Shirayama Shokusan Company Ltd v Danovo Ltd (No 2)
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE HART |
| Judgment Date | 26 February 2004 |
| Neutral Citation | [2003] EWHC 390 (Ch) |
| Date | 26 February 2004 |
| Court | Chancery Division |
| Docket Number | Case No: HC010C4637 |
[2003] EWHC 390 (Ch)
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Hart
Case No: HC010C4637
Mr Mark Dight (instructed by Teacher Stem Selby) for the Claimant
Mr Michael Soole QC (instructed by Reynolds Porter Chamberlain) for the Defendant
Hearing dates: 4th–11th February 2003
Handdown Judgment: 5th March 2003
APPROVED JUDGMENT
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic. The Honourable Mr Justice Hart
This is an action by the claimant against the defendants, a firm of valuers, for negligence. On 4th February 2000 the claimants advanced the sum of £1.9m to a company known as Cheyne Lodge Investment Limited ("Cheyne") on the security of the properties described below ("the Properties") and the personal guarantees of two of Cheyne's directors. It claims to have done so in reliance on valuations of the Properties provided to it by the defendants which advised that the Properties had values in the aggregate (based on an "estimated restricted realisation price"("ERRP") of £2.99m. The loan was for a period of three months, later extended to four, and was intended to provide Cheyne with bridging finance in connection with its acquisition of the Properties pending the conclusion of long term re-financing arrangements then being negotiated between Cheyne and Nat West Bank. Cheyne failed to pay on the due date, the claimant appointed receivers, and the Properties were in due course sold in early 2001 for some £875,000.
Expert valuers retained respectively by the claimants and the defendants (Mr N.C. Boyd of Edward Symmons & Partners and Mr P.E.N. Haigh of Humberts Leisure) have agreed for the purposes of this litigation that the aggregate value of the Properties which ought to have been advised to the claimant by the defendants on the information then available in December 1999, again on the ERRP basis, was £1.13m. The defendants concede that their valuation cannot be supported.
The defendants further concede that, if they are liable to the claimant, the quantum of loss suffered by the claimant (assuming no reduction for contributory negligence) is £1.38m.
ERRP as defined in the RICS Appraisal and Valuation Manual means an opinion as to the amount of cash consideration before deduction of costs of sale which the valuer considers, on the date of valuation, can reasonably be expected to be obtained on future completion of an unconditional sale of the interest in the subject property assuming;
a) a willing seller;
b) that completion will take place on a future date specified by the Client (and recorded in the valuer's Report) which does not allow a reasonable period for proper marketing (having regard to the nature of the property and the state of the market);
c) that no account is taken of any additional bid by a prospective purchaser with a special interest; and
d) that both parties to the transactions will act knowledgeably, prudently and without compulsion
In the present case all relevant valuations on the ERRP basis specified 3 months as the date for completion of the hypothetical sale It will be noted that one of the elements in the definition is that both parties to the transactions are assumed to be acting "without compulsion". This may suggest that an ERRP is something different from a Forced Sale Valuation (FSV). It is clear that the claimant proceeded on the basis that an ERRP was equivalent to a FSV, and it was not suggested on behalf of the defendants that it was wrong to do so. I understand that, subsequent to the events that I have to consider, the RICS has in fact abandoned ERRP as a basis for valuation of commercial property.
The claimant is the wholly owned subsidiary of a company SGI Limited (formerly Zedfleet Limited), which is itself 100% owned by Mr Peter Shalson. The claimant was incorporated as a special purpose company the business of which was intended to be the advance of money by way of short term bridging finance to commercial property borrowers. It was set up in early 1999, its sole director being Mr Barry Wiseman. Mr Wiseman's function was to find suitable potential borrowers and to do the necessary ground work in connection with the structuring of the potential loans. For doing so he was to be remunerated entirely by commission paid by the borrower in the event of the successful negotiation of the loan. The amount of that commission was a matter for him to negotiate with the borrowers but was not to exceed 2% of the sum advanced. Mr Shalson (wisely it may be thought) secured an agreement from Mr Wiseman that in the event of a default by a borrower Mr Wiseman would have to make monthly payments, for a maximum of 6 months, of amounts equal to his commission to be held by the company unless and until the arrears were discharged.
