Introduction

The decision of HHJ Cawson KC in Rowland Philip Bratt v Nigel Lawson Jones provides useful guidance on the extent to which valuers can be found liable in professional negligence for inaccurate valuations of property.

Executive Summary

• The Court will form a view based on an evaluation of the evidence before it of the most likely value as at the valuation date applying professional standards which applied at that date.
• The Court then has to consider an appropriate margin for error applicable to the valuation judgment, in order to determine the range within which a non-negligent valuation would fall.
• If the valuation is within the range, negligence would not be established and there is no need to analyse the method of the valuer. 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.
• If the valuation is outside the margin of error, then the valuer’s competence and the care used in their valuation is called into question. The Court will examine at that stage the question of whether in reaching a valuation outside the range the valuer has acted “in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession”.
• The Court can either consider the result first and then the method or it can consider both issues in parallel, depending on the specific facts of the case.
• The starting point for a valuation calculation is a residual calculation and then a valuation by comparables on a £ per sq m or £ per plot basis.
• A value based on a single comparable could be acceptable.
• An acceptable range for a valuation is generally 10-15% of the true valuation, but in some circumstances, the range may be greater than 15% depending on the nature of the property.

The Facts

Mr Bratt and Banner Homes Ltd (“Banner”) entered into an option agreement under which Banner were entitled to exercise an option (“the Option”) to acquire a development site forming part of Cotefield Farm Bodicote in Oxfordshire (“the Site”) at a price representing 90% of “market value”, to be determined, if not agreed, by a third party valuer.  The Option was exercisable following the granting of planning permission for 82 dwellings, which was granted on appeal on 26 March 2012.  Mr Bratt served a “Valuation Notice” on Banner on 14 June 2013.  As the parties could not agree a valuation of the Site, they agreed to the appointment of Mr Jones as expert valuer under the option agreement.

Mr Jones was appointed pursuant to that agreement as the third party valuer.  He valued the Site at £4,075,000.  Having received submissions from Andrew Fairburn FRICS on behalf of Mr Bratt and John Turner MRICS on behalf of Banner, Mr Jones completed his valuation on 20 April 2016, being an amount of £4,075,000.  Banner subsequently acquired the Site 90% of the “market value” arrived at by Mr Jones.  The site was subsequently developed with the construction of 86, rather than 82, dwellings.

Mr Bratt claimed that the true value of the Site was somewhere between £7,000,000 and £8,600.000 (being 10% either way of £7,800,000).  Mr Bratt sued Mr Jones for breach of contractual obligations and a tortious duty of care, seeking the difference between 90% of the true value of the site and 90% of Jones’ valuation of £4,075,000.

The case raised interesting questions of liability and quantum, in particular, as to whether the focus ought to be on the result of the disputed valuation rather than the process by which the value was arrived at, and the extent to which the valuer’s actions fell below the standard of a care required by the test in Bolam v Friern Hospital Management Committee [1957] 1 WLR 582.  That test being whether or not the valuer, conforming to a practice accepted as proper by a respectable body of professional opinion, should not ordinarily be liable merely because others disagree.

Valuation by Comparables

Mr Bratt’s expert evidence, provided by Mr Fairburn, focused on evidence of comparable transactions of sites marketed for development and also a residual valuation of the Site.  First, Mr Fairburn considered that the seven comparables he had identified demonstrated a value of £7,649,541.  With an upwards adjustment for “improved market conditions” that amounted to the sum of £8,000,000, nearly double the valuation of Mr Jones.  He then undertook a residual valuation, himself cautioning against its reliability, separating his calculations between the 32 affordable housing units (£3,150,000) and the 50 open marketing housing (£21,422,520), arriving at a total GDV of £24,572,520.  This was on the basis of a value of £315 per square foot, more on this later, as it is argued by those representing Mr Jones that, properly analysed, it only supported a figure of £265 per square foot.

Mr Turner, the expert for Mr Jones, adopted a residual appraisal as his primary means of valuation and, working on the basis of £248.03 per square foot per market unit, arrived at a “market value” for the Site of £1,766,000.

Mr Jones had originally considered all but a few of the comparables put forward by Mr Fairburn, but on reaching his determination, relied on the sale of a site at Bloxham Road Banbury in 2014, as it was so similar to the Site that it ought to be given the greatest weight, given they were both greenfield sites on arterial roads to the south of Banbury, adjacent to existing housing. 

In arriving at his valuation, Mr Jones did not refer to a “per square metre” valuation but a valuation per plot for the market value housing. 

The price paid by Morris Homes for the Bloxham Road site was £13,000,000.  Mr Jones then adjusted the prices to take into consideration several issues, such as s106 costs of Bloxham Road and known abnormal site costs for Bloxham Road, to arrive at a headline figure of £14,865,396.96.  This figure was then converted into a figure per unit, so that it could be applied to the Site, applying a rate of £20,000 per affordable unit (of which there were 44), £888,000 was deducted from the headline figure.  The resulting sum was then divided by the number of units at Bloxham Road, arriving at a per market unit of £138,469.  That figure was adjusted by a deduction of 9% for inflation, as the units at Bloxham Road were sold after the Valuation Date.  The adjusted per market unit of £125,250 was multiplied by the number of market units at the Site (50), arriving at a figure of £6,262,500.  Then the number of affordable housing (32) was multiplied by £20,000, giving a figure of £640,000.  After the deduction of £964,440 in section 106 costs and the abnormal costs of the Site, the final figure was rounded up to £4,075,000.

