notes will then depend on the quality of the financial positions themselves rather than on that of the original mortgage lender. The issue proceeds of the notes were used by the SPV—in this instance, RMAC—to pay GMAC the price of the portfolio. The investors would assume the risks under the financial positions and would obtain their return from the income-stream generated by those positions (i.e. the moneys paid by the mortgagors or the proceeds of sale of the mortgaged properties). This use of asset-backed securities is variously known as repackaging or securitisation. A fine discussion of this form of financing is to be found in chapter 18 of Dr Joanna Benjamin’s Financial Law (2007).

The income-stream received by the securitisation structure was applied in an order of priority, referred to in the evidence as a “cascade” or a “waterfall”. Noteholders with the lowest-risk notes (AAA-rated notes) were the most assured of receiving payment; those with notes at the highest risk would receive the highest interest rates to reflect the increased risk that they would not be paid. Any excess moneys reaching the bottom of the cascade at the end of a quarter after payment of the noteholders would be paid to the Residual Holder, which was GMAC. The evidence before me is that the losses suffered by the RMAC portfolio by reason of the transaction relating to the Property were borne by GMAC, in that they were reflected in a diminution in the income-stream that reached GMAC at the bottom of the cascade.

The argument advanced on behalf of Countrywide may be summarised as follows. The Mortgage Sale Agreement effected an assignment by GMAC to RMAC of the cause of action, if any, against Countrywide. At that time, no substantial loss had been suffered. RMAC has suffered no loss at all, because all losses suffered by the mortgage pool have been borne by GMAC in the manner described in paragraph 60 above. GMAC cannot maintain a claim for its own losses, because it has assigned its cause of action and, insofar as it may purport to be claiming as the legal owner of a cause of action that has only been assigned in equity, it is seeking to recover not on behalf of the fund but in respect of its own independent losses.

If it had been necessary to do so, I would have rejected Countrywide’s argument on this matter. As it is not necessary for my decision, I shall state my reasoning only summarily and shall not set out the detailed provisions of the Mortgage Sale Agreement, as a fuller treatment might have required.

If I had found liability on the part of Countrywide, contributory negligence would have been relevant both to the claim in tort and to the claim in contract, because the liability in contract would have related to a contractual obligation to exercise care and skill which was coextensive with the duty of care existing at common law independently of the contract: Forsikringsaktieselskapet Vesta v Butcher [1989] A.C. 852.

Section 1 (1) of the Law Reform (Contributory Negligence) Act 1945 provides:

“Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage …”

“Contributory negligence does not involve breach of a duty owed by the plaintiff to the defendant, but the failure by the plaintiff to use reasonable care to protect its own interests”: Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co Ltd [1994] 2 E.G.L.R. 108, per Phillips J at 136. The defence will only be made out if it is established that the claimant’s negligence was a cause of the loss: ibid. at 137. In assessing the causal effect of a claimant’s negligence, the court is entitled to use broad common sense: The Volute [1922] 1 A.C. 129, 144.

In Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 A.C. 190, the House of Lords held that the percentage reduction for contributory negligence was to be applied to the entire loss (“the basic loss”) of the lender and not to the recoverable loss as limited by the House’s earlier decision in Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co Ltd [1997] A.C. 191. The decision in the Platform Home Loans case has been forcefully criticised, notably by Professor Stapleton at (1999) 115 L.Q.R. 527 and by Professor Murdoch at (2004) 20 P.N. 97 and (2005) 21 P.N. 233, but remains good law.

The matters relied on by Countrywide fall broadly into two categories that raise different considerations: first, failures to carry out sufficient enquiries and investigations into the Borrower’s honesty and reliability; second, the operation of an imprudent policy of lending up to 90% loan to value (LTV). In order to consider at least the first category, it is necessary to set out some of the basic facts relating to the lending process.

When a mortgage application was received, it was entered onto GMAC’s systems before being processed by the New Business Department. Although the members of the New Business Department would become involved at various points, GMAC operated what was by and large an automated underwriting process consisting of two components, namely “Assetwise” and “Enterprise”. Enterprise was a work-flow system. Assetwise was a system that assessed the information relating to the application and made a decision as to whether the application should be accepted, declined or referred for consideration by the New Business Department. Assetwise’s assessment of the credit-worthiness of an applicant was by reference to mandatory procedures applicable in all cases, such as Experian credit searches, and to those parts of GMAC’s lending policy and product-specific rules that applied to the particular application. Once an application had been accepted, the New Business Completions Department was required to ensure that all special mortgage conditions had been complied with before the moneys were advanced.

The Borrower’s mortgage application was submitted by a firm of independent brokers. Among the many points that arise in respect of the application form, the following are particularly worthy of note.

I may summarise what did and did not come to light in the underwriting process, and what steps were and were not taken, as follows.

In those circumstances, Countrywide contends that GMAC contributed to its losses in the following main respects: first, it failed adequately to investigate the Borrower’s income and the reasons for the discrepancies in his stated income; second, it failed to advert to substantial non-disclosure of debt; third, it failed to interview the Borrower; fourth, and in any event, it lent imprudently having regard to the LTV on the transaction. The thrust of the case on the first three of these points is simply that, if the application had been looked at properly, it would have been apparent that there was, to put it at its lowest, very great doubt as to the Borrower’s honesty and creditworthiness for the proposed loan and that a reasonably prudent lender would not have proceeded with the transaction in those circumstances. Numerous relatively small details (such as the incorrect National Insurance number, the misstatement of the floor of the block where the Property was, a discrepancy in the stated details concerning the existing mortgage lender, the provision of only a mobile telephone number, the indications that the transaction might be intended as a cloak for a buy-to-let transaction, and the omission of a stated reason for the remortgage), though either trivial in themselves or unlikely to have independent causal relevance to the decision whether to lend, became relevant as part of the bigger picture revealed by the larger points.

Regarding the issue of the Borrower’s income, Mr Foskett said that GMAC had complied with the requirements of its Policy because, for the reasons already stated, the transaction was not properly to be considered high-risk. He did not consider that it had been necessary to go further and specifically verify the Borrower’s income, because the credit-searches revealed that the Borrower had been servicing his debts without default. Indeed, in that regard he thought that the higher level of debt shown by the Experian checks provided, if anything, comfort rather than a cause of concern: it was encouraging that, despite his significant levels of debt, the Borrower was meeting his repayments. He did, however, state that, if the non-disclosure of significant debts had been noticed by the New Business Department, an explanation would have been sought. The reason why this was not done was that reliance was placed on the figures disclosed by the Experian checks and, as those disclosed neither default nor unsustainable levels of debt (on the basis of the declared income), the Assetwise system was satisfied. Further, GMAC’s system for identifying potential fraud was restricted to searches for previous reported cases of actual or suspected fraud; the reliance on the Experian information in preference to that provided by the applicant meant that inconsistencies between the two were not investigated as potentially indicative of fraud. If GMAC required further information or clarification on any matter, it would do so in writing; it did not operate an interviews system.

Both parties adduced expert evidence in respect of the lending process and decision. The defendant relied on the evidence of Mr Brian Pitt, a director of Rockstead Limited, a company specialising in the provision of audit and due diligence services to the mortgage industry. The claimant relied on the evidence of Mr Adrian Bloomfield, a consultant to the financial services industry and among other things the Chief Executive of the Association of Short-Term Lenders and a former Vice-Chairman of the Association of Mortgage Lenders. For brevity’s sake I shall not recite the extensive experience of either witness, but I have regard to it and am satisfied that they were very well qualified to assist the court on the matters to which their evidence related. The experts prepared a helpful joint report in a form akin to that of a Scott Schedule; I shall not deal with every single item but shall simply summarise what seem to me to be the main points of their evidence.

Mr Pitt’s evidence was to the following effect. The loan was underwritten on a status (non-self-certification) basis, but as there was no attempt to verify the Borrower’s income the application was in substance for a self-certified loan. Lenders, brokers and regulators all knew that self-certified mortgages were riskier than conventional mortgages. A policy requiring self-employed applicants to provide accounts where the LTV exceeded 85% was in line with the marketplace at the time, but the further policy requiring only a telephone verification of the fact of self-employment because the transaction was not high-risk was not in line with the marketplace. Having regard to the high LTV, to the non-disclosure of financial commitments as identified by the Experian check and to the inconsistencies regarding the declared income, the application was properly to be considered high-risk. Any competent and prudent lender would have verified the Borrower’s income, and the broker’s request that the requirement of a tax assessment be waived should have been investigated, as it indicated the possibility that the Borrower could not substantiate his declared income. Further, although the enquiry and response regarding the amount of the monthly rental on the Borrower’s existing property relative to the mortgage payments in respect of that property satisfied GMAC’s own policy, the mere statement of the Borrower that the rental income was in excess of 125% of the monthly payment did not prove the fact and was inadequate for underwriting purposes. In his report (para 4.4.8) he said:

“The establishment of the customer’s ability to repay the loan is not only a requirement of the lender’s own policy but is a fundamental aspect of effective underwriting and a regulatory requirement. In my opinion, the Claimant failed to adequately assess the applicant’s ability to repay the loan by not establishing the exact nature of the applicant’s occupation and therefore was not in a position to fully consider the plausibility of the declared income.”