The claimant employed solicitors to draw up a standard documentation for use in making such loans, including in particular a standard form of facility letter. The solicitors also produced a set of "Lending Criteria" for use by the claimant. The principal criterion was that the loan should be no more than 70% of the forced sale valuation as advised by the valuer.
In June 1999 the management of SGI Limited was strengthened by the appointment of a financial controller, Mr Daniel Wolinsky, a chartered accountant. It became part of his role to review the financial viability of loan applications submitted to the claimant and recommended Mr Wiseman. This he would do in informal consultation with Mr Shalson (who worked in the same office), the final decision always being a matter for Mr Shalson. In their evidence both Mr Wiseman and Mr Wolinsky described themselves and Mr Shalson as acting as an informal "credit committee" for the purpose of considering the suitability of loans recommended by Mr Wiseman. This is a somewhat grandiloquent description of the highly informal arrangements which were in fact in place for considering the suitability of loans.
The valuer who gave the valuations of the properties on which the claimant claims to have relied in this case was a Mr Ashton-Kane (who at the material time described himself, and to whom I shall refer, as "Mr Kane"). Until the autumn of 1999 he had been employed in the Manchester offices of Henry Butcher Smith Vincent Limited ("HBSV Limited"). In August 1999 the claimant had approached HSBV Limited with a view to its valuing some other properties on the security of which the claimant was proposing to lend to Cheyne. In November 1999, however, HBSV Limited was placed in receivership and Mr Kane co-founded and became a director of the defendants, who acquired from the receivers the assets of the Manchester and Leeds offices of HBSV Limited and traded as HBSV Chartered Surveyors.
The Properties were the following: -
1) Naventi's Blackpool Lancashire. This consisted of 20 residential flats offering primarily studio accommodation, and a purpose built leisure club. It is within a short walk of Blackpool's main retail area, Blackpool Tower and Central Pier. Mr Kane's valuation was £1.5m. This may be compared with Mr Boyd's valuation of £450,000 and Mr Haigh's £800,000, and their ultimately agreed valuation of £595,000. The price apparently being paid by Cheyne for this property was £925,000.
2) The Park Hotel, Morecambe Lancashire. This was a substantial detached purpose built hotel comprising 32/33 en suite bedrooms, public bar and function accommodation, within reasonable walking distance of the Promenade and Town Centre. It was valued by Mr Kane at £515,000. Mr Boyd's valuation was £150,000 and Mr Haigh's £200,000. Their agreed valuation was £170,000. The purchase price apparently being paid by Cheyne was £165,000.
3) The West County Hotel, Millom Cumbria. This was a 9/10 bedroom pub/hotel situated on a split level site, 6 of the rooms being en suite. Millom is a small market town. Mr Kane valued this at £275,000. Mr Boyd valued it at £105,000 and Mr Haigh at £150,000. Their agreed valuation was £135,000.
4) The Wansfell Hotel, Seascale Cumbria. This was a traditional brick built hotel, offering 10 bedrooms with en suite facilities. To the rear was an extension, which in November 1999 was nearing completion, to provide a further 20 bedrooms, with en suite facilities, together with an unfinished bungalow. Mr Kane valued it at £700,000, Mr Boyd at £145,000 and Mr Haigh at £300,000. The agreed valuation of the two experts was £230,000. The purchase price apparently being paid by Cheyne was £220,000.
It will be noted that, although they were ultimately able to agree valuations for my use, Mr Boyd and Mr Haigh started out fairly far apart, and certainly outside the tolerance one would normally expect of two competent valuers. This was partly attributable to a difference in approach to converting their open market valuations (OMV) to an ERRP. In the case of Naventi's and the West County Hotel Mr Boyd's and Mr Haigh's OMVs were within acceptable valuation tolerances (Naventi's: £1.05m, £1.075m, West County Hotel £225,000, £200,000) In the case of the Park Hotel their OMVs (£215,000, £270,000) differed because of the different views each took as to the amount of capital expenditure required. In the case of the Wansfell Hotel OMVs (£200,000 £390,000) the differences were attributable to the difficulty of valuing the unfinished and untried nature of the extension. Mr Boyd and Mr Haigh were able to agree broadly as to the turnover to be expected but took very different views as to the profit margin. Following discussions they were each able to agree to modify their initial views on...
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