A recent decision by the High Court has provided positive guidance on how Northern Ireland courts will deal with professional negligence claims. The decision should provide further comfort to lenders to pursue valid professional negligence claims in Northern Ireland.
In a preliminary ruling, the High Court followed the established rules in England and Wales in relation to margin of error and valuation methodology. The Court has held that a valuation by Myles Danker Associates (MDA) of a site purchased by Helm Housing Association (Helm) in March 2007 fell outside the acceptable margin of error and the methodology for the original valuation was flawed. As the valuation was outside the acceptable margin of error, there was in all likelihood a claim against the valuer.
It is a well established principle that the valuation of land and property is not an exact science and there is a permissible margin of error within which a valuation may fall without it being negligent. An error on the part of the valuer does not necessarily amount to negligence. However, if he produces a valuation which is outside the marg in of error, he is likely to face an uphill battle to avoid a finding of negligence.
In October 2006, Lacuna Developments Ltd (Lacuna) agreed to purchase the site for £6,525,000. Notably, the site, which had no planning permission, had been fully exposed to the open market and was the subject of frenetic bidding by a number of developers and speculators. It was therefore an open market sale, a crucial factor for the Judge.
In February 2007 Lacuna agreed to sell the land direct to Helm. Helm asked MDA to value the site "as if it were put on the market today given that no approvals exist". MDA proceeded to produce a valuation report figure of £10,000,000. Helm relied on this valuation and bought the site for £9,750,000.
Following the collapse of the Northern Ireland property market in 2007, the value of the site plummeted to around £1,000,000.
Helm subsequently commenced a claim to recover the damages it had suffered as a result of the negligent MDA valuation.
To deal with the matter in a proportionate manner and to save expense, it was agreed between the parties that the court should make a preliminary determination as to whether the valuation fell within the margins of errors proposed by the parties.
The question for the court was simple: did the valuation carried out by MDA for £10,000,000 fall within a tolerance of 10% on either side (as contended by Helm) or 15% (as contended by MDA)? If the court decided that the valuation fell within accepted tolerances, it indicated that, in keeping with the weight of authorities in England and Wales, there would be no requirement to hear any evidence about whether MDA had carried out the valuation negligently.
The Court concluded that the valuation was outside the permissible margin of error, which it considered to be + or – 10%. It further determined it to be outside that suggested on behalf of MDA, namely + or – 15%.
Mr Justice Horner found that MDA made a number of errors – the most striking being that the original valuer’s methodology was flawed as it relied solely on the residual method in its assessment. The conclusions should have been sense checked with comparable evidence – the most obvious being the open market sale of the actual site a few months previously.
Helm had also expressly asked for the property to be valued as if it were put on the market that day, given that no statutory approvals existed, in essence planning permission for redevelopment. Instead, MDA valued the site as though it was for a specific scheme of 200 authorised units. In particular, MDA took no account of the planning lead in time, which the expert valuers agreed should have been at least 24 months. This created an inflated valuation figure, which could not be supported by the market.
At this stage, the court has only heard from the two expert valuers and Mr Justice Horner stressed that he has not formed definite opinions on the matter. The comments made by the Judge in the ruling however do suggest that MDA will find it difficult to convince the court that it did not act negligently. If the court determines that it did, damages are likely to be awarded to Helm.
This ruling provides some welcome guidance on how the courts in Northern Ireland can be expected to deal with negligence actions against valuer professionals, including margin of error and valuation methodology.
The ruling also drew heavily on the judgment of Weatherup J in Bank of Ireland v Patterson Miller ( NIQB 140) which also found that the valuer had erred in methodology adopted (the use of comparables only with no residual cross-check) and the reported value was outside the permissible margin of error.
Although the claimant in this case is not a lender, it is important to note that many of the principles and authorities developed in England and Wales were applied by the court when reaching its decision and appear to be good law in Northern Ireland.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions.