
Insight
Where lenders agree to make additional funding available to a borrower is there anything they can do to protect themselves if this advance is used in whole or in part to pay down sums advanced under an earlier facility and it transpires that the subsequent advance has been made on the basis of a negligent valuation?
Tiuta (the Lender) entered into a loan facility with a developer (the Borrower) based on a valuation that was provided by De Villiers. The loan facility completed and the Lender took a first legal charge over the development site (the Site). This was, in fact, the second loan facility between the Lender and the Borrower: the first facility and its supporting first legal charge over the Site was redeemed and discharged upon completion of the second facility, the second facility essentially being a refinancing, plus an additional advance of £500,000.
The Borrower defaulted on the second loan facility and the Lender appointed receivers to realise the value of the Site. At this point, it became clear that the Site would realise only £2.14m on sale; some £1.110m less than assessed by De Villiers’s valuation for the Site. The Lender claimed against De Villiers to recover their losses on the loan.
The Supreme Court had to decide the extent of the Lender’s “losses”, bearing in mind that the second facility was partially to refinance the first.
The Supreme Court held that the Lender could not recover that part of the second facility that was used to repay the first (i.e. the refinancing part) because the initial decision to lend these funds was not based on the second, negligently prepared, valuation. (Crucially, the Lender did not allege that the first valuation was negligently prepared.) The Supreme Court reasoned that the Lender would have incurred losses on the first facility if the second had not been drawn and it could not be said that “but for” the second valuation the Lender would have suffered losses on the first facility.
The Lender’s losses were restricted to that part of the £500,000 additional funding provided by the second facility that had been drawn by the Borrower (some £289,000).
The point to take away is that it may be difficult to claim for losses that relate to a loan facility which refinances or restructures an earlier facility.
It is not known how the Supreme Court would have decided had the Lender asserted that the first valuation was negligent in addition to the second. Lord Sumption hinted that the outcome may have been different.
Following this case, we recommend that lenders: