B e f o r e :
THE HONOURABLE MR JUSTICE COULSON
|| Webb Resolutions Limited
||- and -
Mr. Peter De Verneuil Smith (instructed by Rosling King) for the Claimant
Mr. Luke Wygas (instructed by LSL Legal Services) for the Defendant
Hearing dates: 19, 20, 21, 22, 26 and 27 November 2012
HTML VERSION OF JUDGMENT
Crown Copyright ©
The Hon. Mr. Justice Coulson:
- In about 2006 and 2007, GMAC RFC Limited ("GMAC") were the largest centralised mortgage lenders in the United Kingdom. The defendant ("E.Surv") was and remains the largest residential surveyor in the country. GMAC regularly used E.Surv to carry out mortgage valuations on residential properties. In these proceedings, GMAC allege that some of those valuations carried out in 2006 and 2007 were performed negligently and/or in breach of contract. They have assigned their claims against E.Surv to Webb Resolutions Limited ("Webb"). No point is taken on the validity of that assignment.
- These proceedings originally concerned four valuations, although the claims in respect of two have now been settled. The two valuations that remain in issue concern, first, the valuation of Apartment 1207 at Masshouse Plaza, Birmingham, where the borrower was a Mr Ali, and second, the valuation of 13, Foxdene Road, Seasalter, Whitstable, Kent, where the borrower was a Mr Bradley.
- The individual claims are exceedingly modest. It is accepted that the SAMCO cap applies in both cases, so that each claim is limited to the difference between the E.Surv valuation figure and what the correct valuation figure is. In those circumstances, the damages claim in respect of the Ali valuation is £24,445 plus interest, and the damages claim in respect of the Bradley valuation is £45,000 plus interest. However, I am told that many of the issues which arise for determination in this case also arise in another 40 potential claims that Webb have against E.Surv. In addition, I am told that Webb have in excess of 200 claims against other valuers where similar points may arise. As I understand it, it is the potential impact of this Judgment on those other claims which explains the length of the trial, and the detailed exploration of the issues by both counsel.
- I deal in Section 2 below with E.Surv's duty of care and its contractual obligations, resolving a number of the issues that arose as to precisely what they were obliged to do and the standard to which they had to do it. In Section 3 below, I set out a summary of the relevant law in relation to negligent valuations. Then, at Sections 4, 5 and 6 below, I deal respectively with the Ali valuation, the allegations of failure to mitigate in respect of the Ali loan; and the allegations of contributory negligence in respect of the Ali loan, which involve potentially important issues arising out of GMAC's lending policies. At Sections 7, 8 and 9, I repeat that exercise in respect of the Bradley valuation and loan. There is a summary of my findings at Section 10 below.
2. THE DUTY OF CARE/CONTRACTUAL OBLIGATIONS
2.1 The Duty of Care
- At paragraph 10-056 of Jackson and Powell on Professional Liability (7th edition, 2012) the learned editors write:
"In common with other professional persons and in the absence of an express term to the contrary, the standard required of a surveyor is that of the ordinary skilled man exercising the same skill as himself. He is variously described in the cases as the 'reasonably skilled', 'competent', 'prudent' or 'average' surveyor."
This passage (and its predecessors) have been approved in, amongst other reported cases, Sampson v Metcalfe Hambleton and Co.  PNLR 542 at page 5; Muldoon v Maize of Lilliput Limited  1 EGLR 43 at 45M, and Lewisham Investment Partnership v Morgan  2 EGLR 150 at 152D.
- This basic duty at common law can, of course, be extended, reduced or modified by the terms of the contract between the lender and the valuer.
2.2 The Terms of the Retainer
- There was a Supplier Agreement dated 22nd September 2004 between E.Surv and GMAC. Although it did not appear that these terms were made available by E.Surv to the individual surveyors carrying out the valuations, there was no evidence to indicate that these terms were not those which governed the provision of services by E.Surv to GMAC.
- The relevant terms of the retainer for these purposes were as follows:
(B) The Client is a mortgage company that provides loans on security of residential property located in the United Kingdom.
5.0 The Service Levels
5.6 The Supplier shall at all times deliver the Services in compliance with the Guidance to Valuers published by the Royal Institution of Chartered Surveyors (the 'RICS') and all such other relevant guidance notes as issued, applied and updated by the RICS by time to time and except where varied or amended by this Agreement, such Guidance notes are incorporated into this Agreement and the Supplier hereby agrees that this obligation applies notwithstanding any delegation by the Supplier of the performance of any of its obligations under this Agreement in accordance with clause 4.1 above.
6.0 Standard of Care
6.1 Whilst acting under this Agreement, the Supplier shall at all times, act in accordance with this Agreement and in good faith and shall observe the standard of skill, care, competence and diligence in performing its obligations which a prudent manager and supplier of property valuations and appraisals would observe practicing a profession in which it or their being employed for the purposes of this Agreement."
- The RICS Appraisal and Valuation Standards (which were incorporated into the Supplier Agreement by clause 5.6) include, at appendix 5.1, a document entitled 'The Minimum Contents of Valuation Reports'. This includes the following:
"The valuer must make it clear if the valuation is being carried out without the information normally available when carrying out a valuation.
The valuer must indicate in the Report if (where practicable) verification is needed of any information or Assumptions on which the valuation is based, or if information considered material has not been provided.
If any such information or Assumption is material to the amount of the valuation, the valuers must make clear that this valuation should not be relied on, pending verification…"
The RICS Appraisal and Valuation Standards also include what is called UK Appendix 2, the RICS mortgage valuation specification. At paragraph 5.5.1 of that document, there is an express warning to the valuer to treat notified sale prices on new build properties with caution, because of the potentially valuable incentives which the developer may have offered in order to maintain a high sale price. At paragraph 5.5.5 it also warns that, whilst comparables may be available from sales and re-sales on the development, these may not be reliable if considered in isolation, and should be considered in the context of any incentives which were available and could have influenced the price paid.
- On behalf of Webb, Mr De Verneuil Smith maintained that clause 6.1 imposed a more onerous burden on the E.Surv valuers than the common law, principally as a result of the use of the word 'prudent'. He argued that clause 6.1 required the E.Surv valuers to err on the side of caution in a way that the general common law duty might not.
