Reason restored in refinance cases

29 Nov 2017

Tiuta International Ltd v De Villiers Surveyors Ltd [2017] UKSC 77

Exactly a year ago we reported on the issues arising from the Court of Appeal decision in Tiuta International Ltd v De Villiers Surveyors Ltd - a case all about the recoverability of loss.

Today the Supreme Court delivered its judgment in the final chapter of this litigation. At the heart of the dispute was this: to what extent should the manner in which a lender providing refinance to a borrower chooses to structure that lending determine the extent of its appointed valuer’s liability where there has been a negligent overvaluation?

A brief history

Tiuta was providing secured finance for the purpose of a residential development in Ascot. It advanced some £2.45m at the outset. As works progressed, and the value of the development increased, additional finance was sought, taking the facility up to some £3.1m. De Villiers provided the supporting valuations on both occasions. Crucially, this further advance was not merely a variation of the original facility, so Tiuta contended. An entirely new facility was created whereby the new advance was deployed for the most part to pay off the balance of the original loan (in fact, only some £289,000 of ‘new money’ was advanced); there was a fresh loan agreement, the original charge against the property was released and a new charge was executed and registered with the Land Registry.

Tiuta pursued a claim for the entire shortfall on the new facility following default alleging negligence in relation only to the later valuation. The response of De Villiers was this. In circumstances where, on the lender’s own case, the original facility had been discharged in full by the new facility, any potential liability which might have existed in relation to the valuation supporting that advance was extinguished by the refinance. Furthermore, at the point the new facility was entered into, the claimant already stood to make a substantial loss from its earlier lending in any event; such loss as formed part of Tiuta’s claim could not as a matter of fact have been caused by the later valuation.

The valuers’ arguments were upheld at first instance and they obtained summary judgment on that issue thereby limiting De Villiers’ liability to any loss caused by the ‘new money’ lent.  Tiuta appealed.

Court of Appeal

That decision was overturned by the majority of the Court of Appeal. It found that the new facility was the means by which the borrower was enabled to discharge the original facility, which in turn served to release the valuer from any potential liability for the first valuation. The correct application of the but for test of causation in this instance was, therefore, simply to compare the amount of the funds advanced under the new facility (disregarding the pre-existing indebtedness to the lender) with the value of rights acquired. In reaching this conclusion the court was evidently anxious to avoid a defendant escaping liability for an earlier valuation due only to the fortuitous way in which a later advance had been structured. De Villiers then appealed to the Supreme Court.

Supreme Court

Lord Sumption, delivering the unanimous decision of the court, found the correct result to be an obvious one, a point reflected by the judgment being handed down within just weeks of the hearing earlier this month:

"In my opinion the result of the facts as I have set them out is perfectly straightforward and turns on ordinary principles of the law of damages."

Rejecting the majority of the Court of Appeal’s reasoning he concluded that, but for the later valuation, Tiuta would still have incurred a substantial loss arising from the original facility. Whilst it was correct that the making of a later advance could extinguish a valuer’s potential liability in relation to the original facility, crucially no negligence was being alleged in relation to the earlier valuation and, therefore, there was no basis to contend that a consequence of the new facility was the extinction of any earlier liability.

The loss demonstrated by making the basic comparison referred to by Lord Nichols in Nykredit, is a purely factual inquiry into what position the claimant would have been, had there been no breach and its actual position. A valuer cannot be liable for more than a claimant’s actual financial loss revealed by that comparison merely by virtue that they might have contemplated a potential liability in respect of the full amount advanced under the later facility.

Following on from the court’s decision earlier this year in Swynson v Lowick Rose, Tiuta’s new argument on collateral benefit (namely that the application of new facility to discharge the earlier one should be disregarded as being a collateral benefit to the lender) was rejected out of hand:

"The concept of collateral benefits is concerned with collateral matters. It cannot be deployed so as to deem the very transaction which gave rise to the loss to be other than it was."   

What this means for you

Whilst the decision will not be welcomed by lenders, they are perhaps unlikely to be surprised by it. Valuers in refinance transactions will doubtless feel a sense of relief that they are not, without more, exposed to unexpected liabilities going well beyond merely any ‘new money’ advanced.

As was noted in the first instance judgment some two years ago, a refinancing transaction does not cause a remedy in respect of an earlier, negligent valuation to disappear into a black hole. What is now clear is that where there has been refinancing which extinguishes potential loss on an earlier facility, lenders will need to ensure that they plead negligence in relation to both valuations and seek to establish that the second advance has given rise to the loss of a valuable cause of action in respect of the first if they are to have the prospect of making a full recovery of their shortfall.

As both Tiuta and Swynson have made their way through the courts there had been strong dissenting judgments that a disregard for the way that a claimant has structured their affairs could cause injustice to a defendant in making them liable for losses that the claimant would have suffered in any event. The Supreme Court judgments in these cases address that concern and make clear that there will be no tampering with well-established principles to protect a claimant from the unintended consequences of how they have chosen to structure their affairs, however fortuitous the outcome may be for a defendant.

<< Back

Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

Related Expertise

Related Sectors

Related contacts

Martin Jensen

Martin Jensen


Who to contact

For more information about any of our news releases, please contact:

Natalie King
 +44 20 7638 2811
+44 20 7920 0361
Email Natalie

Semi Da-Cocodia
+44 161 236 2002
+44 161 838 6840
Email Semi

Jo Murray
+44 20 7638 2811
+44 20 7865 4849
Email Jo