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	England and Wales High Court (Technology and Construction Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> PLT Ltd v. Smith Melzack (a firm) [1999] EWHC Technology 239 (29th April, 1999) URL: http://www.bailii.org/ew/cases/EWHC/TCC/1999/239.html Cite as: [1999] EWHC Technology 239

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PLT Ltd v. Smith Melzack (a firm) [1999] EWHC Technology 239 (29th April, 1999)

IN THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION

TECHNOLOGY AND CONSTRUCTION COURT

BEFORE HIS HONOUR JUDGE RICHARD HAVERY Q.C.

BETWEEN

PLT LIMITED

Plaintiff

and

SMITH MELZACK ( A FIRM )

Defendant

Case number 1996 ORB 1432

Dates of Trial: 26th/27th/28th/ January 1999 1st/2nd/3rd/4th/8th/9th/10th/11th/16th/17th

February 1999

Date of Judgment: 29th April 1999

William Crowther Q.C. and Andrew Spink for the Plaintiff ( Solicitors: Edge & Ellison )

David Blunt Q.C. and Nigel Tozzi for the Defendant ( Cameron McKenna )

JUDGMENT

1. In this action, the Plaintiff, which I shall call PLT, carries on business as a lending institution, in particular the business of lending, secured by mortgages, for the development of commercial property. The Defendant firm, Smith Melzack, is a firm of property consultants and valuation and rating surveyors. It carries out, among other things, valuations of commercial property developments and marketing for sales and lettings. PLT claims against Smith Melzack damages for professional negligence arising out of valuations of a commercial property development in Ashford, Kent, prepared by Smith Melzack in June and November l990 and associated advice provided by Smith Melzack between June and November l990.

2. The development was on a site of 1.89 acres known as Montpelier Park (which I shall call "the property"), forming part, namely phase III, of a larger development, Fairwood Business Park, Dencora Way, Ashford, Kent. The freehold interest in the property was to be the main security for a loan to a company, London & Commercial Properties Ltd., ("L & C"). L & C was the developer of Montpelier Park and required the loan (a) to enable it to repay to Midland Bank sums advanced to enable it to purchase and begin the development, and (b) to complete the development, of the property. Another bank, Chancery Plc ("Chancery") was also to advance money to L & C at the same time as PLT, in part to enable L & C to service, for a 15 month period, interest due on the loan from PLT. Chancery’s security was also to be charged over the property, ranking behind PLT’s charge.

3. PLT claims that as a result of Smith Melzack’s negligent over-valuation of the freehold interest in the property and other related negligent advice given by Smith Melzack, PLT made the loan to L & C when otherwise it would not have done so. When L & C subsequently defaulted on the loan, PLT suffered substantial losses.

4. Smith Melzack deny negligence and further or alternatively allege that PLT was itself negligent in entering into the loan which, Smith Melzack say, was not a loan into which a reasonably prudent bank should have entered at the material time. There is also an allegation that PLT failed properly to mitigate its loss.

5. In June l989, Smith Melzack were appointed by L & C as one of two joint marketing agents in connection with the proposed purchase, development and sale of the property by L & C. In December l989, L & C bought the freehold interest in the property from Dencora Plc for £760,000 with the assistance of a loan of £504,000 from Midland Bank. Outline planning permission for the development of the property permitting the construction of ten single storey industrial units with mezzanine office space had been obtained in September l989. The units were to be constructed with steel portal frames with 39ft spans, clad with insulated steel sheeting above 7ft high brick walling. The front elevation was to be glazed. The roofs were to be steel sheeted and to contain roof lights.

6. By February or March l990, L & C was seeking a loan to repay the sums outstanding to Midland Bank and to enable it to undertake the proposed development. It approached a bank, Guinness Mahon and Co. Ltd. ("Guinness Mahon") which, in turn, instructed Mr Michael Taylor FRICS of Taylor Riley, a local firm of valuers, surveyors and estate agents, to carry out a valuation of the property both in its existing state with the benefit of the outline planning permission and upon completion of the proposed development. Mr Taylor was called by the Plaintiffs to give evidence before me as an expert valuer.

7. Mr Taylor gave an informal valuation to Guinness Mahon of the property upon completion of the proposed development in the sum of £2,834,000. That was insufficient to enable Guinness Mahon to make the loan.

8. Construction work at the property started in March l990. The contractors were Tarmac Construction Ltd. ("Tarmac"). The contract price was £1,324,350. Detailed planning permission for the development was obtained on 18th April l990.

9. In May l990, L & C was still seeking finance to enable it to repay the sums outstanding to Midland Bank and to enable it to complete the proposed development. It instructed a finance broker, a company carrying on business under the name Chancery Property Finance. I understand the name of the company to be Chancery Financial Services Ltd, though the name Chancery Securities Financial Services Ltd. also appears in the documents before me, as does the trading name "Chancery". The distinction between these various entities is of no significance for present purposes and I shall adopt the initials CPF to refer to it or them.

10. On 31st May l990 L & C, by one of its ectors, Mr Eugene Leibu, sent to Mr Stuart Sandler, a partner in Smith Melzack, a number of documents including a financial appraisal of the development showing a realisation at £95 per square foot of £3,420,000. An accompanying note said that Mr Leibu understood that Mr Sandler had been instructed by Chancery to value the property. Chancery appears to have carried on business under the name Chancery Bank. On 1st June l990 CPF instructed Smith Melzack, for the attention of Mr Sandler, to prepare a valuation of the property. The valuations and advice of which the Plaintiffs complain were prepared by Mr Sandler.

11. Mr Sandler’s first valuation was dated 12th June l990. It gave a value of £720,000 for the open market value of the site and a value of £3,400,000 for the open market value of the completed development. It did not answer all the questions contained in the instructions. On 13th June a telephone conversation took place between Michelle Skinner, the Property Finance Executive of CPF, and Mr Sandler, in consequence of which Mr Sandler sent a further valuation, dated 14th June l990. That gave a sale price of the units of £95 per square foot, advised that the development should be viable and that there was a reasonable level of demand for property of the relevant type.

12. Thereafter, the Plaintiffs were approached by CPF with a proposal for the Plaintiffs and Chancery jointly to finance the development of the property. In the event, the arrangement mentioned above was made.

13. On 18th July l990, CPF sent to the Plaintiffs a presentation which included copies of Smith Melzack’s two valuation reports, of 12th and 14th June. On 26th July Ms Skinner of CPF, by telephone, asked Mr Sandler for information regarding building costs, likely letting rentals and the anticipated demand for units on the completed development. On 27th July Mr Sandler, on behalf of Smith Melzack, replied by letter stating that annual rental levels would be in the region of £7.00 to £7.50 per square foot. He pointed out that that rental level did not truly reflect his opinion of the freehold prices achievable in the region of £95 per square foot. He repeated that there was a reasonable level of demand. The letter of 27th July l990 was never sent to PLT, who were unaware of its contents.

14. On or about 17th August l990, CPF obtained the written consent of the Defendants to the use by Chancery and by the Plaintiffs of the Defendant’s report and valuation dated 12th June l990 and subsequent addenda dated 14th June l990 and 27th July l990 in relation to the property, and to treatment by Chancery and the Plaintiffs of the report and valuation and any other advice given by the Defendants as if it were addressed to Chancery and the Plaintiffs. I am satisfied on the evidence that PLT obtained that letter of consent and did so to overcome the problem that would otherwise have been created by the Defendant’s standard terms of engagement which disclaimed responsibility to third parties, and by a similar clause in the report of 12th June.

15. On 22nd August l990, PLT sent to L & C an offer letter. It offered a total facility of £1,681,000 of which £504,000 would be made available initially. The balance of £1,177,000 was to be made available to cover 81.5 per cent. of the building costs and 100 per cent of the professional fees against architect’s certificates. The principal security was a first legal charge over the property. Mr Eugene Leibu was to be a surety in the sum of £150,000. The period of the loan was to be fifteen months from initial draw-down. Interest was provided for. Capital repayment was to be made on sale of the completed units but in any event at the end of the fifteen month loan period. The sum of £250,000 as security for the payment of interest was to be placed on a blocked deposit account with PLT, interest on the balance in that account being allowed at 2 per cent below the rate charged on the loan account. PLT would consent to a second mortgage to Chancery and a third mortgage to Tarmac.

16. On 12th October 1990 PLT’s solicitors, MacFarlanes, sent their report on title in respect of the property to PLT, who forwarded a copy to Smith Melzack on 16th October, with a request for Smith Melzack’s comments on it and in particular for confirmation whether or not any of the points raised by the solicitors had a detrimental effect on Smith Melzack’s valuation.

17. On 23rd October 1990 Smith Melzack replied to PLT that they did not consider that any of the points raised by the solicitors had a detrimental effect upon their valuation dated 12th June 1990. On the 5th November 1990 Smith Melzack wrote to CPF expressing their opinion that there had been no changes in the valuation of the property. Chancery sent a copy of that letter to PLT on 8th November. The first draw-down took place on 9th November 1990.

18. In circumstances to which I shall return, PLT lent an additional sum of £45,000 to L & C under the mortgage in January 1991. Practical completion of the development took place in that month. The last payment under the loan was advanced by PLT on 23rd April 1991, at which time marketing of the units in the completed development was continuing.

19. As at August 1991, no units had been sold or let. Smith Melzack had been instructed by PLT to provide an up to date valuation of the property, but declined to do so, stating that "... there is hardly any market at all at the present time for industrial buildings, including this development and therefore we are unable at this moment in time to give an accurate valuation ...". When pressed by PLT to provide the required valuation, Smith Melzack advised that, on an assumed rental of £5.50 per square foot per annum, the open market value of the property on an investment basis was £1.75 to £2 million, which was also their opinion of the sale price which would be likely to be obtained if a sale of the property could be achieved.

20. L & C met the interest payments due under the loan via the sum held on blocked deposit until November 1991. Part of the interest due in December 1991 was also met. Thereafter no repayments of interest were made.

21. The loan was not repaid by L & C at the end of the fifteen month term in February 1992. Formal demand for repayment was made on 19th May 1992. The demand was not met and PLT took possession of the property on 22nd May 1992. PLT thereafter appointed agents to let the property.

22. On 5th August 1994, PLT appointed Law of Property Act Receivers in respect of the property.

23. On 23rd March 1998, the property was sold by PLT for £750,000, the purchaser’s offer having been made in November 1997.

24. The letter of instruction required the open market valuation of the property for mortgage purposes of:

(a) The property as a levelled site with the benefit of existing planning permission and vacant possession.

(b) The completed development:

(i) With vacant possession.
(ii) Upon completion of the letting(s) at current rental levels.

25. The letter of instruction, so far as is material, was in the following terms:

"We are pleased to confirm instructions for you to prepare an open market valuation of the above property for mortgage purposes. It will be used in connection with a building finance facility to be extended to the proposed borrowers. ...

We look forward to receiving your report which must clearly state it may be relied upon for mortgage purposes. The report should indicate that it is addressed to such Lender as we may notify to you in writing as having agreed to lend on the basis of your report, in which event we shall require a letter from you in the form of the draft annexed. ...

Please indicate in your report if the valuer or your firm have had any previous involvement with the property forming the subject of the valuation. If so, please indicate the nature and extent of that involvement and confirm specifically that you consider there is no conflict of interest on the part of the valuer or your firm.

The report must be signed by a partner of the firm who is a member of the Royal Institution of Chartered Surveyors. The valuations referred to below should be based on current values and should reflect market conditions prevailing at the date of the report, and changes in market conditions that you are able to predict, and should include:

(1) The open market valuation for mortgage purposes of:

(a) The property as a levelled site with the benefit of existing planning permission and vacant possession.

(b) The completed development:

(i) With vacant possession.

(ii) Upon completion of the letting(s) at current rental levels.

(2) Your opinion of the selling prices likely to be realised for the completed units.

....

(4) Your advice on:

(a) The demand for the type of development site.

(b) The demand and rental value for the type of accommodation to be provided, in the completed development. ...

(5) Do you consider the development appropriate and suitable for the site and your comments upon:

(a) The viability of the proposed scheme with particular reference to building costs and the anticipated timescale. If appropriate, please prepare and incorporate within your report your own appraisal and viability study."

26. Valuation of the completed development with vacant possession (paragraph (1)(b)(i) of the letter of instruction) has been called valuation on a resale basis; valuation of the completed development upon the completion of the lettings at current rental levels (paragraph (1)(b)(ii) of the letter of instruction) has been called valuation on a resale basis. I shall adopt that terminology.

27. The first report, dated 12th June 1990, was eight pages long. It gave the gross internal area of the property as approximately 36,919 square feet. It gave the following valuation:

"We are of the opinion that the open market value of the freehold interest for mortgage purposes in this development site, assuming the current planning consent, and bearing in mind current market conditions and trends and our various comments contained in this report, is in the close region of £720,000 (seven hundred and twenty thousand pounds).

We also consider the total open market value of the completed development, bearing in mind current market conditions and trends and our various comments contained in this report, to be in the close region of £3,400,000 (three million, four hundred thousand pounds)."

The report did not state whether the valuation of the completed development was on a resale basis or on an investment basis. It made no mention of Smith Melzack’s previous involvement with the property. The area of 36,919 square feet is, by common consent, incorrect.