- I do not accept the submission that the use of the word "prudent" puts a gloss on, or makes more onerous, the ordinary duty at common law. That is because, as set out in paragraph 5 above, prudence is one of the tests against which the duty of a professional at common law has been measured: see in particular Sargeant and Brothers v Keith Multon and Co. Limited  73 Lloyds Law Reports 104, at page 107, column 2. It has been used interchangeably with the words 'reasonably skilled' and 'competent'. In addition, I also accept Mr Wygas' submission that, as a matter of dictionary definition, 'prudence' means wisdom or knowledge or skill in a particular subject or area, and does not necessarily mean conservative or erring on the side of caution.
2.4 Re-Sale Valuation
- The second submission advanced by Mr De Verneuil Smith on the basis of clause 6.1 is that, because recital B made clear that the valuations were required for a mortgage company providing loans on security of residential property, the valuations ought to have been considered on the basis of the re-sale value of the property. In other words, the valuations should have been undertaken on the assumption that the borrower may default, with the result that the property being valued would be resold within a relatively short time thereafter. The evidence made clear that a valuation on the basis of re-sale value, certainly of a new-build property, might be as much as 10 or even 15% lower than an ordinary valuation. That is common sense: it reflects the fact that, rather like a car, a new-build property will have a value when it is first sold that will not be immediately maintained.
- In my view, the submission that the defendant was obliged to carry out valuations on a re-sale basis is contrary to the authorities. In Banque Bruxelles Lambert SA v Eagle Star Insurance Co. Limited and Others  QB 375 at 404E, Sir Thomas Bingham MR said:
"In the absence of special instructions, it is no part of V's duty to advice L on future movements in property prices, whether nationally or locally. The belief among buyers and sellers that prices are likely to move upwards or downwards may have an effect on current prices, and to that extent such belief may be reflected by V in his valuation. But his concern is with current value only. He is not asked to predict what will happen in the future. His valuation is not sought to protect L against future decline in property prices. In no sense is he a guarantor of L's investment decision."
- This passage reflects the earlier warning of Watkins J (as he then was) in Singer and Friedlander Limited v John D Wood and Co.  2 EGLR 84 at 85, when he said that, whatever conclusion the valuer reached:
"…it must be without consideration for the purpose for which it is required. By this I mean that a valuation must reflect the honest opinion of the valuer of the true market value of the land and at the relevant time, no matter why or by whom it is required, be it by merchant bank, land developer or prospective builder. So the expression, for example 'for loan purposes' used in a letter setting out a valuation should be descriptive only of the reason why the valuation is required and not as an indication that were the valuation required for some other purpose a different value would be provided by the valuer to he who seeks the valuation."
- Of course, that general position could be negated by special instructions requiring valuations to be performed on a particular basis. Here, if GMAC required valuations to be carried on the basis of re-sale, then they had every opportunity of making that requirement clear in clause 6.1. But they did not do so. Instead, they provided in general terms for the skill, care, competence and diligence required of E.Surv in supplying property valuations and appraisals. There is nothing in clause 6.1 that would have alerted E.Surv to the risk that the valuations themselves had to be carried out on a special or unusual basis.
- I do not accept that, merely because recital B recorded that GMAC were a mortgage company providing loans on security of residential property, it can somehow be inferred into the Supplier Agreement that valuations were to be carried out on a re-sale basis. Recital B did no more than record GMAC's business. Since valuations are conventionally done on the basis of the value of the property at the time that it was valued, rather than assuming a particular set of specific facts (such as default and a subsequent re-sale) I do not consider, on a fair construction of the Supplier Agreement, that anything other than the standard valuation was required.
2.5 The Electronic Valuation Forms
- GMAC required E.Surv to complete the valuations on particular electronic forms. As we shall see below, in the context of their entire mortgage loan process, GMAC were wedded to 'tick box' forms for every aspect of their operation. It was a business model which, according to some of the material before the court, bordered on obsession. Although I accept Webb's concerns about the way in which the GMAC guidance notes relating to the completion of the valuation forms were introduced into the evidence by E.Surv, I have concluded, on all of the evidence, that these guidance notes were those which existed at the time of these two valuations and were, therefore, relevant.
- The particular parts of the guidance notes to which reference was made included the following:
In respect of this new form, GMAC RFC only required information requested on the form to be provided. We do not want any additional information, unless we make a specific enquiry at a later date…
In respect of the new valuation report, please note that it is in a purely tick box format and no additional text will be accepted within the body of the report.
Also note, there is NO general remarks section, any attempt to supply additional pages of text will not comply with our requirement and therefore will not be read by our underwriting staff. All our information requirements are met by the tick boxes provided on the form."
- An issue arose, in particular concerning the valuation of 1207 Masshouse, the property purchased by Mr Ali, as to what the E.Surv valuer should do if his obligation to take reasonable care (and/or his specific obligation to comply with the RICS guidance notes), required him to do or say something which could not be accommodated by the tick boxes provided. I am in no doubt at all as to the general answer to that: if the valuer could not discharge his contractual or tortious obligations to GMAC without adding words somewhere on the form, or producing a covering letter to address the particular issue, then he had to take that course, regardless of the warning in the GMAC guidance notes; anything else would be a plain failure to comply with those obligations.
- On the other hand, where the valuer's personal preference might have been to add words or provide some other kind of embellishments, but he properly concludes that their absence would not be a breach of his overriding obligations, then he would not be required to say anything further. On that basis, of course, GMAC would have no grounds for later complaint, because it would be their own thoughtless adherence to the 'tick box' format which had given rise to the omission in the first place.
- As I have already noted, particular issues arose in relation to the electronic valuation form used for the Ali valuation. I deal with those specific matters in Section 4 below.
3. THE LAW RELATING TO NEGLIGENT VALUATIONS
3.1 Methodology versus Result
- In some of the reported cases, such as Lewisham v Morgan and Merrivale More PLC v Strutton Parker (a firm)  PNLR 498, there has been a debate about whether, in a negligent valuation case, the focus ought to be on the way in which the valuer went about his task (the methodology), or on the consequential valuation (the result). How relevant is it that the valuer made a number of errors in going about his valuation if, in the final analysis (and perhaps more through luck than judgment), his valuation was reasonable?
