Bridging finance and valuers’ scope of duty clarified

In the last 10 years the number of new lenders entering the bridging finance market has expanded rapidly to meet the growing appetite for this form of funding. Post 2008 and the financial crash, mainstream lenders are not as able to provide finance to the smaller and less well established developers. So those developers have relied instead on bridging finance. Funding is typically made available on a 6 to 12 months basis and secured against the property on an ostensibly low Loan to Value (LTV) ratio but at interest rates which reflect the risks inherent in this market.

Each of these lenders, if asked, would say that the single most important factor in their lending decision is the value of their security. This has been the challenge for valuers and their insurers. Bridging finance is risky and borrowers do default. If the loan is not repaid, the lender expects to recoup its entire outlay (including interest) from the sale of the asset. Too often the same lenders have also argued that the valuer should be responsible for their losses if the sale proceeds prove inadequate.

One short term lender was Hope Capital Ltd (Hope). In early 2018, Hope (together with Hope Capital 2 Ltd) lent £2.4m (the loan) to a company owned by an individual, Evangelos Pieri. The security was a Grade 2 listed Elizabethan hall named Cedar House, situated in Cobham, Surrey. This was valued at £4m, by Alexander Reece Thomson LLP (ART), a firm of surveyors. The loan was not repaid at the end of the 6 month loan term. Hope appointed LPA (Law of Property Act) receivers but Cedar House was not sold until October 2020, by which time, the pandemic had hit. The reason for the delay lay with the borrower, Mr Pieri. Shortly after the loan was made, Mr Pieri had started works to the property, which included laying a concrete floor in the Medieval Hall.

Cedar House was ultimately owned by the National Trust. They were not happy that the building had been altered in such a detrimental manner and without their permission. They served a S146 Notice requiring rectification forthwith, failing which the lease held by Mr Pieri would be forfeited. In order to avoid losing their security, Hope was required to fund these works with only limited assistance from Mr Pieri and only recovered £1.4m when the property sold at auction over two years after the original loan.

Hope argued that ART should be responsible for the entirety of its losses pleaded at up to £3.9m including (a) the contractual interest which Mr Pieri should have paid, (b) the additional profits which would have been generated had the loan not been made and (c) the costs of rectifying the damage done to the property by the borrower.

ART argued that even if it had been negligent, the majority of these losses fell outside the scope of its duty because they were caused by Mr Pieri. His actions prompted the National Trust to serve a S146 Notice and that delayed the sale of the property with disastrous consequences.

The judgment, handed down on 27 September 2023, analysed the different categories of losses claimed by Hope, starting with its claim for contractual interest (as distinguished from cost of funds which is the conventional approach to interest in claims against valuers). Hope said that it was able to satisfy the criteria detailed in Swingcastle Ltd v Alistair Gibson [1991] to support a claim for contractual interest. The criteria being a track record of profitability but only limited funds available to it and evidence of loan applications which it had been obliged to reject as a result. However, the judge disagreed. The documentary evidence in support of these factors either did not exist or was unreliable. Even the evidence supporting the cost of funds had shortcomings such that the judge felt obliged to rely on expert evidence as to what was reasonable.

When it came to the overall losses suffered by Hope, the judge spent some time considering the application of Manchester Building Society v Grant Thornton UK LLP [2021] and Meadows v Khan [2021]. He emphasised the importance of the valuer’s job – i.e. to value the property but rejected the assertion that the valuation was the only consideration for a bridging finance provider. That was not consistent with the lenders own obligations to comply with its lending criteria or to identify a proper exit route by which its loan would be repaid. On that, he was highly critical of Hope’s decision to ignore an obvious untruth by the borrower, Mr Pieri. Ultimately, Mr Pieri could not be trusted to deal with a Grade 2 listed property and that had led to service of a notice which potentially jeopardised Hope’s security. For that reason, he agreed with the defendant’s reliance on Charles B Lawrence & Associates v Intercommercial Bank Ltd [2021]. This required the court to deduct the value of the land at a specific point in time from the loan, as a means of limiting the losses suffered by the lender, to those which fell within the scope of the valuers duty.

Clearly this is a fact specific decision but there is no doubt that it also addresses a number of the issues which the rapid expansion of short term lending has presented to valuers and their insurers.