28. Mr Sandler gave evidence before me. He explained in his first witness statement, which he signed on 8th May 1998, and to which he deposed, that the instructions to value the completed development were ambiguous as it would not be possible to value the development with vacant possession and on completion of the lettings at the same time. I reject that explanation, since it is obvious that valuations (1)(b)(i) and (1)(b)(ii) asked for in the letter of instruction were alternative valuations. Mr Sandler went on:

"I have a recollection (although there is no note on file) that I pointed out the ambiguity in a telephone conversation with Michelle Skinner of Chancery and Chancery agreed that the completed development should be valued on the basis of completed sales. Certainly, on receipt of the valuation, neither Chancery nor PLT stated that I had not complied with my instructions. My understanding was that the development was conceived to attract owner occupiers rather than for letting as an investment and that a valuation of the development on the basis of completed sales was appropriate. I would have explained this conception to Chancery."

Mr Sandler’s understanding that the development was conceived to attract owner occupiers rather than for letting as an investment sits uneasily with a statement in his report that "the scheme will cater for purchasers as well as lessees". Mr Sandler explained in evidence that at the relevant time he felt that the market was interested in purchasing rather than renting.

29. The question whether Michelle Skinner varied the instructions by agreeing that the completed development should be valued only on a resale basis is in issue. I shall return to that issue.

30. The second report, dated 14th June 1990, followed after a telephone call. That report consisted of a two-page letter, which included the following:

"You have asked us to comment as to our opinion of the likely selling prices for the completed units. Based on comparable evidence that we have been able to obtain and bearing in mind current market conditions and trends, we feel that these units should realise a sale price in the region of £95 per sq. ft. ...

In our opinion, this development is both appropriate and suitable in terms of this site and the current market and should these asking prices be realised will provide a profitable and viable development."

Reference was made to some comparable properties, and the report went on:

"You have also asked for our opinion on the demand for this type of development. Whilst the market is not as buoyant as a year ago, we are finding that there is still a reasonable level of demand for good quality warehouse accommodation in the Kent area. With the completion of the M20 and the Channel Tunnel, together with the opening of markets in 1992, we feel that Kent will become very popular with companies supplying products to Europe. As we have mentioned previously, we feel that the subject development, apart from being finished to a high quality, will have an advantage over any competition, in the fact that flexible accommodation can be offered to occupiers, in terms of unit size."

I need quote no more.

31. Neither report indicated that Mr Sandler and the Defendants had had previous involvement with the property. Mr Sandler said in evidence that he thought that his omission to disclose his previous involvement with the property was "just an oversight". I regard that omission as reflecting adversely on Mr Sandler’s credit as a witness. His omission was the more serious since his firm was involved in a conflict of interest. Smith Melzack had an interest in the development going ahead since it stood to earn fees on the sale of the completed units; moreover, if the development did not go ahead, his firm would not be paid for work already done.

32. In his first witness statement, Mr Sandler said:

"I calculated the development value by reference to an assumed rental income of £313,811 per annum (£8.50 per sq. ft x 36,919 sq. ft) and then applied a yield of 9%. The valuation calculated by calculator on a purely mathematical basis would have been £3,486,788 but the computer print out produced a figure of £3,401,745."

The figure of £3,486,788 represents £313,811 divided by 9 per cent. It emerged in evidence that the difference between that figure and the valuation of £3,401,745 represents purchaser’s costs at 2½ per cent. of the lower figure. That evidence was elicited from Mr Sandler with some difficulty; but he accepted that a deduction of 2½ per cent. for purchaser’s costs was appropriate only if he was doing an evaluation on an investment basis.

33. In a supplemental witness statement, dated 27th January 1999, also deposed to in evidence by Mr Sandler, Mr Sandler said that he had valued the completed development at £3.4 million on the basis of a freehold price in the region of £95 a square foot. That valuation was not derived from the computer calculation. The computer was used simply to calculate the costs and hence, given the gross development value, the site value. It was apparently not possible to feed the gross development value ectly into the computer. So he fed into the computer an annual rental of £8.50 per square foot, together with a rate of return 9 per cent., in order to produce a development value of £3.4 million, from which figure the computer could make deductions of costs. The rental figure was simply a device to obtain what he regarded as the correct development value. His assistant Mr Cousins gave evidence to similar effect in relation to the use of the computer in that way. Mr Sandler said that Smith Melzack had had a computer which would carry out the necessary calculation on the basis of a price of £95 per square foot, but it was not available at the material time. He had not intended his earlier statement to mean that he had arrived at his development value by applying an annual rental of £8.50 a square foot.

34. I find that evidence unconvincing. A selling price of £95 per square foot would produce a value of £3,507,305 from which there would be no reason to deduct purchaser’s costs since the open market price of the completed development with vacant possession would already reflect them. Moreover, had it been desired to enter into the computer a value reflecting a price of £95 per square foot, the obvious course would be to enter a rental of £9.50 per square foot and a rate of 10 per cent. That would avoid any necessity to use a calculator, or the computer on a trial and error basis, in order to determine an arbitrary combination of rent and return such as to lead to the required value. However, the combination, on Mr Sandler’s evidence, was not arbitrary: he took the yield at 9 per cent. because be felt that that was the correct investment yield for the particular site. Why he should do so when taking an arbitrary rent is not apparent.

35. I find that Mr Sandler arrived at his valuation of £3.4 million on the basis of a rental of £8.50 per square foot and a yield of 9 per cent.

36. Mr Sandler said that Michelle Skinner agreed that the completed development should be valued on the basis of completed sales.

37. Having regard to a reference in the report of 14th June 1990 to a telephone conversation of the previous day with CPF and to the reference in the same report to a request on the part of CPF for a "comment as to" Smith Melzack’s opinion of the likely selling prices, it would seem that Ms Skinner had read the report of 12th June as being a valuation on an investment basis, and was asking for a valuation also on a resale basis, in accordance with the written instructions. Mr Sandler’s oral evidence, however, was that the instructions that the development should be valued on the basis of completed sales were given in a telephone conversation between Mr Sandler and Ms Skinner which took place immediately Mr Sandler had received a faxed copy of the instructions, before they were delivered by post. The copy was faxed on 1st June 1990.

38. If the figure of £3.4 million in the valuation of 12th July 1990 was indeed arrived at on the basis of completed sales at £95 per square foot, it would be expected that the letter of 14th June would simply confirm that fact. Instead, it mentions the price of £95 per square ft for the first time. Two comparables are referred to. The first is one of the units of the Henwood Business Centre, than which Fairwood Phase III (the instant development) is said to be of much higher quality. The Henwood unit was said to be the subject of an agreement for sale at £96 per square foot. The other is a unit at Ashford Business Park said to be under offer at a rental of £8.50 per square foot.

39. No file note or confirmation in writing of any change in instructions has been put before me. There is no mention of any change in the instructions either in Mr Sandler’s report of 12th June 1990 or in his report of 14th June 1990. It is apparent from Smith Melzack’s letter to CPF of 27th July 1990 that Ms Skinner had the previous day asked Smith Melzack to comment on the possible rental levels that the completed units could achieve.

40. In his supplemental witness statement, Mr Sandler said "In paragraph 67 of the Plaintiff’s opening it is suggested that there is no written evidence of the variation which I discussed with Michelle Skinner on the telephone ... This is not so. On my copy of page 2 of the letter of 1st June 1990 from Chancery Property Finance I ruled through paragraph (1)(b)(ii) in pencil. I do not believe that this can be seen on the photocopy in the Court’s bundle ..., but it is quite clear on the original document". Mr Sandler produced in evidence a copy of the letter of instruction of 1st June 1990 faxed to him on that day by Michelle Skinner. Paragraph (1)(b)(ii) was faintly crossed out in pencil. I am not satisfied that that crossing is contemporaneous, and I regard it as throwing no light on the position.

41. I reject Mr Sandler’s evidence that his instructions were changed. My findings are that the valuation in the first report was made on an investment basis at a rent of £8.50 per square foot, a return of 9 per cent, less 1/41 purchaser’s costs. During the telephone conversation on 13th June Michelle Skinner asked for a valuation on resale basis. That valuation was given on 14th June at £95 per square foot. There was no change in the instructions.

42. Since the development was under construction at the material time it was not possible to measure it in order to determine the floor area of the completed development. Figures which are apparently mutually contradictory have emanated from the architects. An application dated 22nd November 1989 for detailed planning permission, i.e for the approval of matters reserved by an outline planning permission dated 20th September 1989, showed the gross external floor area of the building as 3325 square metres. Drawing G1 accompanying that application was not in evidence, but I am satisfied from a revised version of that drawing, drawing G1-B, that drawing G1, like drawing G1-B, showed a gross area of 3325 square metres. Drawing G1-B contains a schedule of accommodation which shows a gross area of 3325 square metres and what is described as a nett area of 3189 square metres. A nett area is defined on the drawing as being measured inside the external walls and as including staircases and toilets. Mr Taylor said that he would call that the gross internal area (GIA). Mr Taylor’s usage accords with a definition given in an RICS/ISVA code of measuring practice. The case has proceeded on the basis that the floor area to be used for the purpose of valuation is the GIA. Detailed planning permission was granted on 18th April 1990 by reference to plan G1-C. A copy of that plan which is before the Court has the schedule of accommodation deleted. I am satisfied on the evidence of Mr Taylor that the copy in the file of the local planning authority (Ashford Borough Council) contains the same schedule as appears on drawing G1-B.

43. By 23rd April 1990 it appears that a minor amendment had been decided on, which had the effect of increasing the GIA (and indeed the gross external area) by 5 square metres. Again on the evidence of Mr Taylor, I am satisfied that a later G drawing showing that amendment was in the file of the local planning authority stamped and dated as having been received in July 1990.

44. The figures apparently conflicting with the figures of 3325 and 3189 square metres are a gross external area of 3425 square metres and a GIA of 3289 square metres, in each case exactly 100 square metres in excess of the values shown on drawings G1 to G1-C and permitted by the original detailed permission of the 18th April 1990. In 1997 Mr Duncan Preston, a valuer who gave expert evidence before me on behalf of the Defendants, enquired of the firm of architects about that discrepancy. The individual architect in question was dead, but the firm carried out research and by letter of 13th August 1997 stated that the area of 3289 square metres had been arrived at from some draft documents emanating from drafts of bills of quantities and other documents provided by the quantity surveyor to the contractor, Tarmac. It was obtained by dividing the total anticipated project cost of £1,389,260 by the cost per square metre of £422.39 producing an area of 3289 square metres (35402 square feet). The discrepancy has not otherwise been explained. There was an answer given by Mr Preston in cross-examination relating to the inclusion of the void area above the staircases at first floor level, but the point was not taken up and in any case those areas are included in the lesser figures. The reason for the discrepancy remains unexplained.

45. Without at this point passing upon Mr Sandler’s performance, I am satisfied that the proper areas to have taken for the purpose of the valuation in June 1990 were the lesser areas. The GIA of 3189 square metres has been taken to be approximately equal to 34323 square feet, and I shall adopt that approximation.

46. Mr Sandler adopted an area of 36,919 square feet for his valuation. He took that area from a schedule of accommodation sent to him by Mr Leibu of L & C on 31st May 1990 which showed "gross lettable area" as 36919 square feet. That schedule accompanied a financial appraisal dated 15th May 1990 showing a gross realisation of £3,420,000 representing an area of 36,000 square feet at £95 per square foot. That appraisal had a footnote stating

"N.B. (1) Floor area re-measured by Architect - 36,919 sq. ft.

(2) Units 5 & 6 on plan now amalgamated - plans being redrawn".

Sent to Mr Sandler in the same bundle was a copy of the detailed planning permission dated 18th April 1990 referring to drawing G1-C. Mr Sandler had a copy of drawing G1-C, but on that copy the schedule of accommodation giving the areas was expunged.

47. In his report of 12th June 1990, Mr Sandler reproduced the figures described as gross lettable area in the schedule of accommodation he had received from Mr Leibu. He described the total of 36,919 square feet as the gross internal area. Since he was adopting, as the GIA, figures given to him which were not so described, his duty of skill and care required him (as is common ground) to check the figures carefully.

48. The figure of 36919 square feet represents 3430 square metres and reflects the incorporation of the proposed amendment increasing the area by 5 square metres. It is the gross external area of the building including the unexplained extra 100 square metres. The expression "gross lettable area" does not appear in the RICS/ISVA code of measuring practice. Mr Preston expressed the view that the use of the expression was quite inappropriate in the context. He went on to express the opinion that a reasonably competent valuer should have obtained confirmation from the architects as to what comprised "gross lettable areas" and reconciled them with the known definition of "gross internal areas".

49. On 18th December 1989 the architects sent to Mr Leibu and to the quantity surveyor a schedule of accommodation showing an area described as "whole of buildings O/A external walls (including stair at first floor)" as "3425 square metres (36866 square feet)" and an area described as "inside external walls (including stair at first floor)", i.e the GIA, as "3289 square metres (35403 square feet)", (apparently a typing error for 35402 square feet). On 30th March 1990 the architects sent to Guinness Mahon a fax message stating

I confirm the following areas (sic) calculations:

A. The whole of the buildings (i.e gross over external walls including the stairs at first floor) - 3425 m² (36866 ft²)

B. Gross inside external walls including stair at first floor - 3289 m² (35403 ft²)

50. Mr Blunt QC, for the Defendants, did not seek to justify the area of 36919 square feet in Mr Sandler’s valuation. He submitted that the reasonably competent valuer would have asked the architect to provide him with details of the floor areas. Had Mr Sandler done that at the time of his valuation it is clear that he would have been told that it was 35403 square feet, as that is what the architect had told L & C on the 18th December 1989 and Guinness Mahon on the 30th March 1990. Mr Blunt argued that that was the area that Mr Sandler should, exercising reasonable care and skill, have taken as correct.