- I consider that, as a matter of law, the right approach is to focus on the result, that is to say the negligent valuation itself. That seems to me to be the ratio of Merrivale More PLC, and it was the basis of the subsequent decision by Lewison J (as he then was) in Goldstein v Levy G (a firm)  PNLR 35. Of course, whilst it does not follow that, if the valuation was outside the reasonable margin, the valuer was automatically negligent, it immediately spotlights the way in which the original valuation was performed, and provides a prima facie case for the valuer to answer.
- Although that approach was broadly accepted on behalf of Webb by Mr De Verneuil Smith, he submitted that, in a case like this, where there were significant allegations of contributory negligence, such that the court may have to undertake an apportionment of blameworthiness as between the two parties, the way in which the valuation was undertaken may be of some significance, in addition to any consideration of the accuracy or otherwise of the valuation itself. I accept that: whilst the focus has to be on the valuation, and whether the figure was within a reasonable bracket, I can see that, if I find that the E.Surv valuations were negligent, and I am then required to undertake a balancing exercise between the parties' respective blameworthiness when considering the allegations of contributory negligence, questions as to how the valuations were carried out may become material.
- It is accepted that, in any negligent valuation case, there is a permissible margin of error, or bracket. In cases concerned with complex calculations for investment purposes, where variable figures are used in set formulae, it is usual for the bracket to be assessed by reference to each of those variables: see Goldstein and Derek Dennard and Others v Price Waterhouse Coopers LLP  EWHC 812(Ch) at paragraph 191. But the parties in this case were agreed that, for a residential valuation, there ought to be just one bracket, calculated by reference to the correct valuation figure.
- It is, I think, potentially unwise to fix the applicable bracket (the percentage margin for error) solely by reference to earlier authorities. Those decisions about margin were obviously based on the evidence before the court in the particular case, and sometimes the margins were agreed by the experts. Only limited assistance can therefore be derived from those earlier decisions. That said, it does seem to me that the earlier cases are of some assistance because they do provide some rough parameters. I summarise them below.
- In Singer and Friedlander, now 15 years old, the margin was generally said to be 10% either side of the valuation figure and in exceptional circumstances could be 15%. Generally, however, brackets in double figures have tended to arise either for specific one-off properties, like a hotel (Corisand v Druce and Co.  2 EGLR 86); or if there was a particularly unusual feature of the property, like a very large plot of land but a small house (Legal & General Mortgage Service Ltd v HPC Professional Services Ltd  PNLR 567); or by agreement: see Mount Banking Corporation Ltd v Cooper and Co.  2 EGLR 142 and Arab Bank PLC v John D Wood Commercial Limited  EGCS 34. For more standard residential properties, the margin has been lower. In Axxa Equity and Law Home Loans Limited v Goldsack & Freeman  1 EGLR 175, the court fixed a bracket of roughly + or – 5% in a case involving residential property, and a similar range was agreed by the experts in BNP Mortgages v Barton Cook and Sams.
- Two more recent cases were drawn to my attention. In Paratus AMC Limited v Countrywide Surveyors Limited  EWHC 3307 (Ch) HHJ Keyser QC identified a bracket of 8%, whilst in Platform Funding Limited v Anderson and Associates Limited  EWHC 1853 (QB) a margin of 10% had been agreed between the experts.
- In K/S Lincoln and Others v CB Richard Ellis Hotels Limited  EWHC 1156 (TCC) I summarised some of the authorities noted above as follows:
(a) For a standard residential property, the margin of error may be as low as + or – 5%;
(b) For a valuation of a one-off property, the margin of error will usually be + or – 10%;
(c) If there are exceptional features of the property in question, the margin of error could be + or – 15%, or even higher in an appropriate case.
I consider that this summary still holds good, notwithstanding the citation of other authorities to me in the present case. Here, the disputes between the experts were straightforward: the valuation experts called on behalf of Webb argued that the margin should not be higher than + or – 5% on each valuation, whilst the valuation experts called on behalf of E.Surv maintained that it should be + or – 10%. I therefore deal with the appropriate margin as it arises in respect of each valuation.
4. THE ALI VALUATION (1207, MASSHOUSE PLAZA, BIRMINGHAM)
4.1 The Facts
- Having regard to the mortgage valuation report on 1207, Masshouse Plaza ("the Ali property") completed by Mr Tomalin of the defendant and dated 28.11.12; the notes of his earlier site visit dated 22.11.06 and the accompanying documents; his witness statement dated 29.5.12; and his answers in cross-examination; I make the following findings of fact in respect of his valuation of the Ali property:
(a) Mr Tomalin was an experienced valuer who undertook about 1,000 valuations a year. He had not seen the terms of the GMAC retainer, set out at paragraphs 7 - 9 above.
(b) 1207 Masshouse was a two bedroomed flat on the 12th floor of this new development. The asking price, as Mr Tomalin knew, was £227,995. When he went to the property to inspect it, he was given a floor plan (which, he said, was not necessarily to scale), but was told by the sales team that he could not access the flat and that the construction works would not be completed for another two weeks. He did not push further or advise anyone that he was prepared to undertake the valuation without inspecting the property.
(c) The valuation was therefore based on Mr Tomalin's impression of the new building generally, the floor plan of the property with which he had been provided, and what he was told by the sales team. According to his notes, his visit to the Masshouse development lasted just 10 minutes.
(d) Mr Tomalin's notes were rudimentary. He relied on the unscaled floor plan, and what he was told by the sales team, in noting an external floor area of 70 square metres. He agreed that purchasers are more interested in internal floor areas but, because he had not carried out his own inspection, he had no figure of his own for the internal area. The only measurement of the internal area was undertaken subsequently by the claimant's expert, Mr Lee, and put at 67.5 square metres.
(e) The particular point that Mr Tomalin's site notes emphasised was the "enormous balcony" which would look out over the new park that would be constructed to the southeast.
(f) The most important information that Mr Tomalin had to produce his valuation was a list of comparables produced by the Quest database and which Mr Tomalin had printed off for this purpose. But, as he agreed that he knew, the Quest data was not based exclusively on actual sale/purchase prices, so it was not an entirely reliable guide for comparison purposes.
(g) From the Quest list, Mr Tomalin ticked six properties, all of which he had previously inspected. They were in the Southside development on the other side of Birmingham city centre. They all had £/square metre rates which were lower than the figure of £3,257 that was required to justify the asking price of £227,995 for the Ali property. His notes expressly acknowledged that. But Mr Tomalin went on to justify the asking price on the basis of the "massive balcony". His mortgage valuation report therefore valued the property at the asking price of £227,995.
