Legal questions: overvaluation claim
Limitations on claims
31 July 2015
Alexandra Anderson and Katherine Fletcher look at the limitations affecting overvaluation claims
We received an overvaluation claim relating to a valuation carried out in 2007. Doesn't the right to bring a claim expire after 6 years?
The basic rule is that, for a claim in contract, the time for bringing a claim expires 6 years after the date of breach of contract. So where a claimant claims that a valuation was too high, the right to recover damages for breach of contract usually expires 6 years after the date of the valuation. By contrast, the time for bringing a claim in tort starts to run when the claimant suffers a loss. For a lender, this may not be until the borrower defaults on loan repayments, which could be months or even years after the valuation.
Further, if a claimant can demonstrate that they did not have the requisite knowledge to bring a claim during the primary limitation period, they may be able to rely on section 14A of the Limitation Act 1980 to extend the time for bringing a claim. This provides that, as long as the claimant brings the claim within 3 years of learning the facts necessary to bring the claim (subject to a long-stop of 15 years), the claim will be in time.
What if the borrower never made any repayments? Would their inability to repay be partly to blame for the bank's loss?
The test for whether a lender has suffered a loss rests on the value of the property and the borrower's covenant to repay the loan being worth less than the amount of the loan and the interest that has accrued on it. Only once the amount outstanding on the loan account exceeds the value of the property and the covenant will a loss occur and the time start to run for bringing a claim.
The basic rule is that, for a claim in contract, the time for bringing a claim expires 6 years after the date of breach of contract
This begs the question of how you value a borrower's covenant – a point on which the courts have given little assistance. However, the point has been addressed in the recent case of Toombs v Bridging Loans Ltd (BLL), which provides some helpful guidance.
The claim involved a valuation prepared in September 2006. The borrower defaulted and BLL issued a claim on 16 May 2013, alleging that the property was worth only 75% of the value advised by Toombs in September 2006. Toombs applied to have the claim struck out, on the basis that it was time barred. The application failed, but Toombs was given permission to appeal.
On appeal, the court considered 2 key issues:
- at what point did the value of the borrower's covenant became inadequate to make up the difference between the amount of the loan and the value of the property
- when did BLL have the requisite knowledge of its loss, for the purposes of section 14A?
The borrower had failed to make any repayments, either by the original deadline (2 May 2007) or by an ‘extended’ deadline, approximately 6 months later. The judge held that, in the absence of any other evidence as to the value of the borrower's covenant (BLL had failed to produce any), the failure to make any repayments was of itself clear evidence that the covenant was worthless.
As a result, when the borrower failed to repay the loan on 2 May 2007, BLL's security was limited to the value of the property alone. Since the property was alleged to be worth less than the amount outstanding on the loan account as at 2 May 2007, BLL suffered a loss at that date. The time for bringing a claim therefore expired on 2 May 2013, 2 weeks before BLL issued its claim.
The judge also held that BLL had 'knowledge' of its loss when the borrower failed to repay the loan by the agreed extended date in December 2007. It could therefore not rely on section 14A and the claim was time barred.
So what does that mean for my claim?
If the borrower went into default more than 6 years before the claim was made, and in the absence of evidence to show that their covenant was still of some value, then the claim is probably out of time. If the borrower is a special purpose vehicle, or a sub-prime borrower, the chances are that the covenant is of little or no value on the date the loan is made.
Surveyors should take a robust approach to late claims, and the judgment in Toombs provides useful ammunition in arguing that such claims are time barred.
Alexandra Anderson and Katharine Fletcher specialise in defending claims against surveyors at RPC
This feature is taken from the RICS Property journal (May/June 2015).