51. I think that Mr Blunt’s argument oversimplifies the position. Mr Sandler was negligent in accepting for valuation purposes, without further enquiry, a figure described as gross lettable area. If he had made proper further enquiry, he would have realised that that figure was wrong. That much is not in dispute. There are various things that Mr Sandler might have done, which he did not do. Mr Sandler said that it was unusual for valuers to apprise themselves of planning applications and planning permissions. If he had checked with the local planning authority, he would probably have been told that the maximum permitted GIA was 3189 square metres. If he had consulted the file in the possession of his own firm’s marketing department, as Mr Cousins did, he would have found that his colleague Mr Menzies on measuring the plan had found a gross external area of 35421 square feet. That is equivalent to 3292 square metres, somewhat less than the correct figure of 3325 square metres. Drawing G1-A, a copy of which before me had come from Smith Melzack’s discovered documents, contained the schedule of accommodation showing gross internal area as 3189 square metres. No doubt Mr Sandler could have found that drawing if he had made enquiries within his firm. When Mr Sandler was asked in cross-examination why he had not consulted the marketing file, he said "having received the plans ectly from the architect there was no reason for me to go scouring through the building looking for other plans". That answer must be predicated on the basis that he would make use of the plans he had received. Copies of architects’ plans provided to Mr Sandler by Mr Leibu were attached as Appendix V to Mr Sandler’s valuation report of 12th June 1990. It appears that those drawings included drawings W2-B and W3-B (west block ground floor and first floor) and E2-C and E3-B (east block ground floor and first floor). Those drawings are marked out, partly in squares 3 metres by 3 metres, and partly in rectangles 3 metres by 3.3 metres. If Mr Sandler had calculated the area from those drawings he would have concluded that the GIA was less than 3325 square metres, let alone 3430 square metres.

52. If Mr Sandler had checked the figures with the architects after carrying out one or other, or more than one, of the above checks, it is probable that even if the architects at first gave him the figure of 3289 square metres as the GIA, he would have elicited from them the doubtful source of that figure, or the reason for the discrepancy between that figure and 3189 square metres. It is, of course, possible that he would immediately have been given the figure of 3189 square metres, since it appears on the architect’s drawings G1-A, B and C.

53. If Mr Sandler had checked the figures with the architects without carrying out any previous checks, he might have been given the figure of 3289 square metres without realising that there was reason to question it. But it is, I think, just as likely that he would have been given the figure of 3189 square metres.

54. I accept that if Mr Sandler had checked the figures with the architects and been given a figure of 3289 square metres in circumstances reasonably making that figure apparently credible to him, he would not have been negligent in valuing the property on the basis of that figure. Carrying out the other checks, or some of them, is not in my judgment necessary, in those circumstances, to avoid a finding of negligence.

55. But I have to make a finding what would have happened on the hypothesis that Mr Sandler had not been negligent. He might have done the minimum necessary to avoid the finding of negligence; but in my judgment I am not bound to assume that he would have done no more. He might have done more by way of checking. Taking into account all the possibilities and the likelihood of the various possible outcomes, I find on a balance of probabilities that if Mr Sandler had not been negligent he would have elicited the area 3189 square metres, or the increased area of 3194 square metres, as the GIA.

56. As one aspect of negligent valuation Mr Crowther QC, for the Plaintiffs, relied on the fact that the solicitors’ report on title contained a reference to the area of the property as approximately 3200 square metres. That represents approximately 7 per cent less than the figure of 3430 square metres adopted by Mr Sandler. Mr Sandler’s evidence on the point was this:

"Q. If that was the right figure that would make a substantial difference to your valuation would it not?

A. Yes. The words "approximate" and "aggregate" - it was not a defined figure.

Q. Can you remember whether you read that?

A. Yes.

Q. You did read it?

A. Yes.

Q. Did that not cause you any worries?

A. No.

Q. Why was that?

A. In a report on title it refers to an aggregate or average or approximate floor area. My conclusion at the time was that as the figures were provided to me by the architect who was ectly responsible for constructing this scheme then they would have the more accurate figures.

Q. Have a look at C.33 and see what you said in your statement about this. Paragraph 19, fifth line. "I cannot recollect whether or not I noted the discrepancy".

You are saying there that you cannot remember, are you saying now that you can remember spotting it and you thought it through and preferred the architect’s figures: Which is correct?

A. I would have read the report on title, but I did not think if there was a discrepancy it would have any significant effect.

Q. In your statement you said, which you confirmed: "I cannot recollect whether or not I noted the discrepancy". Is that right or is your present evidence right?

A. Having read the report on title I may have noted, or may not have noted the discrepancy.

Q. It is quite simple, you have just said you spotted it and you thought about it and you came to the conclusion you have given us. In your statement which you confirmed on oath you said you could not remember whether you had noted the discrepancy. I just want to know which my Lord should rely upon?

A. I said I could not recollect whether or not I noted the discrepancy.

Q. Is that right, you cannot remember?

A. Yes."

57. Whilst I am not assisted by that evidence, I do not think that this matter adds significantly to the negligence that I have found.

58. Mr Taylor expressed the view that the rental value of the property was £6.75 per square foot in June 1990. Mr Preston considered that the rental value of £7 to £7.50 reported by the Defendant on the 27th July 1990 was reasonable. On the totality of the evidence, I find that the market had not fallen, but had remained static, and would have been so perceived in June and July 1990 by valuers, during the period from November 1989 to July 1990. I have been referred to a number of comparable property lettings particulars of which have helpfully been agreed between the experts and put before me, together with agreed comments, in the form of a table. Nevertheless, the experts were by no means agreed as to the conclusions to draw from those transactions.

59. Mr Preston gave evidence, which I accept, that smaller units normally command a higher rent per square foot than larger units. Obviously the assumption is that other things are equal. Mr Preston did not quantify the effect.

60. There are nine agreed instances of lettings of comparable properties occurring from December 1989 to May 1990. Five of those were of units at the Henwood Business Centre, which is situated half a mile from the town centre. Of those five lettings, three were of rebuilt premises with 12 foot eaves; two were of new units with 20 foot eaves. Of the remaining four lettings, two were of premises on Leacon Road, close to the Montpelier Business Park, namely Fairwood Industrial Park Phase I and Brookfield Industrial Estate. The remaining two lettings consisted of a letting of a unit on Mace Industrial Estate, near Henwood but closer to the town centre, and a letting of a unit on Ellingham Industrial Estate, situated at the south of the town relatively remote from the town centre. I set out in the table below the areas of the units let, the rentals agreed per square foot, and the dates when the terms were agreed.

61. Fairwood Phase I was close to the subject property. It comprised units ranging in size from approximately 3500 square feet to approximately 27,000 square feet, on offer at rentals between £7.60 and £5.60 per square foot. The large unit sold at £5.55 had been on offer at £5.70. The other units had a generally higher proportion of office space than that of the subject property. Mr Taylor said he would not have expected the subject development to achieve those levels of rental since it was of lower quality. I accept that a higher proportion of office space, other things being equal, tends to yield a higher rental, but in my judgment any premium reflected in the rents of Fairwood Phase I compared with Fairwood Phase III is likely to be slight.

62. A later letting, in November 1990, at £6.38 of a unit of 8145 square feet at Fairwood Phase I affords an indication of the variation of rental with area, albeit in a range well above the areas of the units in Phase III. For reasons given below, I find that rental levels remained substantially static between June and November 1990. Even allowing for a slight premium represented by Fairwood Phase I, that suggests a rental significantly in excess of £6.38 for the units at Fairwood Phase III, whose average area was 3438 square feet.

63. In reaching the suggested conclusion, I have used information not available to potential valuers in June 1990. That was simply to show roughly how the rental values of similar units depend on the area; I assume such a consideration to be within the expertise of a valuer.

64. The other neighbouring development represented in the nine comparables is Brookfield. Mr Taylor said the size and layout were similar to those of the subject development, but an adjustment had to be made to reflect the fact that it was a ten-year-old building without ancillary offices; he considered the differential to be in the region of 15 per cent. The adjustment proposed by Mr Taylor would yield a rental value of £6.90 a square foot but he was wrong, in my judgment, to ignore the difference in size of the units. A rental value for the subject property of £7.00 a square foot or rather more is suggested by the Brookfield letting.

65. Mace Industrial Estate is close to the town centre. Mr Taylor considered the letting there not to be a comparable letting. The building, the access and the parking were inferior; the proximity of the estate to the town centre seemed to be its saving grace. Whilst the building had been readily lettable, it was outdated in terms of design and layout. I conclude, especially having regard to the large area of the letting at Mace, that a rental at Fairwood Phase III substantially in excess of £5.50 was to be expected.

66. Scarcely any evidence about Ellingham has been put before me. That agreed comparable is of no assistance to me.

67. Henwood Business Centre had the advantage of location: compared with Montpelier it was only about one-third of the distance from the town centre (ignoring a little-known pedestrian route to Montpelier). The rebuilt units were of inferior specification to Montpelier in respect of eaves height. Mr Taylor accepted that the units, being in shell condition with WC’s but with no offices or heating, were inferior to Montpelier in that respect. He accepted that there was limited access, limited parking, and that the premises were unsuitable for heavy goods vehicles. I accept his evidence that the location had advantages for quasi-retail and for auto-related businesses, and that all the five lettings in question were to such businesses. Accordingly, I find the Henwood lettings to be of little assistance as comparables.

68. On the totality of the evidence about comparables, I would find the rental value of the subject premises as of June 1990 to be £7.00 per square foot. That apparently provisional finding has to be tested by reference to the other evidence. For reasons given later in this judgment, the provisional finding represents my final finding.

69. In order to calculate the investment value of the property it is necessary to determine the appropriate yield. Mr Preston considered that the yield of 9 per cent appearing in Mr Sandler’s calculation was marginally pessimistic and could have been slightly lower, leading to a higher value. His own office adopted a figure of 8.25 per cent. Mr Preston did not give an investment value of the property. The rest of the evidence supported a figure of 9 per cent; I accept that figure. It is common ground that purchasers’ costs have to be deducted; Mr Taylor and Mr Preston were agreed that the appropriate rate was 2½ per cent of the net figure. I shall adopt that figure. Thus one has to divide the gross figure by 1.025 to arrive at the investment value.

70. I thus find the investment value of the property as of June 1990 to have been the product of the area, 34376 square feet and the rental value, £7.00 per square foot, divided by the product of 9 per cent and 1.025. That gives a value of £2,608,477, say £2.6 million.

71. I have to consider the value of the development on a resale basis. I have heard much evidence as to comparable sales, and shall consider that first.

72. There were no sales of comparable properties between November 1989 and April 1991. In the table below I set out particulars, agreed between the experts, of sales of comparable properties that occurred before June 1990. To avoid confusion, I continue the numbering from the previous table.

73. As to transaction number 17, Mr Blunt submitted that the sale of Eden Business Centre units 3 and 4 arguably represented a price of £96 per square foot. The figure agreed by the experts, rightly in my judgment, was £88.38 per square foot. The transaction was a part-exchange transaction at a stated value of £350,000 under which the vendor accepted unit 2 St. George’s Business Centre, crediting for it £150,000 against the consideration for units 3 and 4 of Eden Business Centre leaving a cash balance of £200,000. The combined area of units 3 and 4 was 3960 square feet, making a price per square foot of £88.38, as agreed between the experts. The area of unit 2 of St. George’s Business Centre was 1645 square feet; it was thus valued at £91.19 per square foot.

74. If units 3 and 4 at Eden Business Centre had been sold at a price of £96 per square foot, the price would have been £380,160. That implies that the stated value of the transaction of £350,000 was not the true value, which I am not prepared to accept. It also implies that the allowance for unit 2 of St. George’s Business Centre was £180,160, not £150,000; the allowance of £180,160 for unit 2 represents £109.52 per square foot, a wholly unrealistic price in my judgment. I reject Mr Blunt’s submission.

75. The Eden Business Centre was situated a quarter of a mile south of the town centre and was close to the railway station. It was a block of five high quality high-tech two-storey units with first floor offices and unplastered ground floors suitable for industrial or storage use or for conversion to offices. I am satisfied that it appealed to a clientele different from those who would be interested in Montpelier Park, and would have attracted higher prices. The evidence of Mr Taylor in that respect is supported by that of Mr Martin Barrow, who gave evidence for the Defendants. He had acted for Dencora Properties on the sale of Fairwood Phase III to L & C.

76. It is common ground that St. George’s Business Centre was of lower value per square foot than Montpelier. Some of the units (e.g that involved in transaction No.12) had no offices; others did have offices (including that involved in transaction No.16).

77. The part-exchange transaction in relation to which I have attributed a value of £91.19 per square foot to unit 2 of St. George’s Business Centre has not been relied upon by either party.

78. The fact that only one comparable sale had taken place within the 11 months preceding the valuation in June 1990 should, in my judgment, render the valuer particularly cautious. The fact that during that period other comparable properties were on offer (albeit to a limited extent) suggests an absence of demand which might have a depressing effect on prices.

79. Mr Blunt relied on uncompleted sales, that is, sale transactions where terms, including price, were agreed but the transactions were not completed. He also relied on asking prices and offers. I summarise the position as follows.

80. Units at Henwood Business Centre were offered for sale from Summer 1989 at £100 per square foot, increased by March 1990 to £108 per square foot. In June 1990 offers were made for unit 17 (1526 square feet) at £95 and for unit 3 (1753 square feet) at £94. The developer went into receivership and the Receiver, having adopted a policy of letting, rejected the offers.

81. Bridge Road Business Centre was a small development about half a mile from the town centre consisting of three refurbished units and two new units. The refurbished units ranged in size from 1277 to 2573 square feet. The new units were under construction in March 1990. Prices of £95 per square foot for 999-year leases were quoted. There were no sales.