- I am in no doubt that Mr Tomalin's performance of the valuation fell below the standard to be expected of a reasonable valuer and was therefore in breach of the requirements of clauses 5.6 and 6.1 of the Supplier Agreement. There are four principal reasons for this conclusion.
- First, he produced his valuation without inspecting the property. The mortgage valuation form that he signed expressly certified to GMAC that the property described in the report "has been inspected by me". He also certified that the inspection had been carried out in accordance with the current RICS guidelines, which required such an inspection. The failure to inspect meant that the completed mortgage valuation form was fundamentally misleading, because it was expressly representing that an inspection had been performed, when it had not.
- Mr Tomalin said that he could not tell GMAC that he had not inspected because of the guidance notes as to the 'tick box' nature of the form (see paragraphs 17 - 20 above). That is plainly wrong; nothing in the guidance notes suggests that the valuer should make a false declaration in the valuation form. At one point, he said that, if he had left the relevant boxes blank, the mortgage valuation report could not have been sent off or would not have been accepted by GMAC. This was said in order in some way to justify his decision to complete the form on a false basis but, on analysis, it explained why Mr Tomalin should have left the relevant boxes blank; a decision not to send the form, or its rejection by GMAC, would have been appropriate in circumstances where an inspection was required but had not been carried out.
- Mr Field, the defendant's expert valuer, agreed that, having been told that the property was two weeks from completion, Mr Tomalin should have insisted on seeing the property before completing the mortgage valuation form.
- The failure to inspect the property had an obvious knock-on effect, in that it meant that, in completing his valuation, Mr Tomalin relied entirely on the information provided to him by the developer's sales team. This, too, was very dangerous. For instance, he said on the form that the external floor area was 70 square metres, whereas he was in no position to fill in that box because he simply did not know how large the Ali property was, having not carried out any inspection himself.
- The second way in which Mr Tomalin's performance of the valuation fell below the appropriate standard was that, despite the RICS guidance in respect of incentives, I am not persuaded that he actually asked the sales team about incentives on the property. The relevant box on the form is left blank and the best that Mr Tomalin could do was to say that he thought that he would have asked the sales team about incentives; he could not remember whether he had actually done so or not. I conclude, given the brevity of his visit and the slapdash nature of the valuation, that he did not. That means that there was a second failure to follow the RICS guidelines.
- Thirdly, the comparables on the Quest table showed £/square metre figures which were not necessarily based on the actual sale/purchase prices, because the Quest database included asking prices and valuations. This discrepancy is highlighted in the defendant's own expert's report. It was a third failure to follow the RICS guidelines, and it had an important impact on the correct valuation figure for the Ali property, as explained below.
- The final way in which Mr Tomalin's performance of this valuation fell below the appropriate standard was that he started at the asking price of £227,995 and then worked back in an effort to justify that figure. His contemporaneous notes made that approach plain, because his own scrutiny of the Quest comparables, and the £/square metre rates they produced, showed that the purchase price was not objectively justified. Given the importance, in his analysis, of the balcony, I consider that, at the very least, he was required to work out the comparable value of the flat and then work out a separate figure for the balcony. He did not do so, because he had started at the figure he wanted to reach at the end. This again was bad practice. However, notwithstanding these defaults, the real issue, in accordance with the authorities summarised in paragraphs 22 - 24 above, was whether or not Mr Tomalin's valuation was negligent.
4.3 Valuation: Mr. Tomalin's Comparables
- There was no shortage of comparable properties produced by the Quest software: over 50 such comparables were identified on one single sheet. Mr Tomalin highlighted six, because they were all properties in the Southside development which he had inspected. They were:
||£ per sq. metre
|Plot 435, Southside
|Plot 446, Block R, Hurst Street
|Plot 295, Block P, Hurst Street
|Plot 318, Block M, Hurst Street
|Plot 272, Block K
|Plot 459, Level 6
- Here, as we know, in order to justify the purchase price/valuation of £227,995, Mr Tomalin was obliged to arrive at a £/square metre figure of £3,257. That was higher than any of the six figures identified in the table above; it was, as he put it in his oral evidence, "higher than what I would like". The average £/square metre figure for those six properties was £3,002 and, as we shall see, that figure was itself inflated because the Quest figures for Plots 318 and 459 (to name but two) were based on the asking prices or valuation figures, not the (lower) sale/purchase prices actually achieved.
- Accordingly, save for the question of the balcony, Mr Tomalin's comparables did not on their face justify his valuation.
4.4 Valuation: The Experts' Comparables
- There were numerous comparables suggested by Mr Lee on behalf of the claimant, and Mr Field on behalf of the defendant. However, in cross-examination, it became apparent that there were equally numerous reasons why most of these comparables were inappropriate, a conclusion very often accepted by the respective experts. I summarise briefly below this process of elimination.
- There were no comparables within the Masshouse development itself for Mr Tomalin to consider (the property being one of the first to be sold), but in his first report, the claimant's expert Mr Lee identified five other Masshouse properties which he said were comparable. He did so on the express assumption that they were identical in size and layout with the property. In cross-examination, it quickly became apparent that they were not identical in size and layout, and he accepted that, on that basis, they were not good comparables.
- Similarly, Mr Field was unable to sustain his use of Apartments 614 and 913 at Masshouse, honestly accepting in evidence both what he called a "lack of analysis" for these properties and errors in the comparative valuation figures for the property which he had extrapolated from them.
- The remaining potential comparable in the Masshouse development was Apartment 1001 which apparently sold a few months after the Ali property for £225,000. It was a smaller flat (63 square metres) with a smaller roof terrace. Mr Field put this forward in his first report as "perhaps the best comparable and indicates a value just above £225,000 for the subject property".
- On analysis, however, there were a number of reasons why this was not a good comparable. First, because it related to a subsequent sale, it was not available to Mr Tomalin. It therefore needs to be treated with some caution in any subsequent assessment of his valuation.
- Secondly, as the cross-examination of Mr Field made plain, his calculation of £225,000 for the property was incorrect. In fact, applying the correct £/square metre ratio from 1001, Masshouse, it produced a value for the property of more than £240,000. This was therefore an anomalous figure, something which Mr Field accepted without qualification in cross-examination. He was unable to explain how his incorrect figure of £225,000 had been calculated. Thirdly, again as Mr Field agreed, the £225,000 figure for Apartment 1001 may have been inflated because of incentives.
