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April 19, 2012

Case notes: lenders’ claims against valuers

Two recent Federal Court Full Court decisions have dealt with claims under section 52 of the Trade Practices Act (as it then was) by lenders against valuers.

The two decisions (by different judges) both upheld the claims but in one case allowance was made for contributory negligence by the lenders.

In Propell National Valuers (WA) Pty Ltd v Australian Executor Trustees Limited [2012] FCAFC 31 the trial judge found that representations made by the valuers in the valuation as to the value of a Perth property were misleading and deceptive in contravention of s 52 of the Trade Practices Act 1974 (Cth), and in breach of the duty of care the valuers owed the lender to prepare the valuation with due care and skill. The trial judge assessed damages payable at $405,682.15 plus pre-judgment interest, and costs. The Full Court dismissed the appeal by the valuer.

The valuation in May 2007 was for $1.6 million. The lender advanced the sum of $1,220,650. When the borrower defaulted the lender sold the property as mortgagee in possession by public auction in February
2010 for the sale price of $980,000. The lender calculated its loss as at 4 June 2010 in the sum of $407,739.15.

It was common ground before the trial judge that a margin of 15% error above market value was permissible in respect of a valuation and would not constitute misleading or deceptive conduct by the valuer or a breach of duty of care. His Honour accepted this proposition.

The trial judge concluded the valuation of the property of $1,600,000 was a gross over-valuation and was both misleading and deceptive and in breach of the valuer's duty of care and skill owed to the lender.

There was no dispute that the valuer owed a duty of care to the lender as well as to avoid conduct in breach of s 52 of the Trade Practices Act.

In Valcorp Australia Pty Ltd v Angas Securities Limited [2012] FCAFC 22 the valuer prepared a valuation report in which he expressed the opinion that the fair market value of the property for mortgage security purposes was $3.6 million with a forced sale value of $3.2m. The property was sold by the first mortgagee less than 2 years later for a price of $1.75 million.The total amount advanced by the three lenders was $2.88 million.

The lenders claimed Valcorp’s conduct contravened s 52 of the Trade Practices Act, on the basis that Valcorp’s conduct comprised a representation that the valuation was based on reasonable grounds and was the product of due care and skill, which was misleading or deceptive.

The trial judge found that the valuer valued the property by reference to the wrong market, namely, a wider Adelaide market, rather than the Glenelg market, which was a falling market, and by reference to sales which were not comparable.

But based on each of the lenders’ pre-transaction contributory negligence (the failure to check the borrower's capacity to repay), the trial judge found the lenders 25% liable.

On appeal, the Full Court decided that that each of the lenders was guilty of contributory negligence to the extent of 50%. But the Full Court endorsed the trial judge's assessment of negligence by reference to the standards which they set for themselves rather assessing whether the riskier nature of the lending practices engaged in by each of the lenders by lending monies to borrowers who fall into the sub-prime category, affected the nature of the obligation on the lenders to investigate the capability of the borrowers to service the loans.

The Full Court also decided that the trial judge did not err in finding that the lenders had established a loss of opportunity to relend the monies advanced to the borrowers which was of some value.

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Posted 19th April 2012 by David Jacobson in Financial Services, Trade Practices