82. St. John’s Court, Ashford Business Park was a development situated at the edge of the town with convenient access to the M20 motorway. I accept Mr Taylor’s evidence that it was generally superior to Montpelier. Eleven new units ranging in size from 1535 square feet to 10,230 square feet were due for completion in June and September 1990. 999-year leases at a peppercorn ground rent had been marketed since January 1990. Offers of £107.50 to £110 per square foot on three units quoted at £110 to £115 were made but had fallen through by March 1990.

83. Mr Blunt pointed out that Mr Taylor himself had been marketing some of those properties at those prices.

84. In my judgment, little reliance can be placed on asking prices. They may represent an initial negotiating position of the vendor and may sometimes be offered in the hope that the market, if depressed, will rise.

85. Mr Blunt also relied on the fact that the land from Montpelier Park had been sold for £760,000 in November 1989. That sum greatly exceeds the residual value calculated from the gross development value supported by Mr Taylor. Mr Blunt submitted that the market had a more optimistic view than Mr Taylor’s of what completed industrial units were worth. In my judgment, that argument carries little weight. The price of land sales reflects developers’ expectations, but it is obvious that the valuer ought not to assume that the developer has got it right.

86. I find the evidence of comparables insufficient to be able to conclude more than that the resale value of the property in June 1990 was less than £88 per square foot. The resale value can, however, in my judgment be estimated by reference to the value on an investment basis. That value, as I have found it to be, is equivalent to approximately £75.63 per square foot. Mr Sandler’s value of £95 per square foot represents a premium of 25 per cent over the value on an investment basis. Mr Sandler considered that a large premium was realistic. In my judgment, such a large premium is not realistic.

87. Mr Taylor said that the higher value on the resale basis incorporates a premium element an owner-occupier is prepared to pay to control his business premises (eliminate rent and rent increases) and hopefully produce some capital growth. He thought that a 5 per cent premium for sales value over investment value was "probably the right sort of level".

88. Premiums are variable. A figure of 7 per cent is implicit in Mr Taylor’s valuations for June 1990, and 13.7 per cent. is implicit in his valuations for November 1990. Mr Sandler’s figure of £95 per square foot represents a premium of 3 per cent. over his valuation of £3.4 million which I have found to have been on an investment basis. In my judgment, 7 per cent. is the right figure to take.

89. If 7 per cent is added to my figure for the investment value of £2.6 million, one arrives at a figure of £2.782 million.

90. In this context I have so far made no reference to a draft valuation of the property which Mr Taylor prepared for Guinness Mahon in March 1990. In that draft report, he valued the property, if offered for sale on 999-year ground leases, at £2,834,000. He valued the site on a residual basis at £720,000. He was much criticised by Mr Blunt for what he wrote in that draft report. Mr Taylor accepted that his residual valuation was quite wrong.

91. Mr Taylor’s evidence was that he faxed the draft report to Guinness Mahon. He had a continuing dialogue with Guinness Mahon by telephone. Guinness Mahon told him that they would need the gross development value to be well in excess of £3 million. He responded that you could not even reach £3 million and that his figure of £2,834,000 was the very maximum. As it became clear that the scheme was not going to be viable even at his maximum figure, he gave only secondary consideration to the residual site value. I accept that evidence.

92. In his draft report to Guinness Mahon, Mr Taylor made the following remarks on market conditions:

"The commercial market in Ashford was very buoyant in 1988 with both prices and rents rising sharply. This however has not been sustained through 1989 and we have seen the market level off with demand and enquiries dropping considerably. This has in our view now caused both rents and prices to dip. The principal cause is high interest rates. We view this as a short term situation, but we may not see demand to increase again until mid 1991 which will coincide with the opening of the final link of the M20."

93. In the market commentary contained in his expert’s report, Mr Taylor said this among other things:

"The commercial property market in Ashford had been very buoyant in 1988 with both prices and rents rising sharply. This however had not been sustained through 1989 and the market levelled off with demand and enquiries dropping considerably. However, at the beginning of 1990, rental levels and land and building prices achieved in 1988/89 set the benchmark for the new year. Developers, landlords and agents were expecting these levels to be maintained. As the year progressed it became apparent that the market was weakening as the response to the marketing programmes for remaining units on schemes released in 1989 was poor. While some enquiries were received and terms may have been tentatively agreed, no sales and few lettings were completed during the year. ... The response of developers at the beginning of 1990 was not to panic and reduce prices and rents, albeit the true market must have been at a level below asking rents and prices, with the result that deals were not being done. ... 1990 was a year of change and it was therefore more difficult to value than in a stable market. It became evident as the year progressed this change was towards a progressive decline in the market. A prudent valuer through his enquiries to commercial agents with first hand experience together with the market reports being published at this time, would have recognised the position and brought this to his client’s attention as I did in my draft valuation of this property in March 1990. He would have reported the situation in his comments on market conditions prevailing having regard to the purpose of the valuation for bank lending."

94. I accept that evidence. But I find no evidence to support the remark in Mr Taylor’s draft report of March 1990 that rents and prices had dipped. The evidence of lettings of units at Henwood suggests that rentals remained steady until May 1990 at any rate.

95. Mr Taylor’s valuation of March 1990 at £2.834 million on a resale basis works out at a value of £82.57 per square foot, using the area of 34,323 square feet that he adopted for that valuation. In his expert’s report valuing the property as of June 1990 (without hindsight) he arrived at a figure of £2.5 million for the gross development value on an investment basis, and £2.675 million for the value on a resale basis. The latter figure represents a premium of 7 per cent over the former.

96. Mr Taylor’s reasoning behind the valuation on a resale basis contained in his expert’s report is summarised in paragraph 10.25 of that report. That paragraph reads as follows:

"This evidence shows asking prices for new developments of between £95 and £115 per sq ft. However, no sales had been achieved other than two refurbished units sold in 1988 and 1989 between £70 and £74 per sq ft and two high-tech units sold in 1989 reflecting £88.38 and £93.61 per sq ft. There is no sales evidence since September 1989. This indicated that the market for purchasers was very weak by June 1990, reflecting the high level of interest rates and concern about the national economy. It was evident at that time that the market was not prepared to pay £95 per sq ft. In relation to the subject development there was evidence in 1989 which would support a price in excess of £74 per sq ft achieved on a refurbished unit, but less than £93.61 achieved on a high-tech unit close to the town centre. A mid-way point would have been £82.50 per sq ft. Clearly the market had weakened since 1989 and by June 1990 there was no activity in the owner-occupier market. As such the value would have dropped in my opinion by 5% to about £78 per sq ft in June 1990."

97. Some corrections have to be applied to the facts stated in that paragraph. The number of refurbished units sold in 1988 and 1989 was six, not two. The upper price was £77, not £74, per square foot. There was no sales evidence since November 1989; it is not correct that there was no sales evidence since September 1989. I accept Mr Taylor’s conclusion that the market was not prepared to pay £95 per square foot. In my judgment, he was right objectively in concluding that the market for purchasers was weak by June 1990; but the limited availability of property available for sale could, in my judgment, justify a view that the market for purchasers was not very weak. The following exchange took place during the cross-examination of Mr Taylor:

Q. But none of the new projects was on stream yet by June 1990, were they?

A. No they weren’t, but they were being very actively marketed, and some of them were getting very close to completion, and that is a view that I took."

98. Although there is logic in Mr Taylor’s reduction of his value as a result of the market weakening since 1989, a valuer valuing in June 1990 could I think properly have regarded the evidence of lettings as tending to show that the sales market had not fallen.

99. Mr Blunt made the point that Mr Taylor was not truly an independent or objective witness because of his own valuation of the property in March 1990. When he was instructed by the Plaintiffs he had a preconceived view of the correct valuation and of the market in 1990, so that it was virtually impossible for him to come to any conclusion other than the one that he did, namely that Smith Melzack’s valuation in June 1990 was too high.

100. That argument sounds more impressive than it is. One might say of any expert witness with equal justification or lack of it that once his expert’s report has been furnished to the other party it is virtually impossible for him to change his mind. The point of Mr Blunt’s argument is that it was virtually impossible for Mr Taylor to change his mind between March 1990 and the time when experts’ reports were exchanged. But that is not ectly relevant. The relevant question is whether the March draft report was correct. There appears to be nothing in the March draft report that required Mr Taylor to downvalue the property by 5 per cent in his expert’s report, as he did, or by any amount. It is by no means obvious why Mr Blunt says that Mr Taylor ought to have changed his mind. Events occurring after June 1990 that might have caused Mr Taylor to change his mind are the very things consideration of which is to be avoided (unless they throw light on the state of the knowledge possessed by valuers in June 1990, a point that does not arise here). In another context, Mr Blunt himself submitted quite correctly that the Court must be careful not to be wise after the event. It must guard against hindsight. So must the expert valuer witness. I find Mr Taylor’s draft report to Guinness Mahon to be of value not only as representing the opinion of an expert valuer, knowledgeable of the local market, who had no incentive to undervalue the property, but also as being free from any possible influence of hindsight.

101. The figure of £2.782 million that I have arrived at above, by way of applying a premium over the investment value determined by reference to the comparable lettings, represents a price of £80.93 per square foot on an area of 34,376 square feet. That figure of £80.93 is to be compared with Mr Taylor’s figure of £82.57 for March 1990.

102. I consider that Mr Taylor’s valuation of March 1990 supports my figure of £2.6 million as the investment value based on the comparables, arrived at without reference to Mr Taylor’s March report. I find the value of the property in June 1990 to have been £2.6 million on an investment basis and £2.782 million on a resale basis. For the avoidance of doubt, that is my finding as to the most probable valuations that a valuer acting with due skill and care in June 1990 would have arrived at.

103. Mr Crowther submitted that Mr Cousins’s valuation of £2.5 million on the resale basis appearing in the first draft of the Smith Melzack report constituted corroboration of Mr Taylor’s valuation. Mr Cousins gave no explanation how he reached that value, and I do not regard his figure as corroborating that of Mr Taylor.

104. I find that Mr Sandler was negligent in adopting a rental value of £8.50 per square foot in reaching his valuation of 12th June. There could be no justification for adopting such a high figure; indeed he himself adopted a figure of £7.00 to £7.50 in his letter to CPF of 27th July l990, the contents of which did not come to the knowledge of the Plaintiffs. I also find him to have been negligent in adopting a resale value of £95 a square foot. There was no justification for arriving at such a high figure. In arriving at his valuation, those errors compound his negligent over-estimation of the gross internal area of the property.

105. The instructions to Smith Melzack required valuation of the property as a levelled site. They carried out that valuation on a residual basis, as indeed one would expect PLT to have wished. Smith Melzack took a gross development value of £3,401,745 and deducted from it developer’s required profit, construction costs, fees, costs of sale and financing costs totalling £2,678,667, leaving a residual site valuation of £723,078, which they rounded down to £720,000. Since I have found that the gross development value was arrived at negligently, it follows that the site value was arrived at negligently. However, it is clear from the evidence relating to comparable sites that the site as a level site would have been worth £720,000. The land in question had been sold in November 1989 for £760,000. Mr Crowther accepted that the figure of £720,000 could have been justified on a comparable basis given an open site, but he pointed out that the site at the time of the valuations in June 1990 was no longer an open site and Smith Melzack were specifically instructed to advise on viability. A viability study should have shown a residual valuation. Mr Crowther submitted that Smith Melzack should have reported the correct residual valuation of the site and not a figure that could have been justified on a comparable basis. In my judgment the instructions do not, and certainly do not expressly, ask for a residual calculation of site value. Thus the question whether the site valuation of £720,000 was a negligent valuation is academic. It was justifiable as a valuation on a comparable basis and any negligence in arriving at it was not causative of recoverable damage.

106. There were three lettings completed between June 1990 and November 1990. Their particulars are as follows:

Whether terms of letting No. 20 were agreed before 5th November 1990 does not appear.

107. There had been three lettings of units at Stafford Close since January 1989, all of units of area 1200 square feet. The first was in January 1989 at a rental of £6.00 per square foot; the second in July 1989 at £7.25 per square foot; the third was as shown above in August 1990 at £6.83. Comparison of the first two rentals appears to reflect the buoyancy of the market in 1988 continuing into the first half of 1989. Comparison of the second pair of rentals suggests a fall of 5.8 per cent between July 1989 and August 1990 though it is, of course, only a single instance.

108. At some time during the period from June 1990 to November 1990 Mr Taylor’s clients, on his advice, reduced the asking rents for Hilton Business Centre from £7 per square foot to £5 per square foot.

109. Mr Taylor said that at November 1990 evidence was beginning to emerge that rental values were under pressure and were beginning to drop, as were prices. Mr Preston said that rental values were maintained during 1990; indeed his firm’s (Jones Lang Wootton’s) indices for rental growth of industrial properties showed an increase of 3.7 per cent in the quarter to September 1990 and an increase of 1.5 per cent in the quarter to December 1990. Those figures were not published.

110. I find that rental values had not significantly fallen by the beginning of November l990, and that valuers would have perceived that.