- Accordingly, on the basis of Mr Field's evidence, I concluded that 1001, Masshouse was not an appropriate comparable, even as a subsequent check (it not being available to Mr Tomalin anyway).
- Mr Lee, the claimant's expert, referred to some alleged comparables in the Orion Building. However, he accepted that his figures were a year out of date, and the development did not seem to me to be directly comparable because it was further out of town. In any event, in cross-examination, Mr Lee accepted that, for these and other reasons, the Orion properties were not the best comparators. In my view, they added nothing to the Southside comparables, to which both experts, and Mr Tomalin, paid particular regard. I conclude that it is therefore the Southside comparables which were the ones that really mattered.
- In his first report, Mr Field took three particular properties at Southside, each of which was in Mr Tomalin's original list (paragraph 39 above). They were Plot 435, Plot 318 and Plot 459. Mr Field said that the other comparables which Mr Tomalin had used on Southside were "less satisfactory due to the lack of rationale and detail of accommodation". The cross-examination of Mr Lee also demonstrated why other Southside properties were more unreliable as comparators. I accept Mr Field's evidence that the three Southside properties which he identified in his first report were the best comparables for the property, subject to the particular points made below.
- As previously noted, the £/square metre rates set out in the Quest document (tabled at paragraph 39 above) were not based on actual sale/purchase prices. Thus, as Mr Field noted in paragraph 8.01 of his report, the actual £/square metre rate for Plot 318 was £2,661 (not the £2,921 in the Quest table) and for Plot 459 was £2,571 (not the £3,076 in the Quest table).
- This is important, because it means that the correct average £/square metre for these three Southside properties (namely Plots 435, 318 and 459) was £2,702. When multiplied by the internal square footage of the Ali property (the figure that Mr Tomalin agreed that a purchaser would be concerned about) of 67.9 square metres, it produces a valuation figure for the Ali property of £184,658. But that figure would not, of course, make any allowance for the balcony.
4.5 Valuation: Analysis and Conclusions
- For the reasons set out above, I consider that the three best comparables (which were used by Mr Tomalin and championed by Mr Field, the defendant's expert) were Plots 435, 318 and 459 at Southside. A calculation based on their actual purchase prices produces an average £/square metre of £2,702 and would produce a valuation of the Ali property, without making any allowance for the balcony, of £184,658.
- There was a good deal of debate about whether Southside was a better location and a better development than Masshouse, and whether there should therefore be some deduction from the £184,658 in order to arrive at a comparable figure for the Ali property. I consider that, on the evidence, Southside is a more desirable location because it is closer to the town centre and is in that part of Birmingham, centred around The Mailbox, which is particularly attractive for those who want to live in the centre of the city. Mr Lee suggested a 5% reduction to reflect this.
- Having considered the matter carefully, I have concluded that, although Southside was a better location, the difference was not substantial, and no deduction should be made from the figure of £184,658 to reflect the point. However, because of this difference in location, a figure based on the Southside comparables must be treated as towards the upper limit of the valuation of the Ali property, before any consideration is given to the balcony.
- As noted above, Mr Tomalin obviously thought that the balcony was crucial. Mr Lee sought to play down its importance, making the fair point that, because the flat was small, a disproportionately large balcony would not necessarily provide a significant benefit in valuation terms. He valued the balcony at 4% of the total. Mr Field, on the other hand, argued that the balcony was a significant asset and, in valuation terms, put it as being worth about £20,000 on its own during the course of his cross-examination.
- In the round, I accept Mr Field's evidence. I consider that the balcony was a significant bonus in valuation terms. Although I consider that £20,000 is at the upper end of any valuation of its worth, I am not prepared to put a figure on it that is less than that. Mr Lee's figure of 4% does not reflect its size, location (on the 12th floor) and its views to the south/south east.
- In those circumstances, undertaking an analysis based entirely on Mr Field's figures, one arrives at a valuation of £184,658 by reference to the Southside comparables, and a balcony worth £20,000. That puts a valuation on the Ali property of £204,658. Because I have made no deduction for the Southside betterment, and because I consider that the £20,000 is at the upper end of the range for the balcony, this must be regarded as a relatively generous figure to the defendant.
- Notwithstanding that, the figure of £204,658 is over £23,000 less than the asking price/valuation identified by Mr Tomalin of £227,995. For that reason, because his figure was more than 10% above the right valuation, and 10% was the maximum bracket for which the defendant contended, it does not really matter what view I take about the appropriate margin. However, because the issue was fully canvassed and I have formed a firm view about it, I should set out my conclusions.
- In my judgment, the appropriate margin in relation to the Ali property was + or - 5%. There are a number of reasons for that:
(a) First, the Ali property was a two bedroom city centre flat in the middle of Birmingham. In 2006, there were numerous such flats in similar new developments for sale all over the city centre. It was about as far from a one-off property as it was possible to get.
(b) Secondly, it could not be said that there was any shortage of meaningful comparables. On the contrary, there were scores of potentially relevant comparables. That must mean that a relatively narrow margin is appropriate.
(c) Thirdly, I have already explained why I consider that the Southside development was in a slightly better location than Masshouse. Although I have made no deduction for this (paragraph 54 above), the figure is at the upper end of the range already, which would militate against a margin of more than 5%.
(d) Fourthly, although Mr Field argued for a 10% margin, he was quite unable to support that figure by reference to any external material or anything, really, beyond his own gut instinct. For the reasons that I have given, I do not consider that his opinion can be justified.
(e) For the reasons set out in paragraphs 25 - 29 above, I consider that the authorities tend to support an approximate 5% bracket for a standard residential property of this kind.
- In my view, the only potentially unusual element of the valuation was the calculation of the benefit supplied by the large balcony. On that, I have taken Mr Field's broad figure of £20,000, as suggested during his cross-examination. Everything else was entirely straightforward. Mr Field's figures therefore produce a final valuation figure of £204,658. That was more than 5% lower than the purchase price/valuation identified by Mr Tomalin; indeed it was more than 10% lower. For all the reasons set out in Section 4 above, I conclude that Mr Tomalin's valuation was negligent. But for the negligence, that loan would not have been made to Mr Ali.