Residual Valuation Calculation

Mr Jones also undertook a residual calculation of the value of the Site, which came out as £3,634,219.   Mr Jones had actually made an error in respect of dealing with enhancements and it was accepted by Mr Jones that the true residual valuation would be between £4,560,000 and £4,646,000.

That valuation was arrived at by first calculating the GDV of the development, by identifying local comparables and noting sale prices achieved.  This resulted in a sale price of £263.57 per square foot for marketing housing.  He then took the highest market offer for the affordable housing, being £3,150,000, and adjusted the figure to reflect his own view of the marketing housing rate, arriving at £3,540,000.  Mr Jones then calculated the cost of construction, instructing a QS, John Pillinger, to advise.  Based on that advice, Mr Jones arrived at a construction cost of £12,096,920.  Mr Jones’ residual valuation came out at £3,634,219, but it was recognised by Mr Jones at Court that had errors in relation to enhancements have been identified, it would mean that the residual value calculation would be between £4,560,000 and £4,646,000.  Albeit that Mr Jones insisted that in any event he would have stuck with his valuation of £4,075,000 from the comparables calculation.

The Decision

HHJ Cawson KC summarised the approach taken in Dove J in Barclays Bank Plc v TBS & V Ltd [2016]  EWHC 2948 (QB) at 64:

1. The Court must form a view based on an evaluation of the evidence before it of the correct value as at the valuation date applying professional standards which applied at that date.
2. The Court then has to consider an appropriate margin for error applicable to the valuation judgment, in order to determine the range within which a non-negligent valuation would fall.
3. If the valuation is within the range, negligence would not be 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.
4. If the valuation is outside the margin of error, then the valuer’s competence and the care used in their valuation is called into question. The Court will examine at that stage the question of whether in reaching a valuation outside the range the valuer has acted “in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession”.

The general process to be adopted by the Court can either be:

1. Linear, i.e. evaluate the evidence as to value at the valuation date and apply a margin of error. If the valuation falls within the bracket, the claim fails.  If it is outside the bracket then the Court must consider if the valuer acted “in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession”, or
2. Parallel, i.e. the Court will carry out the valuation exercise but will adopt a more analytical approach to the determination of the margin of error by reference to the various steps in the valuer’s valuation process and by reference to the scope of reasonable professional opinion as applied to each of those steps.

HHJ Cawson KC turned to the matter of valuing the Site and acknowledged that this must be done on the evidence before the Court and the Court’s own assessment of the correct value.  He noted that the process was not about the Court “reaching an immaculate or absolute value, but about reaching the most likely figure on the basis of the evidence, …evidence which is unlikely ever to be perfect”.

The Court first considered valuation through the residual valuation approach.  “It is, of course, a fundamental principle of any open market valuation that it is concerned with what a purchaser would be likely to pay for the relevant asset on the open market at the relevant time…it is not a purely theoretical exercise”.  A Developer will have undertaken a residual valuation and therefore, even if the primary valuation is by way of comparables, a residual valuation ought to be considered and factored into the Court’s valuation.

The Judge considered the most appropriate starting point was to consider Mr Bratt’s residual valuation of £8,204,095 and then to consider the points made on behalf of Mr Jones and arrive at what the Court considers to be the most appropriate residual valuation.

Mr Bratt’s experts considered that the valuation ought to have taken into consideration the fact that this was a low density development and that a Developer would have gone back in for better planning permission.  Indeed, the final planning permission, on appeal, was for 86 rather than 82 units.  HHJ Cawson KC considered the fact that the increased units were only allowed on appeal meant that a purchaser looking at the site in June 2013 would have been more likely to take a cautious approach and not take the risk that a more beneficial planning permission could be obtained.  Thus, this reduced Mr Bratt’s valuation from £8,204,095 by around £1,000,000 to take into account the reduction in units and around £300,000 to factor in the reduced cost of construction.

On the affordable housing, Mr Bratt’s expert had conceded in cross examination that Mr Jones’ expert’s valuation at £3,540,000 was a “reasonable one”, given that their own valuation was between £3,658,415 and £4,583,014.  Mr Jones’ figure was based on an actual offer from a housing association and the Court rejected, as excessive, Mr Bratt’s expert’s assertion that the GDV would be £280 per sq ft.  The Judge therefore reduced Mr Bratt’s affordable housing valuation by £1,225,000.