111. Mr Taylor adopted a yield of 9.5% for his valuation as of November l990. He relied on the quarterly Hillier Parker Average Yields index for the South-East. It does not appear whether they are published. They show 8.9% for May l990, 9.1% for August l990 and 9.6% for November l990. Mr Preston gave Jones Lang Wootton’s internal reports of yields (called yellow sheets) for industrial prime property. In June l990 the figure was 8.25%. In October and November l990 the figure was 9%. He said that that reflected a weakening of confidence in the industrial investment market. He went on:

"The reality is that, at the beginning of November l990, many competent valuers would not have been aware that the investment perception had deteriorated as far as it had since June l990. For example, of the 0.75% difference in my firm’s "yellow sheet" report as between June and November, it was at the meeting in early October l990, only five weeks before the alleged "third valuation" of the Defendant, that we made an adjustment of 0.5%. Particularly bearing in mind that the "yellow sheet" reports are internal JLW documents, and not for publication, in my opinion, a reasonably competent valuer could have taken the view that the change from June l990 was, in effect, de minimis for a property in Ashford where the expectations were for a period of demand and growth linked with infrastructure projects including the Channel Tunnel and M20 link opening."

112. Mr Preston said that his firm’s capital growth index for industrial property moved from plus 4.4% in June to minus 3.3% in September. That statement requires explanation. The actual capital growth indices for investment stock in the industrial sector and what he described as "annualised change" are shown in his report, so far as material, as follows:-

However, what he describes as the annualised change is the change from the corresponding month in l989. The quarterly change from March to June l990 is a fall from 285 to 278, representing an annualised rate of minus 9½%. The corresponding annualised rate from June to September l990 is minus 11%. Thus the figures of plus 4.4% and minus 3.3% are not figures that tend to cancel out over the period from June to September l990. Moreover, the index in December was 262, representing a fall continuing beyond September. Although those figures are not published, and apply to the whole of the United Kingdom, I am satisfied that valuers must have had a general appreciation of the increase in yields and corresponding fall in values on an investment basis. That conclusion is supported by this summary of market conditions in Ashford in l990, given by Mr Preston:

"........the industrial investment market weakened during the year, although rental values still increased . However, during the first half of l990, as evidenced by the rapid industrial rental growth in nearby Maidstone...the perception for Ashford would have been similar, owing to the anticipated M20 improvements and the wider effects of the Channel Tunnel. By November, it appears that upbeat perception had not actually materialised and in reality a serious slow down of transactions had occurred. Nevertheless, the evidence was not there that the market was to become so severely depressed as occurred in l991 and l992."

Whilst I do not accept that rental values increased in Ashford during the year, I am satisfied that there was a perceived weakening in the market, especially in the second half of the year. In my judgment, the proper rate of yield to apply to the property as of the beginning of November l990 was 9.5%.

113. I arrive at the following valuation of the property on an investment basis in early November l990: 34,376 square feet multiplied by £7 a square foot, divided by the product of 9.5% and 1.025, namely £2,471,189, say £2,470,000. That, again for the avoidance of doubt, is my finding as to the most probable figure that a valuer exercising reasonable skill and care in early November l990 would have arrived at.

114. There were no comparable sales between June l990 and November l990. By November l990, it was about a year since any comparable sale had taken place.

115. During the period between June l990 and November l990 Mr Taylor’s clients on his advice reduced the asking prices for units at Bridge Road Business Centre from £95 a square foot to £85 a square foot, and for units at Hilton Business Centre from £100 per square foot to £92.85 per square foot. Mr Taylor considered that the resale value of the premises fell by just over 10% between June l990 and November l990; Mr Preston considered that there was a fall of about 1%.

116. In my judgment, the state of inactivity in the market is likely to have depressed the value of the premises on a resale basis in a similar proportion to its effect on the value on an investment basis. The premium over investment value represented by resale value is not a constant, either over time or from property to property. Normally it would be determined by comparing comparable sales and lettings. But where, as here, there is a dearth of comparable sales, guidance to resale values is afforded by investment values. I see no reason why the percentage premiums should have been perceived to have changed substantially during the period in question. I conclude that the value of the premises on a resale basis in early November l990 was £2.470 million plus 7%, namely £2.6429 million, say £2.65 million.

117. In their letter of 5th November l990, Smith Melzack stated:

"Further to our Report and Valuation of 12th June l990 and to our subsequent letter of 25th October and to your telephone conversation with this office on Friday last, we write to advise you that in our opinion we do not consider there to have been any changes in the valuation of the above property".

The letter of 25th October comments on the solicitors’ report on title. The relevant passage is "We do not consider that any of the points raised by the solicitors have a detrimental effect upon our valuation dated 12th June l990".

118. Initially the Defendants denied that their letter of 5th November l990 constituted a valuation. But Mr Sandler accepted in cross-examination that it was a statement that in his professional opinion there were no changes in the market known to him that made it unsafe to rely upon the valuation. I have found that between June l990 and November l990 there was a perceived weakening in the market and that the value of the property fell during that period. I conclude that Mr Sandler was negligent in expressing the opinion that he expressed in the letter of 5th November l990.

119. CPF’s instructions to Smith Melzack sought advice on demand for the type of accommodation to be provided and on the viability of the proposed scheme with particular reference to building costs and the anticipated time scale. The Defendants’ report of 12th June l990 gave no advice on those points, although it did state that in determining the value they had assumed, among other things, a reasonable period in which to achieve a sale. The Defendants’ report of 14th June stated that the development was both appropriate and suitable in terms of the site and the current market, and "should these asking prices be realised", would provide a profitable and viable development. I take the expression "these asking prices" to be a shorthand for "asking prices equal to the prices we have advised should be realised", viz. £95 per square foot. The report of 14th June went on to say that there was still a reasonable level of demand for good quality warehouse accommodation in the Kent area.

120. In June l990 the optimistic view of the prospects of the market in Ashford having regard to its location close to the proposed channel tunnel seems to have been general. Mr Sandler was not negligent in sharing that view. Nor do I find him to have been negligent in stating in his report of 14th June that there was still a reasonable level of demand for good quality warehouse accommodation in the Kent area.

121. Nevertheless, his view that the development was viable depended on the accuracy of his valuation. His valuation was negligent, and in my judgment so was his opinion on viability. Smith Melzach’s computer calculation shows the costs of the development (making no allowance for profit) as approximately £2.83 million, if one includes £720,000 as the assumed purchase price of the land. Thus on the values of the property as I have found them, the development was to be expected to give rise to a loss. It was therefore not viable.

122. Mr Blunt accepted that the Plaintiffs had established their reliance on the valuation of 12th June l990 together with the letter of 14th June l990. But he submitted that the Plaintiffs did not rely on the Defendants’ letter of 5th November l990 in deciding to permit draw-down. He submitted that PLT were in practice committed to draw-down before they received a copy of the letter on 8th November l990.

123. It is clear from the terms of the offer that the Plaintiffs were not legally obliged to draw down the loan, since the contract for the loan provided by Condition 25 that PLT reserved the right to withdraw at any time prior to draw-down of the advance or any part thereof without explanation and should have no liability to the borrower other than to repay the commitment fee, less any costs and expenses.

124. Mr Wright, PLT’s loan manager at the material time, gave evidence on the question whether PLT had relied on the valuations. The following is an extract from the transcript of Mr Wright’s examination in chief (subject to one amendment that I mention below):

"Q. ....The next point is, that the expert valuer advising PLT, Mr Taylor, is of the opinion that the June valuation should have come at £2.5m on an investment basis and £2.675m on a resale basis, and it may be said, well, you could have lent 1.681m on those valuations without contravening your 70% lending criteria. Would you just comment on that and tell the court whether you would have lent that sum if the valuations had come in at that level.

A. No, I don’t think we would, my Lord, for two reasons. First of all, presumably as a consequence of the end value falling the site value would consequently fall, and that would prevent us from lending 70% of site. Also, as a result of the cost of the development of around between 2.5m and 2.8m, I believe, the development clearly would not have been profitable from the customer’s point of view and not something that we would have entertained.

Q. Profitability from the customer’s point of view is sometimes known, in shorthand, as viability?

A. Yes, it is.

Q. That is a word that has been bandied around, so perhaps we could stick to that. Just describe, is viability important to a lender, and in particular PLT?

A. Absolutely.

Q. Just explain why. It may be obvious, but.....

A. If the customer is not making a profit it puts the whole transaction at risk. Also viability can be interpreted in terms of the viability and safety of the loan itself, from a lending view point. Once again, with those figures our position would have been far, far weaker than the position that we envisaged against the valuation of 3.4m."

For the figure of 1.681m in the first question, the transcript has 6.81m. Whether that is a transcription error or represents a slip on the part of Mr Crowther, I am satisfied that Mr Wright understood the question in the terms that I have stated.

125. The following further extract relates to the Defendants’ letter of 5th November l990:

A. "...........The letter of 5th November is the letter that confirms that we can rely on their report as the figures still stand, relating back to the reports in June.

Q. Did you rely upon it in that sense?

A. Absolutely.

Q. As at the draw-down on 9th November?

A. Yes.

Q. What about in relation to the further advance of £45,000?

A. Yes, I think I state in my proposal to the credit committee, using the figures confirmed in l990, so there was absolutely no doubt that I relied upon that.

Q. You do indeed, but my Lord has seen that and perhaps you do not need to look at it again.

Q. That letter of 5th November l990 was sent to you on 8th?

A. Yes.

Q. ...........By fax. The point is made by the Defendants that you did not rely on that; you were committed; it was all very late. I want to deal with that. Draw-down was in fact on 9th?

A. Yes.

Q. If the valuation of 5th November had come in at a significantly lower figure than the figures already advised, could you and would you have prevented draw-down?

A. Yes, we would.

Q. We have seen the conditions applied to the offer letter, so was it your view that you had a legal right to pull out?

A. Yes, we did.

Q. Would you have done so if the valuation had not been confirmed satisfactorily as at that date?

A. Yes. Depending upon the figures, we would have considered withdrawal, my Lord.

126. Mr Blunt invited me to infer that the Plaintiffs had not relied on the letter of 5th November from Mr Wright’s lack of reaction to information he obtained on 13th November that Mr Leibu hoped to achieve selling prices of £90 per square foot. The following exchange took place during the cross-examination of Mr Wright:-

Q. It is right, is it not, that you did not, after either 13th November or 29th November, make any complaint to Smith Melzack, either orally or in writing, about the fact that on 5th November they had stated, so you say, there was no change in the valuation, when the borrower, within a few days, was saying, "I cannot get £95 a square foot".

A. Yes. I think it has to be borne in mind that the difference is relatively small, at six per cent or so. There would be little objective in complaining to a valuer because we had already lent the money after relying upon his letter. To write a letter within a few weeks suggesting that he may be five or six per cent out, I do not think would be realistic.

Q. No, but really, Mr Wright, if what you say is true as to your belief of the effect of the letter of 5th November, you must have been absolutely "gobsmacked", (if I may put it in a colloquial way), when within a few days you saw the borrower and he was not even intending to ask for the prices which the valuer had said the property was worth.

A. I think it was just, from my recollection at the time, very much a situation where the units were still not complete. These were at an initial enquiry stage, an initial marketing situation, and the reality of the situation had not driven home at that stage, simply because until you actually do achieve lettings and do achieve sales that is your true benchmark.

Q. Is not this the true position, Mr Wright? You did not think or understand that the letter of 5th November was a further valuation on which you could rely, and that you, from your own feel of the market, knew that it was slipping away; and hence, when Mr Leibu said "I am only trying to get £90 per square foot", you were not surprised?

A. No, absolutely not. We without doubt relied upon that letter, as is confirmed by my subsequent comments and reports in the correspondence and reports. They are the professionals; I would take the valuer’s view far greater than any personal view I had or any view of the customer.

Q Did not it concern you, with this project not yet completed and up for sale, that on the one hand the valuer was saying it was with £95 a square foot, and on the other hand the developer was saying, "I am not even going to ask that"?

A The developer is saying he is hoping to achieve £90 a foot. As I said before, that is a six per cent differential. I was not unduly concerned and, to be honest, there was little I could do once we had lent the money."

I am satisfied on that evidence that the Plaintiffs did rely on the Defendants’ letter of 5th November l990 in deciding to go ahead with the facility and to permit draw-down. If the valuations had been at the correct figures as I have found them to be, or indeed significantly lower than they were, the loan would not have been made.

127. Mr Blunt submitted that the valuation reports were prepared by a professional man for professional men. I heard much evidence on the question of prudent lending. Mr Blunt submitted that there was only one standard of prudent lending: that of the clearing banks.

128. I reject those arguments. The Plaintiffs are not professional men. They are a commercial enterprise. The essence of commerce is the undertaking of risk for reward. The greater the possible reward, the greater the risk that an entrepreneur is willing to run. The willingness of an enterprise to run a higher-than-average commercial risk is not in my judgment a fault of the kind contemplated by the Law Reform (Contributory Negligence) Act l945, even if it ends in disaster for the enterprise.

129. I am aware that there are two schools of thought about this. No binding authority on the subject has been cited to me.

130. In HIT Finance Ltd v Lewis & Tucker Ltd [l993] 2 EGLR 231, 236F Wright J. said this:-

"Mr Hughes contends that a valuer, albeit negligent, is entitled to assume that his client will have made further enquiries into the substance of the proposed borrower, and his ability to honour his obligations under the proposed loan, and not to rely exclusively upon the valuation report when deciding whether to enter into the transaction. As I have already said, I accept that a prudent lender must not shut his eyes to any obvious lack of integrity or substance in his borrower, but subject to that, I find it difficult to see how such a consideration is of any relevance in the case of a commercial lender who is, by definition and to the knowledge of any valuer, in business to take a degree of risk. The whole purpose of the taking of the security is, as I have indicated, to provide protection against loss for the lender in the event that the risk in question ripens into actuality."