5. ALI: FAILURE TO MITIGATE
- Although Mr Ali failed to pay the very first monthly instalment in March 2007, he said at the time that this was the result of an error by the bank. Some support for that explanation can be found in the fact that instalments were subsequently paid in May, June and July. However, by August 2007 he was three months in arrears and, in consequence, Eversheds were instructed by GMAC to issue possession proceedings.
- The letter before action was sent in late September 2007. Despite visits to the property by a debt counsellor, no contact could be made with Mr Ali. Proceedings started, and a 28 day possession order was issued on 6th December 2007. Up until that order took effect, in early January 2008, I do not believe that any sensible criticism can be made of GMAC or their advisors. However, there was then a delay until late April, when Eversheds issued a warrant of possession. A notice of eviction was suspended for a fortnight in June, because Mr Ali thought he might be able to sell the flat, but when this did not happen, the eviction took place on 12 August 2008.
- The Ali property was sold for £135,000. The claimant suffered a shortfall on the Ali loan of £103,311.83 and incurred about £12,000 by way of costs and expenses in the repossession process.
- There were a number of pleaded criticisms of GMAC which were said to be failures to mitigate, including the failure to sell at an appropriate price and the failure to pursue him under his personal covenant. In my judgment, neither of these complaints have been made out. The evidence was that the highest possible price was obtained for the Ali property when it was sold; indeed, there was something of a bidding war between interested parties. As for his personal liability, I find that GMAC dealt fairly with Mr Ali and at all times endeavoured to involve him in what was going on. I do not think that they can be criticised for that. There is nothing to say that any claim against Mr Ali on his personal guarantee would have been worth anything at all.
- In his helpful closing submissions, Mr Wygas' principal criticism was of the delays in obtaining possession. With one exception, I reject that criticism and accept Mr Botteley's evidence that somebody in the position of GMAC should not "rush into possession" and should instead go through all the relevant processes and procedures. Every effort was made to let Mr Ali try and find a buyer, hence the suspension of the warrant in June 2008, albeit to no avail. I do not consider that there was any general delay in dealing with Mr Ali's default on the mortgage.
- The exception to that was the four months from early January to late April 2008. An enforceable possession order was in place in early January. But then nothing happened until early April, when Eversheds were asked to issue a warrant, which was not sought until the end of the month. No explanation was given for that four month delay: there were no meetings with Mr Ali, and no attempts to contact him at all during this period. It looks as if the file was simply overlooked.
- For these reasons, therefore, although I reject the majority of the criticisms that GMAC failed to mitigate their loss in relation to the dealings with Mr Ali, I do accept that there was a four month delay for which the defendant should not be penalised. Thus the interest due to the claimant on the damages will exclude any interest for this four month period.
6. ALI: THE ALLEGATIONS OF CONTRIBUTORY NEGLIGENCE
6.1 The Relevant Law
- The burden is on the defendant to demonstrate that GMAC failed to look after their own interests and that their negligence in so doing caused the loss of which GMAC complain: see Davis Swan Motor Co. Limited v James  2 KB 291 and Banque Bruxelles v Eagle Star Insurance at first instance  EGLR 68 at 99 (a decision of Phillips J, as he then was).
- The standard to be applied in a case like this is that of the reasonably competent professional or practitioner. Thus in Banque Bruxelles at first instance, Phillips J said that the conduct of the lender had to be judged "against the standards of a reasonably competent merchant bank at the time".
(b) Lending Policy
- Following the recession in the early 1990s, there were a number of cases, similar to this one, dealing with what might be termed over-generous lending policies. In general terms, the approach is to see what was happening elsewhere in the lending market because, if the claimant was doing what its competitors were doing, negligence was unlikely, unless it could be shown that it was irrational or illogical. Banques Bruxelles was one such case. In Birmingham Midshires Mortgage Services Limited and Another v David Parry and Another  PNLR 494, Sir John Vinelott took a slightly different view when he said (obiter):
"However, evidence of the way in which other businesses are conducted is not a reliable guide to the question whether a business is conducted prudently - that is whether those conducting the business at reasonable care to protect themselves against the risk of injury or loss. There maybe good commercial reasons which lead to those engaged in a business enterprise to take risks, pressure of competition or a desire to break into a new market. That is what happened in this case. During the period from 1985 to 1989 the market for residential properties seemed set for an almost indefinite rise. Interest rates were high. A new type of lender, the centralised lender with no high street presence, with ready access to finance, was attracted to the field. To establish a position in the market the centralised lender was willing to lend money on a non-status mortgage - that is to allow to an excessive extent on the value of the security and, as regards the personal covenant, to allow and self-certification. That was, in my judgment, a risky course."
- More recently, in Paratus, Judge Keyser dealt with a similar issue and concluded:
"79. Insofar as the allegations of contributory negligence related to a business model rather than to the application of that model on the facts of this case, I reject them. GMAC's practice of making loans at 90 per cent LTV on a self-certified basis was certainly at the high-risk end of the market. But the evidence from both experts shows that it was in accordance with a significant, though small, sector of the market. In oral evidence, not even Mr Pitt was prepared to commit himself to the opinion that the practice was not that of a competent lender. On the basis of the evidence before me, I reject the contention that GMAC's business model of 90 per cent LTV loans on a self-certified basis was negligent.
80. In the course of the argument there were some discussions as to whether or not it is open to the court, on a proper application of the law, to find that the entire categories of lending, such as high-LTV self-certified lending, are to be characterised as so imprudent as to be negligent. It in unlikely that pure principle will supply the answer to that question in any particular case. As a matter of law, the court is not bound to accept that the practice of part or even the whole of a profession is competent. …Questions concerning the acceptable degree of risk in the money markets are not readily analysed in terms of logic, and wider considerations of rationality are not easily addressed without access to far more information than is likely to be available to a trial judge or to any court. The fact that high LTV lending creates high risks in any given case does not mean that it is imprudent for those whose business it is to make such loans; and it is their interests that are in issue when considering contributory negligence. The courts are not well-suited to assess whether the business models of entire sectors of the financial services industry are reasonable in the interests of those who undertake them and should in my judgment be slow to hold that entire classes of transaction are imprudent for those who undertake them. I agree…with the approach of Phillips J in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd, where at p.137 he declined to apply to the plaintiff the standards appropriate to orthodox property-backed lending, because to do so would be to ignore the particular structure of the transactions in that case and to apply standards that would preclude any such transactions."
