Property Valuations for Banks not to be Relied on by Guarantors

Gordons LLP represented Santander UK plc (“the Bank”) in a successful summary judgment application, regarding a claim by two guarantors seeking to escape liability under a personal guarantee and indemnity.

The decision, handed down on 12 April 2018, emphasises some important points about the extent of duties owed by banks and valuers to third parties.

Background

The claim ((1) Atique Rehman (2) Nosheen Rehman v (1) Santander UK plc  and (2) BNP Paribas Real Estate Advisory and Property Management UK Limited [2018] EWHC 748 (QB)),    arose out of the provision of a £2m loan by the Bank to a company, secured on two nursing homes which it owned and operated. The Bank instructed BNP to value the nursing homes on its behalf. The Claimants (and another) provided a personal guarantee and indemnity to the Bank in respect of the company’s liabilities. The company defaulted and, following service of a winding up petition by a third party creditor, administrators were appointed by the Bank.

The Claimants sought a declaration that the guarantee was discharged and damages (representing the full extent of any liability under the guarantee).

Blacks Solicitors LLP represented the Claimants, we represented the Bank, and Mayer Brown International LLP represented BNP.

Timeline

The chronology is complicated, but relevant:

• On or around 14 February 2011, the Bank issued Heads of Terms to the Company, which contained conditions precedent, including that suitable interest rate hedging facilities of £2m would be in place for a minimum of 5 years.

• The Bank instructed BNP to prepare valuation reports on its behalf. Those reports were provided in April 2011, and gave a combined market value for the nursing homes of £3.65m (“the Valuation Reports”). The Valuation Reports contained express disclaimers, which excluded liability to third parties.

• On 13 May 2011, an email was sent by the Bank to one of the guarantors (but not either of the Claimant guarantors) saying: “Have got the “final” valuations from Mark Tyler for Polefield & Brooklands…The values are…£3.650m. Above the £3.350m required by the Credit Sanction so that’s a tick in that box”.

• The Bank issued an offer of loan facility to the Company, together with a fixed rate letter, which offered the Company the possibility of fixing the rate of interest payable for its facilities. The Company’s board minutes dated 1 June 2011 recorded that these were approved.

• The Claimants (and the other guarantor) executed a personal guarantee in favour of the Bank in respect of the Company’s liabilities. The loan transaction, and the guarantees, completed on 31 August 2011.

• The Company fell into default in or around 2013 and was put into administration on 19 June 2014. The Properties were subsequently sold, leaving a significant balance outstanding to the Bank.

Claims against the Bank

As against the Bank, the guarantors claimed that:

1. The Bank owed them a duty of care to ensure that the Valuation Reports were undertaken by a competent valuer with expertise in the healthcare sector. The Bank breached that duty by instructing BNP (“the Negligence Claim”).

2. The Bank misrepresented or misstated that: a) the valuations were a true and fair estimate of the market value of the nursing homes and that the nursing homes provided adequate security for the Company’s liabilities to the Bank; and b) the guarantors could rely on the valuations without obtaining their own (“the Misrepresentation Claim”).

3. The Bank was in breach of its fiduciary duty by failing to advise the guarantors to obtain their own independent valuations (“the Fiduciary Duty Claim”).

4. The effect of the fixed rate letter, and the Company’s acceptance of the fixed rate offer, was to discharge the guarantee (relying on the rule in Holme v Brunskill that a material variation to the terms of a principal contract will discharge the surety) (“the Guarantee Claim”).

The Bank brought a counterclaim against the Claimants, in respect of the outstanding sums due under the guarantee, plus interest.

Claims against BNP

As against BNP, the guarantors claimed that it breached the duty of care owed to them in respect of the Valuation Reports because:

1. BNP knew that the Bank sought the valuations to consider whether to grant the proposed facilities to the Company;
2. The guarantors were likely to rely on the final Valuation Reports;
3. BNP consented to the giving of the final Valuation Reports to the guarantors or knew that the Bank was likely to disclose them to the guarantors.

Summary Judgment Success

The Bank and BNP both applied for summary judgment and succeeded.

After an initial hearing in Leeds on 21 February 2018, which was part heard and continued in Newcastle on 23 March 2018, the Judge concluded that the Claimants had no real prospect of succeeding on their claims against the Bank or BNP, or of defending the Bank’s counterclaim, and that there was no other compelling reason why the case should be disposed of at a trial.

Decision

As to the Claimants’ various claims, it was held as follows:

1. The Negligence Claim
   No duty arose in respect of the selection of the valuer. Further, the mere provision of the valuation figures or the Valuation Reports to the Claimants did not give rise to a duty of care when one did not otherwise exist.

2. The Misrepresentation Claim
   There was nothing to suggest that the statements in the May email were wrong. In any event, generally, no representation arises simply by the Bank providing the valuation or valuation reports to the customer. There was no other evidence which made this case an exception.

3. The Fiduciary Duty Claim
   The fact that a customer or guarantor trusts a banker does not give rise to a fiduciary relationship. Such a relationship can only arise if it is reasonable to expect the banker to subordinate its interests to those of the customer or prospective guarantor, and there was no evidence of this.

4. The Guarantee Claim
   There was nothing to suggest that the guarantee was not an all monies guarantee. So, the Claimants had no real prospect of establishing that the rule in Holme v Brunskill applied. Further, there was no evidence that the Claimants did not consent to the alteration of the facilities by the terms of the fixed rate letter. It was not enough for the Claimants to say that there may be evidence at trial which may assist them.

5. The Claims against BNP
   The Claimants did not have a real prospect of establishing that BNP did consent to the giving of the valuation reports to them, or alternatively that BNP knew that the Bank was likely to disclose the reports to them. So, there was no real prospect of establishing that BNP owed them a duty of care.

The Judge was satisfied that the Valuation Reports: a) were private and confidential to the Bank; b) could not be disclosed to the Claimants without BNP’s written consent; and c) could not be relied on by the Claimants without BNP’s written consent. If the Valuation Reports were relied on by the Claimants without any written consent from BNP, BNP accepted no responsibility to them. It was unreal to suppose that the disclaimers might not satisfy the test of reasonableness.

Conclusion

The decision is helpful to banks faced with claims by customers or guarantors seeking to escape their responsibilities when things don’t go their way. It is welcome news for valuers too, and underlines the importance of having appropriate disclaimers in valuation reports.

If you would like to discuss the implications of this case, please contact Frances Mitchell at frances.mitchell@gordonsllp.com or on 0113 227 0210.