Turning to the market valuation, the issue between the parties was that Mr Bratt’s expert asserted a value of £285 per sq ft and Mr Jones’ expert considered £265 per sq ft was appropriate.  Dismissing a comparison to a gated community suggested by Mr Bratt’s expert, the Judge found that the evidence supported a valuation of £265 per sq ft.  Recalculating Mr Bratt’s expert’s market unit valuation GDV using £263.57 per sq ft instead of £285 per sq ft, reduces GDV by £2,965,808 for an 86 unit scheme or £2,824,372 for an 82 unit scheme.  The Judge acknowledged that this would also have an impact of around £1,360,160 on the residual calculation.

The Court was on the side of Mr Jones in respect of the cost of construction, on the basis that rates would likely exceed the BCIS rates due to technical reasons, the residual valuation would therefore fall by £729,000 as a result.

On the subject of Developer’s profit, both sides were broadly at the same figure of circa £3,400,000 and this was not adjusted.

Reducing Mr Bratt’s residual valuation by the amounts set out above, meant that it came down to £4,379,935 which was close to the range suggested by Mr Jones of £4,686,249 and £4,774,812.

The Court then turned to valuation by comparables and the question as to whether this should be done on a £ per GDA or £ per plot basis.  The Judge found that on the facts there was a relatively strong case for carrying out a comparables exercise on a £ per unit basis as:

1. The Site was recognized as being a “low density site”. Valuation on the basis of £ per GDA would risk overvaluing the Site.
2. A potential Developer’s primary concern would have been how much to pay in order to make a reasonable profit and as such, they would use a residual valuation by arriving at a GDV based on the number of units on the Site.

The Judge preferred Mr Jones’ evidence as to the location of the Site.  Mr Jones considered that the site as analogous to Bloxham Road rather than a village location.  The Judge was concerned that Mr Blatt’s experts had failed to sufficiently recognize the differences between the different sites, and, in particular, that the Site was not in a village location and had a specific development potential by reference to a planning permission and the cost of development in respect of the Site.

Interestingly, the Judge commented that unless a certain comparable could be considered an “outlier”, there was no reason in principle why a Court could not make reference to one specific comparable in preference to all other comparables put forward.

Having regard to Site specific issues that arose in respect of a comparables valuation, which we will not go into here, the Court concluded that the best evidence as to the value of the Site was Mr Jones’ valuation carried out by reference to the Bloxham Road comparable on a £ per plot basis, distinguishing between marketing housing units and affordable housing units and that the most appropriate valuation in the circumstances was £4,746,860 “or thereabouts”.  Interestingly, the Judge commented that this was very similar to the residual valuation that he had arrived at, being £4,550,000.

The Judge then considered the application of the “range”, having arrived at his valuation of £4,746,860.

First, the Judge considered whether Mr Jones’ valuation of £4,075,000 falls within a bracket of the kind identified by Coulson J in K/S Lincoln v CB Richard Ellis (supra) at [183], without, at this point, considering if Mr Jones had acted “in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession”.  Coulson J had suggested that that the range would usually be plus or minus 10%, but, if there are exceptional features of the property, the margin of error could be plus or minus 15%, or even higher in an appropriate case.  HHJ Cawson KC considered, in this case, that a range of 10-15% was “entirely appropriate” bearing in mind the wide opinions express as to valuation in the case and the variety of issues that arose concerning a “correct approach” and a number of questions of judgement.  The fact that there is scope for a margin of appreciation as to how to deal with “abnormals”.  The experts had agreed on a margin of error of +/- 15% for the Site.  Finally, a comparison with the residual valuation suggested that a valuation of £4,746,860 is more likely to be too high, than too low.

Mr Jones’ valuation was within 14.15% of the Court’s valuation and therefore within the appropriate margin of error.  As such, and solely having regard to the “result”, the Judge considered that Mr Bratt had failed to establish his claim in negligence against Mr Jones.  Therefore, it was not necessary to move on to consider if Mr Jones had acted in any way not “in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession”.

Obiter

The Judge then concluded his judgment, in obiter, by considering what the Court would have done if Mr Jones’ valuation had been outside of the acceptable range.  It would then be necessary to consider whether Mr Jones’ actions were, in any material respect, negligent, being otherwise than in accordance with practices regarded as acceptable by a respectable bod of opinion within the profession.

Interestingly, the Judge indicated that he would have been inclined to have found that Mr Jones had failed to act in accordance with the expected practices in failing to make reasonable provision for the cost of enhancements being recovered through sales or for there having been some enhancements factored into the Bloxham Road figures.  The Judge saw such mistakes as consistent with Mr Jones’ double counting of enhancements in his residual valuation, indicating that he failed to “get to grips” with the question of enhancements and apply a consistent approach.

Mr Jones sought to rely on an admission by Mr Bratt’s expert that this was the sort of mistake that any valuer might have made.  The Judge considered that the expert’s remarks were limited to the double counting of enhancements rather than the failure to make provision for the recovery of enhancement costs through the purchase price.  In any event, the Judge was of the view that “merely suggesting that a mistake is a sort of mistake that any valuer might have made is not… a recognition of the fact that Mr Jones’s actions were not negligent”.

If you have an issue on this subject then contact John Wallace on johnwallace@ridgemont.co or 0203 909 9593