I agree with that, save for the reference to the lack of substance in the borrower. Wright J. referred in that passage to what he had already said, which was this:-

"I am not suggesting that the prudent lender, merely because he has the comfort of more than adequate security, is entitled to shut his eyes to any obviously unsatisfactory characteristics of the proposed borrower. Plainly a lender would not be acting prudently if he made a loan in circumstances where he had substantial reason for suspecting the honesty of the borrower. Such circumstances might well call into question the provenance of the security itself, quite apart from the possibility that the lender might be put at risk by some other form of fraudulent behaviour on the part of his borrower."

131. Take an extreme case: suppose a commercial mortgage lender decides as a matter of policy to rely wholly on valuations. He decides not to spend time, trouble or money on ascertaining the value of borrowers’ covenants. He knows that he runs the risk of a fall in the market, but he considers, perhaps wrongly, that he will on average earn higher profits that way than he otherwise would and that such expected higher profits are worth the extra risk. Or a lender might make a secured loan to an impecunious patentee who borrows the money in order to develop what the parties hope will be a profitable enterprise. The lender may charge a high rate of interest to reflect the risk. He may know that the value of the borrower’s covenant depends entirely on the success of the enterprise. Or (and this is outside the field of commercial risk), a lender might make a secured loan to an impecunious friend. In none of those cases can I see any reason why such a lender should be expected to tell the valuer more than that the valuation is required for the purpose of mortgage lending. Nor can I see any reason why such a lender should be convicted of contributory negligence on the ground that his lending was imprudent. A loan may be made by an entrepreneur in the hope of profit or by a philanthropist with the object of helping the borrower. Whether the purpose of the loan is gain for the lender or help to the borrower, opinions can differ as to its prudence. But in my judgment the lender’s motivation for making the loan cannot be relevant, and in neither case can any perceived imprudence in making the loan ipso facto constitute fault within the meaning of the Act.

132. If in the examples given above the stated conduct of the lender is not to be treated as contributory negligence, I am unable to see why, if a more cautious lender accidentally (e.g. through careless office management), fails to comply with his own policy of satisfying himself as to the value of the borrower’s covenant, he should be in any worse position in relation to a finding of contributory negligence than his more adventurous competitor who, as a matter of policy, never ascertains the value of borrowers’ covenants.

133. In my judgment, a decision to lend, however it is arrived at, cannot constitute contributory negligence unless no reasonable person (acting with reasonable care) would have lent the money. An example of contributory negligence is a case where the lender has reason to suspect fraud on the part of the borrower. Reasonable care is not the same as commercial or economic prudence. It is the standard of skill and care of the ordinary person.

134. I conclude that there is, indeed, only one standard of care, as Mr Blunt submitted; but far from its being the standard of prudent lending practised as a matter of commercial policy by the clearing banks, it is not concerned with commercial policy.

135. Mr Crowther said that he accepted that the court was bound by the decision of the Court of Appeal in Platform Home Loans Ltd. v Oyston Shipways Ltd [l998] 3 WLR 94 and that the allegations of contributory negligence were capable of constituting contributory negligence. However, he wished to reserve his position on the issue in case the House of Lords reversed the decision of the Court of Appeal in that case. After close of Counsel’s submissions, I was furnished, by agreement between the parties’ solicitors, with a transcript of the decision of the House of Lords on appeal from the Court of Appeal in that case. The appeal was allowed. No further submissions have been offered to me by either side.

136. The point decided by the Court of Appeal in Platform Home Loans appears in a nutshell at page 99 of the report:

"It is submitted that the relevant damage is that sustained by Platform in consequence of the valuer’s breach of duty in respect of which Platform sued. If that is right then, it is contended, that damage could not have been sustained partly because of the fault of Platform in pursuing an imprudent lending policy for such a policy had nothing to do with the overvaluation. Platform contrasts the second aspect of contributory negligence as found by the judge, which, it accepts, did affect the negligent overvaluation because it failed to alert the valuers to a cross-check casting doubt on their figures.

This is disputed by the valuers. They contend that the section distinguishes between "damage" and "damages". They argue that the relevant damage in this case is the overall transaction loss sustained by Platform, part of which was caused by the lending policy of Platform and part by their own negligent valuations. In these circumstances, they submit, the terms of the section permit and require the court to reduce the damages recoverable from the valuers as compensation for the damage sustained by Platform having regard to Platform’s share in the responsibility for the damage.

Thus the issue is: what, in the case of a loan made in reliance on the negligent valuation of the security for it, is the "damage" for the purpose of section 1(1) of the Law Reform (Contributory Negligence) Act l945? Is it the overall transaction loss sustained by the lender in consequence of the loan as contended by the valuers or is it that part of the overall loss consequent on and so attributable to the negligent valuation?"

It is abundantly clear from the report in that case that the question whether an imprudent lending policy can constitute negligence, as found by the trial judge, was not in issue. The question was whether negligence of the Plaintiff which, though unrelated to the valuation, contributed to the loss caused by a negligent valuation could constitute contributory negligence having regard to the nature and scope of the damage for which the valuer was liable. The Court of Appeal held that it could, and the House of Lords upheld that principle, though they approached the question in a different way and by a majority reached a different figure for the damages.

137. It is true that Morritt L.J. in the Court of Appeal said this at page 103 of the report:-

"If the decision to lend was made by the lender without, on his part, any "fault" as defined in section 4 of the Law Reform (Contributory Negligence) Act l945 then no question of contributory negligence can arise. But where, as found by the judge in this case, the decision to lend was arrived at in consequence of a lending policy sufficiently imprudent to amount to fault then the question of reducing the damages for which the valuer is liable may arise."

As I have said, the question whether a commercial policy can amount to fault was not in issue; and I read that statement Morritt L.J. as a statement of the law not on that point, but rather on the point in issue.

138. However, Mr Crowther appears to have read the passage differently. He has submitted that the conduct of PLT has to be judged against the standard of a reasonably competent bank at the material time, although the standard to be applied to small ‘niche’ banks is not so onerous as that to be applied to clearing banks. I feel constrained in the circumstances to adopt an approach that is based on the proposition that a lender’s decision to lend can be sufficiently imprudent to amount to relevant fault. I nevertheless do not think that the conduct of other banks has to be slavishly followed. I propose to consider PLT’s actions in the round.

139. Mr Blunt made the following points in relation to contributory negligence:

(1) that there were shortcomings in a memorandum which Mr Wright prepared for consideration by PLT’s credit committee;

(2) that the Plaintiffs’ credit committee did not trouble to read the presentation from CPF but relied on Mr Wright’s memorandum;

(3) that the Plaintiffs in consequence of (1) and (2) failed to appreciate that L & C would have to contribute to the building costs and other costs and failed to consider the likely amount of such necessary contribution;

(4) that the Plaintiffs failed to obtain any assurance that L & C would be able to produce the necessary funds;

(5) that the Plaintiffs failed to obtain a reference from the auditors;

(6) that the Plaintiffs failed to obtain audited accounts for L & C for the year ending 31st July l989;

(7) that the Plaintiffs failed to make any real enquiry into the conduct and/or success of L & C’s business as an investor in property and as a property developer;

(8) that L & C did not have the resources to make the contribution which they should have made to the building costs;

(9) that L & C did not have the resources required for the marketing of the property;

(10) that PLT had inadequate lending criteria. Its criteria were a limit of 70 per cent of the valuation of the land and 100 per cent of construction costs. A prudent lender would not advance more than 50 to 60 per cent of the lower of cost or value of the land, and up to two-thirds of the cost of development;

(11) that PLT failed to follow its own lending procedures;

(12) that PLT failed to obtain a guarantee from Mr Melville.

And that PLT’s negligence was causative in two respects:

(13) that no prudent lender would have lent at all on the basis on which PLT did, or on the basis of the information which PLT had; and

(14) that if PLT had applied adequate criteria or sought further information L & C’s responses would not have satisfied a prudent lender so that no loan would have been made.

140. Mr Wright was at the material time PLT’s Loans Manager. He was responsible for the following things: the maintenance and monitoring of accounts which had been assigned to him; securing new business in accordance with PLT’s lending policy, including dealing with introducers, structuring loan facilities, agreeing terms with potential borrowers, and submitting proposals to the credit committee for sanction and then monitoring the loan facility until its expiry; and the instruction of expert valuers and surveyors to value, report and advise upon the underlying property transaction or development.

141. PLT was first set up in l987, believing that an opportunity existed for a niche lender to make loans secured on property at good margins to small British corporate borrowers. Its business consisted of lending money to developers of residential and commercial property as well as to property investors and businesses trading from commercial property.

142. Mr Wright explained PLT’s policy and his activities in this way. All loan applications were considered and sanctioned in accordance with PLT’s lending criteria. One of PLT’s main criteria was to permit no more than a 70 per cent loan-to-value ratio, of either land loan to site value or total loan to gross development value, with the values being advised by a recognised firm of chartered surveyors. Another important factor was that the value of no loan should exceed 10 per cent of PLT’s capital base, which, in l987, was in the region of £17 million, except in the case of loans notified to the Bank of England in accordance with the Bank of England guidelines. The actual decision to participate in any particular lending or facility was made by PLT’s credit committee. During the course of the negotiation, conclusion and management of any individual loan, matters of importance were referred by the relevant ector or Loan Manager to the credit committee for a decision. PLT did not maintain any in-house professional expertise in the form of chartered surveyors or solicitors. PLT was entirely dependent upon external professional advisers. The credit committee was responsible for making final decisions on whether or not to agree to loan applications and in relation to important decisions which arose during the management of the loan.

143. On 18th July l990, CPF sent to PLT a presentation which, as I have said, included copies of Smith Melzack’s valuation reports of 12th and 14th June l990. That presentation also contained the following documents:

(1) the following documents relating to references

(a) a letter from Chancery dated 31st May l990 seeking a reference from Midland Bank as to the means, standing and respectability of Mr Leibu, and whether he might be considered trustworthy in the way of business for his unsupported guarantee of £150,000 in connection with the loan secured on property.

b) A letter in reply dated 7th June l990 stating, with disclaimer of responsibility, "respectable and trustworthy and considered good but time would be required if called upon to fulfil".

c) A letter dated 31st May l990 by which Chancery sought a reference from Midland Bank as to the means, standing and respectability of L & C, and whether they were considered trustworthy in the way of business for a loan of £2.1 million secured on property.

d) A reply to that letter dated 7th June l990, again expressed to be without responsibility, stating "respectably constituted private limited company considered good for your figure and purpose. There are charges registered".

e) A letter dated 31st May l990 from CPF from Mr Leibu’s solicitors Franks Charlesly & Co., requesting a reference as to the means, standing and respectability of Mr Leibu and whether he might be considered trustworthy in the way of business for his general standing.

e) The reply dated 7th June l960 with a disclaimer of responsibility stating: "whilst we have no ect knowledge as to Mr Leibu’s personal financial affairs, we are happy to confirm that he is respectable and trustworthy in the way of business. We do not believe he would enter into any commitment which he could not fulfil."

f) Another letter dated 31st May l990 from CPF making the same request to Franks Charlesly in relation to L & C.

g) The answer dated 7th June l990 stating without responsibility "We have acted for the above company since its inception and are aware that the company is a well managed company and prudent in its funding and the commitments it takes on. We are certainly of the opinion that they may be considered trustworthy in the way of business."

h) A letter dated 1st June l990 from CPF to Silver Altman, the auditors of L & C, requesting a reference on Mr Leibu, and another letter of the same date to Silver Altman requesting a reference on L & C. No reply to either letter was in the presentation.

(2) Accounts for L & C for the two years ending on 31st July l989. Only the accounts for the year ending on 31st July l988 were audited.

(3) A personal asset and liability statement of Mr Leibu, showing his net worth to be approximately £162,500.

144. On 9th August l990, Mr Wright produced a memorandum for members of the credit committee. Mr Blunt criticised that memorandum. I find that there were a number of shortcomings in that memorandum as follows:-

(1) Mr Wright stated:

"The contractors for the scheme, Tarmac have agreed a deferred contract whereby 19.5 per cent of the construction costs will be deferred and secured by a subsequent charge over the property, with repayment from the proceeds of sale after full repayment of the first mortgagee.

Smith Melzack were asked by Chancery to value the site in June and arrived at a site valuation of £720,000, with a completed value of £3,400,000. We are being asked to consider an advance of 70 per cent of the site value i.e. £504,000 with £250,000 being provided by Chancery Bank on a second mortgage basis to service our interest. In addition, we are being asked to provide £1,177,000 being 80.5 per cent of the build costs and 100 per cent of the professional fees with Tarmac effectively covering the balance of the construction works against a third mortgage. Our total advance will therefore be £1,681,000, representing just under 50 per cent of end value".

In fact, the proposal was as set out in the Table below:

145. Thus the figure of £253,000 represents the limit of the amount which Tarmac had agreed to defer; that sum would not be increased in the event of cost overruns. Moreover, the figure of 19.5 per cent does not represent a comparison of like with like. It is the proportion of building costs excluding contingency represented by the limit of Tarmac’s deferment including contingency. A like-for-like comparison, whether including or excluding contingency, represents approximately 18.5 per cent. In fact, Tarmac had agreed with L & C to defer payment of 18.5 per cent of sums certified to be due to Tarmac subject to the overall limit of £253,000. Further, the figure of £1.177 million is £5,000 in excess of the proposal. It does indeed represent 80.5 per cent of the build costs excluding contingency, but only 76.7 per cent of the build costs including contingency, plus 100 per cent of the professional fees at £130,000.

146. Furthermore, construction costs including contingency were not covered by the proposed loan of £1.177 million and the Tarmac deferment. It can be seen from the table above that if the figure of £1.177 million covers the whole of the professional fees of £130,000 it represents a contribution of only £1.047 million to the construction costs, which together with the Tarmac deferment of £253,000 makes £1.3 million. That makes no allowance for contingency. Even if there turns out to be no contingency, so that the Tarmac deferment amounts to £241,000, there is still a shortfall of £12,000 towards the construction costs.

