Professionals can’t go on not reporting with suspicious minds

In the aftermath of a shortfall on recovery, lenders often ask themselves with hindsight how far they could have been expected to look behind the information or advice they were given by their professionals.

Whilst this usually arises in relation to claims against solicitors, other professionals can also be expected to provide fuller details, even where this information is not specifically requested by the lender. This is highlighted in Mortgage Express v Countrywide Surveyors Ltd [2016] EWHC 224 (Ch) where a lender was not fully informed about several inflated valuations after the surveyor became aware that there was a problem. The question was how much information should the surveyors have given to the lender about their suspicions and at what point was the lender no longer able to rely on the problem valuations.

The facts are these. Mortgage Express retained Countrywide as a panel surveyor. Between December 2004 and June 2005, one of Countrywide’s employees provided valuations to Mortgage Express for 64 buy-to-let investment properties in a new development.

Suspicions about the accuracy of the valuations were raised internally at Countrywide shortly following the valuer’s retirement. Countrywide concluded from those investigations that the surveyor had probably been fraudulent or at least grossly negligent.

Initially, Countrywide told Mortgage Express that the properties’ rental values might have been overvalued and suggested that the valuations be reviewed – they did not though express their concerns as to possible fraud. Mortgage Express requested a reassessment of the rental value in relation to 21 of the 64 properties valued by the employee. Countrywide’s  revised valuations showed rentals averaging only 50% of the valuations provided by their ex-employee. Countrywide did not refer to any of the other properties valued by the employee nor was information requested from Mortgage Express in relation to those valuations.

The 64 transactions completed at various points both before, during and after the period when Countrywide was informing Mortgage Express of its concerns about the accuracy or otherwise of the original valuations. The question was whether the lender was still entitled to rely on the original valuations, and at what point that was no longer the case.

The Judge decided that simply flagging up that something may have gone wrong was insufficient; the lender was not deemed to be informed of the problem until the new valuations had been provided to them. There must be a sufficiently clear correction or modification of the valuation to prevent reliance or the valuation must be withdrawn in clear terms. So, whilst Mortgage Express’ claim for damages against Countrywide failed in respect of the transactions which completed after the corrective valuations had been provided, claims relating to transactions which completed before or during the intervening period did not.

The Judge confirmed that even where a lender has a suspicion that other valuations may be inaccurate, they are not required to place a stop on future lending until a clear correction or modification of the valuation has been made or the valuation has been withdrawn, in relation to the suspect valuations. This is the case even where continuing to lend amounts to negligence on the part of the lender.

The case highlights some key points for both lenders and surveyors:

• For surveying firms, where fraud is suspected they should treat the client as they would their insurer in a case of negligence – embarrassing though this may be. Whilst surveyors are only required to make a sufficiently clear correction or modification of the valuation when they spot a problem, or withdraw the valuation in clear terms, to prevent it being relied upon, only full disclosure of the potential scale of the loss will protect against a potential claim for breach of contract. If you do not tell the client and they continue to lend based on fraudulent valuations, liability will continue to attach.
• For lenders, it is paramount to have systems in place for an emergency brake on lending where fraud is suspected and clearly communicated to them. Whilst it is to be expected that institutional lenders will have complex lending procedures involving large teams, it will be no excuse that drawdown was permitted against fraudulent valuations simply because the wheels were already in motion.

If you would like to discuss this further, contact Frances Mitchell on 0113 227 0210 or by email at frances.mitchell@gordonsllp.com.