Lenders have had for some time valuer panel arrangements. Panel valuers need to maintain a certain level of professional indemnity insurance and adhere to minimum valuation standards.
By using panel valuers lenders hope to raise the valuation standard. Panel arrangements are also intended to ensure that the lender will have the fall back option of making a claim on a PI policy.
Following the enactment of apportionment legislation across various States and at Commonwealth level the valuer's PI insurer may not cover the full loss.
Our extensive experience with valuer claims has taught us that this risk increases considerably when the lender does not instruct the panel valuer directly.
An example of such a situation can be found in Kayteal Pty Ltd v John Joseph Dignan & Ors.
The Case
Kayteal (lender) lent $780,000 to Mr Bsat (borrower) on the security of a first mortgage over a property in Canley Vale.
John Dignan and his company, Dignan Real Estate (valuers), valued the property at $1.2M in circumstances where, in fact, it was worth only $52,000.
The borrower defaulted under the loan. The lender obtained judgment and the borrower subsequently became bankrupt.
The lender sued the solicitor who acted for it on the mortgage transaction for negligence. The claim by the lender against the valuers' insurers was settled and discontinued.
Decision
The Court found that there were three concurrent wrongdoers liable for the lender's loss:
- the solicitors;
- the valuers;
- the borrower.
In allocating the responsibility between these concurrent wrongdoers, the Court looked at comparative culpabilities/blameworthiness and causative potency of the conduct of each wrongdoer.
The Court found that the valuers were grossly negligent because they:
- were primarily responsible for the valuation and for identifying security property valued;
- armed the borrower with an erroneous valuation which enabled the borrower to mislead the lender;
- inexplicably valued the wrong property;
- failed to heed the solicitors' attempts to draw their attention to discrepancies, which ought to have prompted "the most cavalier of valuers to rethink and recheck".
Nonetheless, the largest part of the liability (47.5%) was allocated to the borrower who knowingly, and for his own benefit, misrepresented the value of the property to the lender. The borrower must have known that the valuation was erroneous as he purchased the property only two months earlier for $52,000. (This case may be contrasted with St George Bank Limited v Quinerts Pty Ltd (discussed in our November 2009 update click here to read) where the borrower's mere failure to repay did not make him a concurrent wrongdoer).
The valuers came second by a nose and were allocated 40% of the liability.
The solicitors were last by a couple of lengths and were allocated 12.5% of the liability. Whilst their liability was slight compared to the others, it was exacerbated by the circumstance that a fundamental purpose of their engagement was to ensure that appropriate protections were put in place and certain issues with respect to the property were identified and reported to the lender.
A safer bet
This is but one example of where a lender can leave itself exposed to a partial recovery if the borrower (or their broker) plays a role in procuring the valuation. This remains the case even if the valuer is on the lender's panel.
In Kayteal the borrower used a negligent valuation to his advantage by obtaining a loan which greatly exceeded the value of the property. Had the borrower not known of the valuation for $1.2M, he may not have applied for a loan at all (or may have applied for a smaller loan instead).
Accordingly, a safer bet for the lender is to instruct the valuer directly and avoid where possible having the valuation assigned.
For more information, please contact:
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Sydney |
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Justin Bates |
t (02) 9931 4763 |
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Anna Vetrova |
t (02) 9931 4736 |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