Mr Bloomfield’s evidence had about it an attractive robustness and simplicity. Its essence may be summed up shortly. Questions of the morals or honesty (in the normal meaning of that word) of the applicant were no proper concern of the lender. The lender’s concern was, rather, whether the applicant would be good for the money; “honesty” was relevant only in the sense of whether the judgement could be made that the applicant would be honest with the lender’s money and repay it: “If he was trying to take my money on false pretences and not repay it, I would take a different view.” In that light, questions as to whether the Borrower had mis-stated his income or failed to disclose debts or concealed the fact that the application in truth for buy-to-let purposes were all beside the point. What the Experian evidence showed was that the Borrower had taken on large debts and had serviced the repayments on them. This credit history gave confidence that, however precisely he may be arranging his affairs, he would continue to repay in the future. Consistently with that approach, Mr Bloomfield was happy to accept that a lender should not advance moneys to someone of doubtful trustworthiness but was unconcerned by evidence that the Borrower had provided false or misleading or incomplete information: such matters did not demonstrate untrustworthiness in its only relevant sense. All that a lender required was enough of the pieces to enable it to see the big picture; once that picture could be seen as a whole, it was unnecessary to concern oneself about the missing details. Critically, the business of a lender was making loans “and lots of them”: nothing was more detrimental to the business of a mortgage lender than a failure to make sufficient numbers of loans. What Mr Bloomfield called an auditor’s approach, which required every last detail to be addressed, was unrealistic and potentially ruinous. Having regard to the high volume of business conducted and the small proportion of transactions that went awry, a prudent lender would be willing to take risks on an individual transaction in order to maintain the required level of business and, to that end, the continued support of independent brokers.

Turning to some specific matters, Mr Bloomfield said that the discrepancies between the disclosed and the actual figures for the unsecured loans were of no consequence, because the figures supplied by the Borrower were more or less right and anyway lenders were not concerned about unsecured debt. The incorrect figures in respect of the disclosed mortgage were more relevant, as were the relatively large amounts of undisclosed credit-card debt, but the credit history disclosed by the Experian checks showed that these matters did not place a serious question mark against the Borrower’s trustworthiness in terms of repayment. Of the failure to disclose the credit cards debts, he said that it was only serious if one were searching for reasons to turn down the application; such an attitude was a certain way to business failure. Similarly, the important question regarding the mortgages on the investment properties was not whether they had been disclosed but whether they had been paid: “If he repays other debts, he will repay mine.” Thus, Mr Bloomfield thought that knowledge by GMAC that the Borrower had misrepresented the original purchase price of the Property would not have been material, because the history showed that the Borrower was sufficiently honest to repay the loan. Again, Mr Bloomfield came very close to saying in terms, and he clearly implied, that a lender would assume that the stated purpose of the loan was quite likely to be false, so that a failure to state the purpose at all was not of itself of any significance. Again, although it was plausible to suggest that a buy-to-let transaction was being disguised as a let-to-buy, the conclusion was not obvious and the favourable credit history meant that it was unnecessary for the lender to investigate further. And in the circumstances it was reasonable to accept without further investigation the Borrower’s assertion that the rental income from his existing property was in excess of 125% of the monthly mortgage payment.

The one respect in which Mr Bloomfield accepted some criticism of GMAC’s handling of the application concerned the Borrower’s income. He accepted that the level of that income was crucial for an underwriting decision and that GMAC made a shoddy job of its investigation, and he said that he would have done things “slightly differently” if he had been underwriting the transaction. Further, although GMAC treated the loan as a status loan, the absence of verification of the income meant that it was more properly to be considered as self-certified. However, he did not accept that GMAC fell short of the standards of a competent lender. Every commercial lender at the time operated some form of self-certification and GMAC, whose business model required it to take greater risks than many other lenders, was entitled to place primary reliance on the credit history and in the light of that history to take the view that the application was not high-risk. Moreover, GMAC’s assessment proved to be correct, because for the next three years the Borrower made the payments under the mortgage as they fell due.

In respect of matters of general lending practice, the main points of Mr Bloomfield’s evidence seem to me to be these. First, although a 10-year interest-only loan was unusual, it was not incumbent on GMAC to enquire as to how the Borrower intended to repay the principal. Second, it was inconceivable that a lender would have interviewed the Borrower. Third, as the vast majority of lenders recorded known risks on the Experian system it would have been unnecessary to look to other systems for the appropriate checks. I mention these—to my mind, tangential—matters only to say that I accept Mr Bloomfield’s evidence on them and shall put them to one side. Fourth, regarding a self-certified loan with an LTV of 90%, he regarded it as demonstrative of the increased level of risk that lenders were willing to entertain in a highly competitive market, but he did not consider that it could be characterised as imprudent; the greatest risk of all was not to make loans.

