Lender’s claim for negligent valuation – ensure you seek damages in time

In the recent case of Todd Hadley Pty Limited v Lake Maintenance (NSW) Pty Ltd (No 2)[1], the New South Wales Court of Appeal considered a claim for pure economic loss allegedly arising out of a valuation report provided for mortgage valuation purposes.

The separate question referred to the Court for determination was whether, for the purpose of its claim against the valuer, the lender suffered loss and damage by the time it had entered into a contract of sale for the property.

This issue was critical as the sale of the mortgaged property was for a price that was significantly less than the estimated value and debt owed to the lender – it would determine if the lender could continue with proceedings against the valuer.

Background

Upon instructions from the mortgagor (Mr Bone), a valuer prepared a report in February 2010 (for mortgage valuation purposes) which estimated the value of the property at Wallalong, New South Wales to be $7.45 million.

The lender, Lake Maintenance (NSW) Pty Ltd (No 2) (Lake Maintenance), relied on the valuation report and advanced moneys to Mr Bone which was secured by the property. The term of the loan expired in December 2011 and Mr Bone failed to repay amounts owing which by then, was $5.038 million.

In January 2012, Lake Maintenance appointed receivers over the property and a contract of sale for the property was entered into on 23 May 2012 for $1.025 million – being significantly less than the estimated value of the property when the loan was established.

Lake Maintenance subsequently commenced proceedings against Mr Bone in June 2012 to recover the remainder of the debt owing. Those proceedings were resolved by a settlement deed which Mr Bone failed to comply with. This resulted in Lake Maintenance filing a consent judgment against him for $5 million and ultimately, bankrupting Mr Bone in September 2017. The appointed trustee of Mr Bone’s bankrupt estate reported in April 2018 that no dividend was expected.

When it was apparent that the debt was not recoverable from Mr Bone, on 14 June 2018 Lake Maintenance commenced proceedings seeking damages against the valuer for negligence and for misleading and deceptive conduct.

The valuer argued that Lake Maintenance had commenced proceedings out of time, being more than 6 years after the lender had suffered the loss.

Were proceedings against the valuer statute barred?

Where more than 6 years had passed between when the contract of sale for the property was entered into (23 May 2012) and commencement of proceedings against the valuer (14 June 2018), the Court had to determine whether causes of action in negligence and for misleading or deceptive conduct arose against the valuer:

• no later than when the mortgaged property was sold, at which point a lender’s ability to recoup the debt owed from proceeds of sale crystallised; or
• a later point in time when it was ‘reasonably ascertainable’ that the lender was unable to obtain full repayment of the debt under the mortgagor’s personal covenants.

Decision

It was accepted that in these circumstances, a valuer owes a duty of care to the lender when providing a valuation. An incompetent over-valuation of the property diminishes the value of the mortgage taken by the lender and the chance to ‘recoup’ any moneys owing is necessarily lost once a mortgaged property is sold.

In weighing up the arguments of Lake Maintenance and the valuer, the Court found it key to focus on the nature of the interest infringed. In this case, the interest infringed was Lake Maintenance’s ability to ‘recoup’ the debt owed from the proceeds of sale. When the contract of sale was entered into, it was clear that Lake Maintenance would suffer a loss and could not ‘recoup’ the full debt owing. The Court held it was at this point in time, being May 2012, that the loss and damage crystallised and the cause of action against the valuer arose.

The Court further held that subsequent prospects of recovering the remaining debt from Mr Bone were irrelevant to the timing of when the cause of action arose. Rather, any recovery from Mr Bone was material to considering whether Lake Maintenance had taken steps to mitigate its loss and whether amounts it sought from the valuer should be reduced if some amounts had successfully been recovered from Mr Bone.

Ultimately, it was held that the cause of action against the valuer arose on 23 May 2012 – more than 6 years before proceedings were commenced against the valuer in June 2018.

Accordingly, Lake Maintenance’s claim had been commenced too late and was dismissed by the Court.

Key takeaway

This case is a useful reminder to carefully consider when loss and damage occurred as a result of negligence and misleading and deceptive conduct. In the case of lenders relying on valuations provided for mortgage valuation purposes, the timing of when proceedings commence will differ depending on whether the valuation was instructed by the lender or the mortgagor.If a lender considers the valuation report was incorrect and caused it loss, it should promptly seek legal advice when the mortgaged property is sold rather than wait to see if moneys can subsequently be recovered from the mortgagor personally.

Authored by:

Barbara-Ann Sim, Partner
Sophie Snape, Solicitor