(2) Mr Wright’s memorandum made no mention of the fact that the borrower would have to find advertising and marketing expenses of £130,000.

147. Mr Wright first discovered that the contingency had not been provided for when on the 10th January l991 he learnt from Mr Leibu that the contract was not a fixed price contract and that the final account would total £1,405,000. L & C was unable or unwilling at that time to meet the whole of the shortfall and PLT found themselves obliged to lend a further £45,000 to L & C under the mortgage to prevent the risk of a forced sale of the property by Tarmac using their powers under their third charge. That made the total loan £1,726,000 representing 50.8 per cent of the valuation at £3.4 million.

148. In a memorandum to the credit committee of PLT dated 18th January l991, Mr Wright stated:

"Our total exposure at £1,726,000 will represent 51 per cent of the current value, as confirmed by Smith Melzack in November l990 at £3.4m. We therefore appear to be well secured, and we still hold approximately £210,000 on the blocked deposit which will service interest, without any sales whatsoever, for a further nine months."

149. Even allowing for the fact that in January l991 PLT were forced into the position of lending a further £45,000 to P & C, whereas when the memorandum of 9th August l990 was prepared, PLT were free to offer or not to offer a loan, in my judgment it is most probable that if Mr Wright had not made the mistakes in question, a loan of £1,726,000 would still have been made. There was, of course, a risk of cost overruns, but the position in early August l990 was that by reference to contract price and moneys certified, the development was approximately half completed and it was expected to be completed by early November. Moreover, as I have said, PLT were not obliged to make the loan when the first draw-down took place on 9th November l990. The amount of the first draw-down was based on a valuation of the works made on 6th September l990 in the sum of £786,772 as certified in Certificate No.6, and on the same day, 9th November l990, as that draw-down was made, a further draw-down was made reflecting a valuation of works of £1,020,516 made on 3rd October l990 and certified in Certificate No.7. The works were thus substantially advanced when the first draw-down was made, and the risk of further delays and cost overruns (and, indeed, of a fall in the value of the security) was less than it would have been if the first draw-down had been made at the outset of the works. Even at 51 per cent loan-to- value ratio, the facility was well within PLT’s own limit of 70 per cent. In those circumstances, I am satisfied that the loan of £1,726,000 would have been made in the absence of the mistakes in Mr Wright’s memorandum. Those mistakes accordingly did not cause any loss.

150. Mr Blunt’s Point (2) was that the credit committee did not trouble to read Chancery’s presentation but relied on Mr Wright’s memorandum.

151. The only document that Mr Wright circulated to the credit committee was his memorandum of 9th August l990. The presentation from Chancery remained in his file. Whether members of the credit committee read that presentation does not appear. If I had found that they did not read it, I should not have considered that Point (2) added anything to Mr Blunt’s other points.

152. As I have said, Mr Wright had accounts for L & C for the two years ending on 31st July l989; the accounts for the first year were audited accounts, but those for the year ending on 31st July l989 were unaudited. Mr Blunt relied on the fact that the Plaintiffs had not obtained audited accounts of L & C for the year ending 31st July l989 as an aspect of contributory negligence. It was put to Mr Wright in cross-examination that it was unsatisfactory from the Plaintiff’s point of view that accounts should be unaudited. His answer was this:

"I think, perhaps to answer that question, the accounts would have been secondary in our consideration. The primary consideration on this facility was the project itself".

153. The point of Mr Wright’s answer that the primary consideration was the project itself was that provided that the construction could be completed and the development marketed successfully, the loan would be repaid out of the proceeds. Realisation of the security was thus not something to be avoided if possible, but an essential part of the purpose of the loan and the expected source of its repayment. So far as the strength of the borrower’s covenant was concerned, therefore, the lender was concerned only with the borrower’s ability to finance the expenditure not otherwise covered by the lending transaction. The amount involved, assuming expenditure of the whole contingency allowance but no cost overruns, was £195,000: viz., £65,000 construction costs and £130,000 advertising and marketing expenses.

154. The cross-examination continued:

"Q. The most up to date audited figures you had were for the year ended 31st July l988, were they not, two years before?

A. Yes.

Q. Do you not agree that that is not satisfactory to a lender when one is dealing with a company which has other on-going projects?

A. I think at the time, my Lord, that was not unusual, development companies would quite often take that sort of period of time to produce audited accounts, and draft accounts would have been the best that would have been available at that moment."

The audited accounts for the year ending on 31st July 1989 have been put before me. The principal difference between the audited and the unaudited accounts for that year was that the unaudited accounts showed a loss on ordinary activities before taxation of £3,380; in the audited accounts, the corresponding figure was £4,745. In my judgment, that difference was insignificant and could not have affected the Plaintiff’s decision to effect the loan.

155. As to Mr Wright’s failure to mention in his memorandum that L & C would have to find £130,000 for advertising and marketing expenses, Mr Blunt submitted that L & C did not have the money required for marketing. However, L & C did in fact market the property, though how much they spent does not appear. There is no suggestion that the development was not properly marketed.

156. As to Mr Blunt’s Point (7), that PLT failed to make any real enquiry into the conduct and/or success of L & C’s business as an investor in property and as a property developer, the presentation from CPF stated that ectors of L & C, Mr Melville and Mr Leibu, were both experienced developers and well known to both CPF and Chancery.

157. Mr Blunt’s Point (10) was that PLT had inadequate lending criteria. PLT’s lending criteria and approval procedures were set out in Appendix I to their Manual of Accounting Procedures and Controls. They read as follows:-

" Principal Lending Criteria and Approved Procedures

The Board of ectors will review the Company’s lending criteria not less than once a year and, if appropriate, resolve to modify them in the light of market conditions.

The lending criteria are not rigid: exceptions will occur, and will be sanctioned within the Internal Approval Procedures set out below.

Lending Criteria (1) Maximum loan to any borrower (or group of connected borrowers) not to exceed 10 per cent of the capital base of the Company in accordance with Bank of England guidelines. Minimum new loan £100,000.

(2) No unsecured lending, Advances not to exceed 70 per cent of valuation of security (normally freehold or long leasehold property).

(3) Security comprising first legal charges over property.

(4) Valuation of security to be established on a current open-market basis by surveyors reporting to the Company for loan purposes. Where the Company is supplying construction finance, stage payments may be released against approved Architect’s Certificates, with the Company reserving the right to employ surveyors to oversee progress generally.

(5) Taking of security to be effected by independent firms of solicitors.

(6) Interest on all loans to be serviced monthly or quarterly.

(7) Interest rates to be set as a function of the market - either Finance House Base Rate or London Inter-Bank Offered Rate.

(8) Maximum capital repayment period 10 years, with minimum 30 per cent capital repaid over period and balloon at end.

(9) Aggregated outstandings with maturities over 7 years not to exceed 20 per cent of the loan book.

(10) Maximum interest-only period 3 years.

Internal Approval

Procedures Loans falling within the criteria indicated above sanctioned by the Credit Committee, whose members are the Executive ectors and the Loans Managers and whose secretary is the Finance ector. The quora for approvals are as follows:

• Advances up to and including £250,000: any three members
• Advances up to and including £500,000: any three members of whom one must be an Executive ector
• Advances over £500,000: any three members of whom two must be Executive ectors.

Any loan falling outside the criteria indicated above, whatever the amount, must be approved by all the Executive ectors."

PLT’s criteria, submitted Mr Blunt, carried with them a significant degree of speculation. First, they assumed that property values would remain constant throughout the period of construction and sale, and that the property would be completed on time, within budget and to specification. In the context of the question whether the loan of £1,726,000 would have been made in the absence of the mistakes in Mr Wright’s memorandum, I have already considered those questions of risk. In view of the late stage in which draw-down took place, in my judgment the risks here were less than they might well have been in similar transactions taking place at the beginning of a development.

158. Mr Challinor, the Defendant’s banking expert, gave this evidence on the subject in the course of his cross-examination:-

"Q. If somebody has a valuation as at say, the 5th November, l990 and the building is going to be completed by January l991 there is not very much scope for changes in the value of the end product, one would hope?

A. If that is the position, yes.

..................................................

Q. If a lender, lending on 5th November was advised that the GDV was such that he had a 50 per cent cushion and the completion was due in January l991, that would be a very happy situation for the lender?

A. It would be reasonable."

I accept that evidence.

159. As to the criteria themselves, Mr Blunt was critical of the lending of 100 per cent of construction costs. It is true that such a policy can lead to a borrower having less commitment to a project than if he invested more of his own money in it; on the other hand, as Mr Wright accepted in evidence, a half built project is difficult to dispose of. And, as Mr Challinor accepted in evidence, the risk of non-completion when the advance includes 100 per cent of building costs is ‘far less’. Thus there is a countervailing advantage in lending 100 per cent of construction costs.

160. As to the criterion of lending up to 70 per cent of gross development value, I was referred to Blay’s Commercial Mortgage Tables. They were put to Mr McQuillen in cross-examination. Mr McQuillen was the Plaintiff’s banking expert witness. According to the November l990 edition of those tables, a number of lending organisations were willing to lend money for property development to the extent of 100 per cent of the building cost and 100 per cent of the fees. They included the following. Heart of England Building Society was willing to lend in addition up to 60 per cent of the land value, but required an indemnity guarantee policy for advances over 60 per cent of some unstated figure which, according to Mr McQuillen’s evidence, was gross development value, wherever it was mentioned in the table. I accept that evidence in general but as will appear it leads to a peculiarity in relation to the United Bank of Kuwait. It was noted in relation to Heart of England Building Society that "Full accounts required from the developer/builder together with a full comprehensive project viability report, plans, estate agents valuations and projected selling prices, local authority permissions, etc. Track record preferred." A finance house called Business Loans was willing to lend in addition up to 100 per cent of the land value. The note stated "Must have three years accounts, project viability and three previous projects. Independent project consultants appraisal prior to commitment at the cost of the applicant. Joint venture companies (50/50) are sought for 100 per cent finance and profit shares of 25 to 50 per cent are required, minimum £250,000." Mr Blunt described Business Loans as doing business in a special way of its own. He did not, however, suggest that it was negligent not to have been carrying on business like a clearing bank. Allied Trust Bank was willing to lend in addition 70 per cent of land value. An indemnity guarantee policy was required for advances of over 70 per cent. It was noted that the developer must have a good track record. United Bank of Kuwait was willing to lend in addition 70 per cent of land value. It required an indemnity guarantee policy for advances over 65 per cent but loans were limited to an overall maximum of 65 per cent of the completed value. If, in accordance with Mr McQuillen’s evidence, the indemnity guarantee policy was required for advances over 65 per cent of gross development value, it is not clear how that is consistent with the limitation of all loans to that figure. United Bank of Kuwait also required three years audited and up to date management accounts and track record.

161. Mr Blunt submitted that PLT were at fault in not taking a guarantee from one of the ectors of L & C, Mr E. Melville. Mr Melville appears to have been a man of substance, and initially Mr Wright, through CPF, sought a guarantee from him. Mr Melville may have been unwilling to give a guarantee; however that may be, Mr Wright’s colleague Mr Gordon (who did not give evidence before me) decided not to require a guarantee from Mr Melville. Mr Wright thought that the reason was that Mr Melville had put a substantial sum of money into the project, but the truth of that proposition was not investigated at the time, nor was it established before me. In cross-examination Mr Wright gave this evidence:-

"Q. Here was a guarantor who was using as an explanation why he didn’t want to give a guarantee in that he had already put lots of money in and you didn’t investigate that to see whether it was true, did you?

A. No.

Q. You took it at face value but in any event it is no reason for a banker to allow a ector off a guarantee, is it?

A. I think we took it in context that we had a guarantee from a ector. The guarantees are taken not for financial reasons primarily but to tie in the ectors to the project. We were also looking in our view at a strong proposition in terms of our own exposure, in terms of the whole transaction, the time to complete and so on.

Q. Here was a putative guarantor who didn’t want to be tied in, a ector who did not want to be tied into the project. Didn’t that raise alarm bells in your mind?

A. No, as I say, we had a guarantee from one of the ectors and in context of the overall project it was something that not only myself but Peter Gordon and also the other members of the credit committee thought was acceptable and reasonable.

Q. It was an indication that here was a ector who had no great confidence in the project. Is that not right?

A. No, I wouldn’t take it as that at all...... It is not an indication of their support for the project.

Q. But are you not supposed to look at things from their point of view. Naturally they are not going to want to give a guarantee. Everyone in their position tries not to give a guarantee but the prudent banker’s position is, "Here is someone who seems to be a man of substance, he is a ector of the company, I want his guarantee". Is that not right?

A. We would always attempt to get guarantees.

Q. You say that would have been your normal practice. You told us that?

A. We would attempt to do. In this instance we took a decision based on the facts of the matter at the time that we would waive that requirement.

Q. What happened was you didn’t take the decision at all, did you? Mr Gordon took the decision?

A. Yes, and I was happy to support that.

Q. Why? Because Mr Gordon had taken it?

A. No.

Q. You were happy to associate yourself with that?

A. Yes."

162. Mr Melville’s reluctance to give a guarantee, assuming that he was reluctant, is not, in my judgment, necessarily an indication of lack of confidence on his part in the project. He was interested in the project in the sense that he had a 62½ per cent shareholding in L & C. But I accept that the absence of a guarantee from Mr Melville is a point against the prudence of the loan.