In section 5 of his report, Mr Bloomfield gave what I regard as an apt summary of the context for the consideration of this issue:

“Any examination and review of a non-conforming mortgage loan has to be conducted in the context of this type of lending (and not measured by the standards of prime mortgage lending). For many years the centralised lender model worked well and created profits for lenders and significant benefits for consumers. In my opinion, it is not appropriate to look at non-conforming loans and try to judge them by the standards of other banking services (such as prime mortgages) as the business models are different…

Non-conforming lenders adopted policies that did not require confirmation of most of the details and factors that concerned prime lenders. However, the few main issues that were crucial to non-conforming lenders needed to be properly investigated and verified. Where even the basic matters were not confirmed and found to be satisfactory, then lenders incurred losses.”

Insofar as the allegations of contributory negligence related to a business model rather than to the application of that model on the facts of this case, I reject them. GMAC’s practice of making loans at 90% LTV on a self-certified basis was certainly at the high-risk end of the market. But the evidence from both experts shows that it was in accordance with a significant, though small, sector of the market. In oral evidence, not even Mr Pitt was prepared to commit himself to the opinion that the practice was not that of a competent lender. On the basis of the evidence before me, I reject the contention that GMAC’s business model of 90% LTV loans on a self-certified basis was negligent.

In the course of argument there was some discussion as to whether or not it is open to the court, on a proper application of the law, to find that entire categories of lending, such as high-LTV self-certified lending, are to be characterised as so imprudent as to be negligent. It is unlikely that pure principle will supply the answer to that question in any particular case. As a matter of law, the court is not bound to accept that the practice of part or even the whole of a profession is competent. In the context of primary liability in clinical negligence, it has been said that the various adjectives used to qualify the practice in question—responsible, reasonable and respectable—all showed that the court had to be satisfied that the body of opinion relied on had “a logical basis”: Bolitho v City & Hackney HA [1998] A.C. 232, per Lord Browne-Wilkinson at 242. Questions concerning the acceptable degree of risk in the money markets are not readily analysed in terms of logic, and wider considerations of rationality are not easily addressed without access to far more information than is likely to be available to a trial judge or to any court. The fact that high LTV lending creates high risks in any given case does not mean that it is imprudent for those whose business it is to make such loans; and it is their interests that are in issue when considering contributory negligence. The courts are not well-suited to assessing whether the business models of entire sectors of the financial services industry are reasonable in the interests of those who undertake them and should in my judgment be slow to hold that entire classes of transaction are imprudent for those who undertake them. I agree with the views of Mr Bloomfield, in the first part of the passage set out in paragraph 78 above, and with the approach of Phillips J in Banque Bruxelles Lambert AS v Eagle Star Insurance Co Ltd [1994] 2 E.G.L.R. 108, where at 137 he declined to apply to the plaintiff the standards appropriate to orthodox property-backed lending, because to do so would be to ignore the particular structure of the transactions in that case and to apply standards that would preclude any such transactions.

However, these considerations lead one back to the second part of Mr Bloomfield’s passage, set out above. If GMAC was going to make an advance with a high LTV, it needed to ensure that it had properly investigated and verified the matters of central importance. In my judgment, it failed to do this in two major respects, which have to be considered together.

On the basis of the evidence before me, I infer that, if GMAC had made proper enquiries as to the Borrower’s financial position, it would have found that he was unable to verify his declared income or to give satisfactory explanation for his inconsistent statements of earnings or his failure to give proper disclosure of his liabilities. The probability is that GMAC would have concluded that the Borrower’s income was of the order of his original statement, namely £85,000, and that it was insufficient to justify the loan that he sought. Further, the reasonable conclusion in the circumstances would have been that the Borrower was dishonest. In those circumstances, GMAC would not have made the advance to the Borrower.

Accordingly, if I had found Countrywide liable, I should have found that GMAC was contributorily negligent. Both Countrywide’s negligence and GMAC’s contributory negligence would have caused the entirety of GMAC’s loss, in the sense that the loss would not have been suffered were it not for the negligence or the contributory negligence as the case may be. Having regard to what I regard as the comparatively egregious nature of GMAC’s lack of care, I should have made a deduction of 60% of the entire loss. If the entire loss were taken as £65,960.76 (see paragraph 57 above), the resulting figure would be £26,384.30. As that figure would be less than the full measure of recoverable damages, judgment would have been in that lower amount.

In the event, however, the claim fails and must be dismissed.