LSL surveying firm over-valued homes, rules High Court

The country’s largest valuations firm, e.surv – part of LSL – is examining crucial High Court judgements against it before deciding whether to appeal.

All three cases revolve around the accuracy of valuations made by e.surv at the height of the housing boom.

On the strength of those valuations, the lenders agreed loans and are now trying to recoup their losses. In only one of those cases has the court said that the lender’s own criteria should share the blame. The court also heavily criticised the use of property indices in arriving at valuations.

The cases come after LSL revealed last summer that it had had to set aside over £17m to deal with potential claims against its surveying arm.

In one of those claims now heard by the High Court, a secondary charge lender, Blemain, brought the case against e.surv alleging professional negligence.

The property in question was a five-bed detached house in Putney valued by e-surve in July 2007 at £3.4m. The borrowers had applied to Blemain for a £250,000 loan to be secured against their property, which they had just remortgaged with Cheltenham & Gloucester.

The valuation for the remortgage was carried out in January 2007 and put the property at £2.65m.

After the borrowers defaulted on their loan with Blemain, the property was sold for £2m in 2010. As second charge holders, Blemain did not receive any of the sale proceeds, and so issued the claim against e-surv.
 
The judge ruled that the property had been overvalued by £600,00 – or 21.4%. Mr Justice Coulson said that Blemain would never have made the loan had they known the property’s correct value.

E.surv argued that the borrowers were risky: they were funding their lifestyles with credit cards, had high credit repayments and a significant level of indebtedness.

However, the court ruled that Blemain themselves had not been negligent in terms of their own lending policy, and the judge awarded full damages.

The judge also said in this case that the margin of error for valuing a standard residential property is 5%, and for a unique property as was the case here, 10%. He did not think that more than that, or 15%, could be sustained.

The judge favoured the use of recent ‘comparable’ sales data to aid valuations, but heavily criticised the ‘mechanistic’ use of property price indices. He said these were unreliable.

In the other cases, heard together, Mr Justice Coulson heard claims brought against e.surv by GMAC. In both cases the loans were self-certified, one to 85% LTV and the other to 95% LTV. The judge found 85% was not negligent, but in the 95% LTV case, ruled that the lenders had contributed 50% to their losses.

In one case, a two-bed flat in Birmingham was valued by e-surv at £227,995 in November 2006. The property was being built and was not inspected – a matter not notified to GMAC. The judge said the value at the time was over £23,000 less. The margin for error should have been 5%.

In the second case, the property was a four-bed house in Whitstable, Kent, with a railway line behind it and a council estate nearby. It was valued by e.surv in July 2007 at £295,000. The judge said it had been worth £35,000 less and that the valuer had failed to take into account adverse features. The margin of error should again have been 5%.

After the cases, e.surv director Richard Sexton said: “This is an industry issue, not just one for e.surv, but we decided to challenge the claims because we felt there were principles at stake.

“We will be studying the final judgements when these are published.”

Currently, LSL and their insurers would stand to have to pay over to the lenders the amount of their losses – half in the case where the judge ruled that GMAC was 50% responsible – plus costs, should these be awarded.

Whilst having professional indemnity insurance, LSL would still be liable for excesses.

Here is how we covered the issue as it emerged last summer:

https://tinyurl.com/cmbbrq4