163. The banking experts were agreed on two points, among others, as follows:

(1) PLT should have required more up-to-date finance accounts to be produced, even if in draft or management form, before the advance was considered.

(2) Special caution is appropriate when being asked to take over lending from other banks.

164. As to Point (1), I am not satisfied that by the time that the loan was agreed in August l990 PLT could have obtained accounts of L & C for the year ending 31st July l990, even in draft or management form. The accounts for the year ending 31st July l988 were not audited until the 2nd May l989, which suggests that they were unlikely to have been available even in draft form in August of the previous year. The same may well have been so in the case of the accounts for the year ending 31st July l990.

165. Point (2) gives rise to a point made by Mr Blunt. He submitted that PLT ought not to have relied on the reference from the Midland Bank because that bank had an interest in divesting itself of involvement in the development. The following exchange took place during the examination in chief of Mr Wright:

Q. ......................Mr Challoner, the Defendants’ banking expert, seems to be suggesting that you should have taken that reference with a pinch of salt because Midland might be wanting to get rid of this customer for reasons of their own and you should have investigated further. What is your comment on that?

A. I am afraid I don’t agree with that. I think it is a very good reference. Midland Bank are a very reputable bank and certainly we relied upon the information given.

I accept that PLT acted reasonably in relying on the reference.

166. Mr Blunt submitted that heavy losses incurred by PLT in the years ending 30th April l991, 30th April l992 and 30th April l993 and other points evident from its accounts did not inspire any confidence that it was a prudent lender. He did not submit that those facts were evidence that the loan in question was made imprudently, and in those circumstances I regard the facts in question as irrelevant.

167. I turn now to consider Mr Blunt’s submissions on contributory negligence in the round. PLT’s lending criteria I find to be at, but not off, the end of the spectrum of criteria revealed by Blay’s Commercial Mortgage Tables. The evidence was all one way that the loan criteria were imprudent by the standards of the clearing banks, and I so find. I am not satisfied that they were imprudent by the standards of that end of the market in which PLT operated.

168. As indicated above, I have accepted some of Mr Blunt’s criticisms of the way in which PLT decided to make the loan. The following facts are also relevant. Mr Leibu gave his personal guarantee in the sum of £150,000. The purpose of that guarantee was simply to secure Mr Leibu’s commitment to the project. Chancery provided £250,000 to a blocked deposit account with PLT in order to service interest due to PLT under the mortgage loan; the provision was secured by a second mortgage on the property. PLT were thus assured of interest up to £250,000.

169. Mr Wright considered, having regard to Smith Melzack’s advice on demand and competitiveness and the blocked deposit, that there was no likelihood of PLT’s having to rely on L & C’s covenant, in relation either to capital or to interest. In my judgment, that was a reasonable view, given the valuation received. The failure of L & C to repay the loan seems to have been due to the lack of demand for the property.

170. The banking experts were agreed that whilst it is not by any means the only consideration, the loan to value figure is a major part of criteria to be included in assessment of property development lending. I accept that view. The cushion of approximately 50 per cent of gross development value that PLT thought they had on the basis of the valuation was a substantial one. That weighs heavily with me on the question of contributory negligence. On the basis that imprudent lending can be fault within the meaning of the Act, I am satisfied that this loan was not imprudent and that the Plaintiffs were not guilty of contributory negligence.

171. Mr Blunt submitted that PLT failed to mitigate its loss by failing to pursue Mr Leibu timeously (or at all) on his guarantee. A formal demand was made on him on 19th May l992. Thereafter no attempt was made to pursue him before he was made bankrupt on 22nd March l995. Mr Leibu’s bank statements suggest that he received over £155,000 on 16th July l992, of which £83,000 disappeared without trace. Had PLT pursued Mr Leibu, there was every reason to believe, submitted Mr Blunt, that that sum could have been caught.

172. There was only one relevant bank statement before me. That showed a debit balance of over £70,000 until the payment in on 16th July l992 of £155,171.99 leaving a credit balance of £82,470.10. On 17th July £100 was transferred out and on 20th July the balance was transferred out and the account closed.

173. Mr Blunt submitted that PLT should have obtained a judgment against Mr Leibu and a garnishee order before the 16th July l992, if necessary making their demand earlier than 19th May l992. I am not satisfied that it was reasonable to expect PLT to take speculative legal proceedings against Mr Leibu in order to mitigate their damage, or that if they had obtained a garnishee order, they would have obtained the money. Moreover, PLT did consider the possibility of pursuing Mr Leibu on his guarantee but, because they understood him to be in financial difficulties, it was decided that the costs of enforcement would not be justified. I find that PLT did not unreasonably fail to mitigate their damage.

174. Mr Crowther accepted that if this were a case of pure valuation advice, the ‘Saamco Cap’ would apply. But he submitted that no such cap applied here since the Plaintiffs required advice as to demand and viability. He referred to a passage in the speech of Lord Hoffman in South Australia [1997] AC 191 at page 223. The passage begins with a quotation from the letter of instruction to the valuer:

"In preparing your report, please comment on the following, if applicable.......7. The current rental value and its relationship with the present income, and give your opinion as to the lettability of the property in the open market or, if unlet, please comment on the viability of the proposed rental income. 8. The completed value (if a development project) and a commentary regarding the potential saleability.....10. The estimated development costs, and a commentary as to whether the costs quoted are realistic."

The proposed loan was for "an initial term of 12 months:" the loan was to finance the purchase of the land and the lenders expected that they would be paid off when the borrower obtained finance to carry out the development. The borrower was an off-the-shelf, single asset company.

The reason why the valuation was wrong was that the valuers had overestimated the demand for the property and underestimated the costs of the development. Thus the information which the report provided under each of the heads I have quoted was also wrong. The lenders say that if the valuers had not been negligent they would have appreciated that the proposed development was not viable. As the borrower was a single-asset company, a default was virtually inevitable. The prospect of some other lender refinancing the project was zero: the lenders were likely to be locked into the loan for an indefinite period and therefore exposed to market fluctuations for longer than they had reason to expect.

The main thrust of these submissions is also concerned with what would have happened if the valuer had provided accurate information. This, as I have said, is not the basis of the valuer’s liability. In any case the comments requested in the bank’s standard letter were not in my opinion, as a matter of construction of the contract between bank and valuer, independent items of information on which the bank was entitled to place reliance separately from the open market valuation. They amounted to an exposure of the valuer’s calculation, so as to enable the bank to form a view as to how accurate they were likely to be. But the valuer would not in my view have incurred any liability if one or more of his comments had been wrong but (perhaps on account of a compensating error) the valuation was correct. The contract did not therefore impose a different liability from those in the other cases."

175. In the instant case, it was not an over-estimate in the demand for the property or an under-estimate in the costs of the development that led to the over-valuations in the reports of 12th and 14th June. In my judgment, the opinion as to demand expressed in the report of 14th June was an independent item of information upon which PLT was entitled to place reliance separately from the open market valuation. The opinion on viability, though dependent on valuation, did not depend only on the valuation: suitability was also referred to. The opinion ought to have, and may have, depended (though was not expressed to depend) also on the opinion as to demand. But the terms in which the reference to viability was couched made it tolerably clear, in my judgment, that the advice on viability was dependent upon the actual realisation of the stated prices, the likelihood of such realisation not being passed upon except in the separate passage on demand. I conclude that the advice on viability, in the context, depended substantially on the valuation and is not to be treated as an independent piece of advice upon which PLT was entitled to place reliance separately from the open market valuation.

176. As I have said, the advice as to demand given in June l990 was not negligent. If repeated on 5th November l990, it would then have been negligent. The question arises whether, on 5th November l990, such advice was given and if so whether it was an independent item of information upon which PLT was entitled to place reliance separately from the valuation. The letter of 5th November seems to be rather carefully worded. The valuation of 14th June is not expressly mentioned. But all parties were aware of the description of the report of 14th June as an addendum to the report of 12th June. That description was contained in CPF’s letter of 15th August l990 countersigned by Mr Sandler on behalf of the Defendants. In my judgment, on the true construction of the letter of 5th November l990, the reference to the report and valuation of 12th June impliedly includes a reference to the addendum of 14th June, as does the reference to the absence of changes in the valuation of the property.

177. In the course of his cross-examination, Mr Sandler gave the following answers:-

"Q. Now the next topic is the 5th November letter..............So that was your professional advice as at that date, that the valuation was unchanged?

A. That the valuation that we did

Q. Precisely.....

A. Applied but we were not asked to do a new valuation.

Q. .................this was a statement that, in your professional opinion, there were no changes in the market known to you that made it unsafe to rely on that valuation?

A. Yes".

And then later on:

"Q. This is a situation where the conflict of interest, I suggest really does become rather acute. If you, at this late date, with draw-down just about to take place - it would be very difficult to tell PLT that things had changed and they ought to think again?

A. Not at all. If we genuinely believed that the market had slowed down to the extent that the quoting prices were not achievable we would have notified PLT straightaway".

Q. I suggest that the review of the evidence I just put before you shows quite clearly there was no demand for this development at those prices and that your valuation should have been revised..........................."

Taking that evidence as a whole, I find that the letter of 5th November l990 did give advice that demand was unchanged but, unlike the advice given in June, that advice was an integral part of the valuation and was not an independent item of information.

178. I thus conclude that the ‘Saamco Cap’ applies. That cap is the difference between the valuation and the true value on 5th November l990. On the resale basis, the valuation was £95 per square foot for an area of 36,919 square feet, viz. £3,507,305, and the true value was £2.65 million. On the investment basis, the valuation was £3.4 million and the true value was £2.47 million. The former basis yields a cap of £857,305; the latter a cap of £930,000. Mr Crowther invited me to choose the latter, for a reason which I reject. Mr Blunt’s argument by way of illustration was also based on the latter. He made no contrary submission. The basis on which the property was sold does not appear, though Smith Melzack, as I have said, advised in August l991 that the open market value of the property on an investment basis was the same as the value on a resale basis. It was the valuation of £3.4 million that the Plaintiffs used in calculating their cushion.

179. In all those circumstances, I think it right to adopt that valuation as the basis of the cap. The cap is thus £930,000.

180. The loss (agreed at approximately £1.8 million including interest) which PLT suffered through making the loan was caused by the Defendant’s negligence. If PLT had not made the loan, they would have suffered no loss. Thus the whole of the loss suffered by the Plaintiffs represents damage¹ to them caused by the Defendant’s breach of duty. But the Defendants are not liable for the whole of that damage, since not all of it falls within the scope of their duty. As Lord Hoffman explained in South Australia Asset Management Corporation v York Montague Ltd. [1997] AC 191,221, the damage for which the Defendants

¹ Perhaps I should find some word other than ‘damage’: see the speech of Lord Cooke of Thorndon in Platform Home Loans Ltd v Oyston Shipways Ltd. But it would I think be liable to lead to confusion to use the word ‘loss’ to describe the difference between an actual and a hypothetical loss. In Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No.2) [l997] 1 WLR 1627, 1631 Lord Nicholls of Birkenhead used the expression ‘basic measure’; in Platform Home Loans Lord Hobhouse of Woodborough used the expression ‘basic loss’.

are responsible is that which has been caused by the valuation being wrong. As I understand the speech of Lord Hoffman, the relevant consequence of the valuation being wrong was that the Plaintiffs had less security than they would have had if the value of the property had conformed with the valuation actually given. That understanding is, I think, confirmed by this statement of Lord Hoffman in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd. (No.2) [l997] 1 WLR 1627, 1638:

"What he must show is that he is worse off as a lender than he would have been if the security had been worth what the valuer said".

Had I been free to work out for myself the effect of that consequence, my reasoning would have been as follows. The value of the security at the time of its realisation had fallen well below its true value at the time of the valuation. That fall in value could have been partly due to the fact that the sale was a forced sale, but was doubtless largely the result of a fall in the market. The property was in fact worth £2.47 million on an investment basis in November l990 and was sold in l998 for £750,000, a fall of about 70 per cent; had it been worth £3.4 million in November l990, the same percentage fall would have led to a selling price of about £1,030,000. It is reasonable to suppose that the same percentage would apply in both cases. Thus the Plaintiff would still have suffered very substantial loss. The recoverable damages for the period up to the date of realisation of the security would simply be the difference between those two sums, namely £280,000. That would seem to me to be the just solution; it was surely in the contemplation of both parties that the Plaintiff’s cushion would diminish proportionately to a fall in the market, if it occurred. That view of the justice of the case seems to be shared by Lord Hoffman. In South Australia, ibid at page 214, he said:

"A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties".

181. It is true that there was no evidence in this case as to the cause of the fall in value of the property nor as to the proportionality of falls in value to initial values when there is a fall in the market. It may be said that the assumption of proportionality is a rule of thumb. But the so-called cap to the damages of (in this case) £930,000, being the difference between £3.4 million and £2.47 million, is itself a rule of thumb (see per Lord Hobhouse of Woodborough in Platform Home Loans, where he said: "The loss suffered by a lender in the event of a market fall may not be ectly proportionate or equivalent to the original overvaluation. The Saamco principle is essentially a legal rule which is applied in a robust way without the need for fine tuning or a detailed investigation of causation"). That rule of thumb is equivalent to assuming that the cushion will not be affected by a fall in the market. If there is to be a rule of thumb, I would prefer one based on an assumption of proportionality.

182. However, I am not free to work the matter out for myself. Counsel have agreed the Plaintiff’s loss at £1,824,764.42 including interest. The damages will be £930,000. I give judgment for that sum plus interest. I shall leave it to Counsel to agree the amount of the interest if possible; in default of agreement I shall hear them further on that point.

HHJB/jc/pmt/6.0/PLT(Apr99)