- Judge Keyser went on to find that, on the facts, there were particular elements of contributory negligence which, had he found the defendants were liable (which he did not) would have led to a 60% reduction for contributory negligence. In the older case of Nationwide Building Society v Archdeacons  Lloyd's Reports pn549, on the basis that the court concluded that the loan should not have been made, the building society's claim for damages was reduced by 90%.
6.2 The Appropriate Standard
- It is as well to deal at the outset with the standard to be applied in the present case. Mr De Verneuil Smith argued that the appropriate standard here was that of the reasonable centralised subprime lender. I do not accept that. Not all of GMAC's lending was in the subprime market. The appropriate standard by which contributory negligence is to be judged was that of the reasonably competent centralised lender.
- As already noted, when considering and applying that test, I should be wary of concluding that practices which were logical to centralised lenders at the time or were common amongst them, were in fact illogical or irrational. That caution comes from the judgement of Phillips J in Banque Bruxelles, as reflected in the recent judgment of Judge Keyser in Paratus.
6.3 The General Evidence About Lending
- The oral evidence called by Webb in support of GMAC's lending policies in these two instances came from Mrs Dell, a former employee of GMAC, and from Mr Denman, the lending expert. The evidence called by E.Surv which criticised those policies came from Mr Pitt, their lending expert. I consider that both Mrs Dell and Mr Denman were generally reliable witnesses, doing their best to help the court, although they both repeatedly gave the borrowers - and therefore GMAC - the benefit of the doubt when considering the detail of these loans. At times the impression was given that GMAC would have been prepared to lend anything to anybody, and on any terms.
- Unhappily, however, I was significantly unimpressed by the evidence of Mr Pitt. His reports were muddled and, in places, incoherent. This was doubtless due to his practice of producing a high volume of such reports without proper care and consideration. That also explained why parts of them, although he did not say which parts, had been researched by someone else, a Mr Dean, who had apparently also done some of the analysis. Mr Pitt's own experience of centralised mortgage lending and sub-prime lending was, by his own admission, limited. His oral evidence was similarly muddled and contradictory. Generally speaking therefore - although not exclusively - if there was a conflict between the evidence of Mr Pitt and Mr Denman, I preferred Mr Denman's evidence.
- The general evidence about these loans was clear. The prospective borrowers were treated as seeking mortgages on a self-certified basis (whether the application form expressly sought this or not). The assumption was that the borrowers had been advised about the best product by the intermediaries, who were FSA regulated. Despite the (rather contrasting) evidence of previous financial difficulties in each case, having processed the proposed loans through their computer system, known as AssetWise, GMAC lent to both Mr Ali and Mr Bradley. The lending was based on very high loan to value ("LTV") percentages. The loans were a subprime lending product which was more expensive for the borrower than a standard mortgage.
- GMAC's business model assumed three critical things: that what mattered most was the speed with which the mortgage application was dealt with; that self-certified mortgages were an entirely appropriate product even for those who were 'credit-impaired'; and that property prices would carry on rising. I deal with each of those elements briefly below.
- GMAC's CEO, Stephen Knight, wrote a lengthy book entitled 'A Vision for Growth in the UK Mortgage Market.' The book was written just before the crash and before GMAC ceased to act as a centralised lender. It is bombastic in a way peculiar to temporarily successful businessmen. The passage of time has lent hubris to much of the book, which repeats over and over again the importance of an automated process which could give "a meaningful predictive decision within seconds of keying the appropriate information". In this way, Mr Knight boasted, GMAC "would then be able [to] build a mortgage book of such consistency and predictability that we did not need all that superfluous paper-based information." The book goes on to say that on average just 14 questions were needed to get an immediate online decision and that response times could be reduced to just 30 seconds.
- The book does not address the rather obvious question as to why it could possibly matter that such important applications were dealt with in seconds rather than minutes. The book also ignores the logical consequence that, if a mortgage application is dealt with just by answering 14 questions, the absence of any useful supporting information becomes a good thing, rather than a negative. In short, it does not seem to me that hindsight is required in order to conclude that a system that put such emphasis on speed and automation over detailed information was, at the very least, potentially flawed. Despite that, the evidence is that, in some form or another, all the centralised lenders acted in a broadly similar way during this period, where the emphasis was on the intermediary doing the donkey work, and the centralised lender merely operating the computer program to produce an instant answer.
- As we shall see when we look at the details, the principal problem with both the Ali and the Bradley loans was that they were, or were treated as being, self-certified mortgages. In other words, the borrower said what his income was and, unless there was a random check, that was regarded as enough. Again, it does not seem to me to require hindsight to see that this was a risky way to run a lending system. But, again, it appears that everyone was doing it so that, in the mid-2000's, I find that self-certified mortgages were commonplace.
- The Financial Services Authority ("FSA") said, in their report CP11/31, published in December 2011, at paragraph 3.128:
"We remain firmly of the view that self-certification of income is not acceptable, nor are fast-tracked mortgages, where the lender does not verify income."
The FSA could have taken the same view from the late 1990's onwards, so as to prevent the sub-prime lending mania that occurred in the mid 2000's. They did not, which is why such mortgages became so common. Thus paragraph 3.128 of the report can only fairly be read against the echo of the stable door closing long after the horse has bolted.
- Thirdly, there is the point that the GMAC business model assumed that property prices would carry on rising. This is also dealt with in the FSA report CP11/31. Interestingly, however, paragraphs 2.24-2.26 of that report do accept that it did not require hindsight to recognise that this was a mistake. There is a reference to a speech in 2004 by the FSA's Chief Executive who noted that in the late 1980's:
"The most profitable and fastest growing mortgage lenders were those that lent money to the most marginally credit worthy customers: their business model was predicated on the belief that property prices were a one way bet-at least in nominal terms-so the property held a security to be relied upon to increase in value at a rate that would cover not just the principal advanced and interest, but also all the fines for late or non-payment of monthly instalments, and all the legal costs of taking possession. In short, they found that lending to distressed borrowers was a highly remunerative activity-until house prices unexpectedly fell. By no stretch of the imagination could that be called responsible lending. Suffice to say that hardly any of those lenders-which included some building societies-outlasted the housing market downturn of the early 1990's. I think lessons have been learnt from the experience of 12-15 years ago…"
- As everyone is painfully aware, the FSA was right to say that in the late 1980's there had been a mistaken assumption that property prices would keep on growing, and wrong to conclude in 2004 that this lesson had been learnt. In fact, what had happened in the 2000's (namely, the discovery by centralised lenders that lending to distressed borrowers was a highly remunerative activity until house prices unexpectedly fell) was exactly what had happened 15 years earlier.
- But again nobody (much less the FSA themselves) had done anything about it after the economic recovery in the mid-1990's, or tried to stop it happening again. Although one is driven to conclude that those involved in the world of financial services and mortgage-lending appear sadly immune to the lessons of history, it is against that background that these allegations of contributory negligence have to be judged.
6.4 The Ali Loan/Facts
- Mr Ali's application form was dated 1 December 2006. It set out details of the intermediary. It sought a self-certified mortgage in the sum of £193,500. £34,495, being the balance of the purchase price of £227,995 was, according to the application form, being paid out of savings. The evidence was that Mr Ali had originally sought a conventional mortgage but had been given a credit rating of 4, which was a fail. He therefore sought a self-certified mortgage, which was a sub-prime product, and would therefore cost Mr Ali more than a conventional mortgage.
- In relation to his credit history, Mr Ali's application form denied that he had any adverse credit history and denied having had any judgment recorded against him in the last six years. As we shall see, both these answers were incorrect. He had an adverse credit history (having been rated as a 4). He also had a County Court Judgment of £275 registered against him.
- There was also a further difficulty in that, although the form suggested that he had an annual income of £70,000, it was unclear whether this was his own income or the income (or turnover) of his business, Walsall Estates. Although he gave details of his accountant, the GMAC system appeared to make a virtue of either not contacting the accountant at all, or contacting them only to confirm the length of time that the borrower had been trading, as opposed to the level of income. The form also indicated that Mr Ali had seven other mortgages, but the details of these mortgages, which the form required to be filled in, remained blank.
- GMAC's AssetWise system used the Experian credit search engine. This is the largest credit search engine in the UK and is regularly used by centralised lenders such as GMAC. The database is not complete because some lenders do not subscribe to it, or to any similar database. I was told that there is no comprehensive credit database to which a lender could refer. In those circumstances, to the extent that it was suggested on behalf of the defendant that other searches should have been used, either instead of or in addition to Experian, I reject that submission.
- The Experian check showed a reference to just one of the seven mortgages which Mr Ali claimed to have. That was another mortgage with GMAC. On that account, there had been a default of one month, about seven months before the application, but those arrears had been cleared. I accept Ms Dell's description that this showed that "Mr Ali was performing well".
- The Experian search demonstrated no other recorded mortgage difficulties, although that may have been because no details of the six other mortgages were discovered. There was a default balance of £1,491 on Mr Ali's current account which, when taken with two other amounts owed to retailers, made a total of £2,447 categorised as "defaults outstanding". As previously noted, there was an outstanding Count Court Judgment of £275. Two other CCJs had been satisfied.
- The GMAC AssetWise programme (on which they were so heavily reliant) accepted Mr Ali's application for the mortgage, noting the result as "Accept with Requirements". It was not clear what, if any, requirements were actually imposed. Mr Ali expressly passed the AssetWise tests in respect of affordability, lending, product, valuation and fraud. I accept that the screen capture showing the number 4 was a hangover from his original (failed) application, and was not applicable to his application for this sub-prime mortgage.
- In the light of that factual background I turn to deal with the individual allegations. I do that by reference to five broad elements: the LTV; the errors in the application form; self-certification; self-funding investment mortgages; and Mr Ali's defaults.
6.5 Allegation 1: The LTV
- In relation to Mr Ali, the LTV (the loan to value ratio) was 85.13%. That was, on the face of it, a relatively high percentage, but it does not seem to me possible, on the material before me, to find that that was negligent. The specific reason for that can be found in paragraph 3.1.1 of Mr Pitt's report where he says:
"The loan to value on this case was 85.13% (including fees) and within the originating lender's policy limit. The policy limit was in line with the market place for a self-certified mortgage for first time buyers at the time of the application, but I regard a prudent maximum loan to value on self-certified cases for first time buyers as 80%."
- Leaving aside Mr Pitt's error in describing Mr Ali as a first time buyer (he was not, but the point is immaterial to this aspect of the case), Mr Pitt was saying that the 85% LTV was not only in accordance with GMAC's policy limit, but was also in line with the market place for a self-certified mortgage. Given the standard to which I have referred at paragraphs 74 - 75 above, it does not seem to me to be possible to conclude that this was negligent, in circumstances where the centralised lending market was lending at this LTV.
- This was supported by other evidence. There was information from a comparison site, Moneyfacts Mortgage Finder, which showed that at the time four out of every five centralised lenders were lending at 85 or 90% LTV. That was one of the reasons why Mr Pitt confirmed that the 85% was not out of line with the market.
- Of course, if there had been any credible third party evidence to demonstrate that the 85% LTV was illogical or irrational, I would have been prepared to consider it very carefully: 85% LTV does seem to me to be inherently risky. But if the vast majority of lenders were prepared to lend at this rate, it cannot have been negligent unless there was some evidence of irrationality. But there was not: there was just Mr Pitt telling me that, in his view, 85% LTV was too high. When asked by Mr De Verneuil Smith why the court should accept his view, given that the only third party information – the Moneyfacts document – was against him, Mr Pitt said: "I can't answer that".
- In view of the difficulties with Mr Pitt's evidence generally, and the lack of any supporting information relating to this aspect of the case, the criticism of an 85% LTV was not an allegation of contributory negligence that could be sustained.
6.6 Allegation 2: The Application Form
- The application form contained errors. But in truth, those errors were very small. There was the County Court Judgment of £275 which was not declared (but which the Experian credit search showed) and the one missed payment some months before on the mortgage account which had subsequently been repaid. Even if those matters had been identified on the application form, I am entirely confident that it would have made no difference at all to GMAC and the result of the AssetWise Programme would have been exactly the same.
- There is a suggestion that GMAC ought to have investigated Mr Ali's performance on his other mortgages. I do not accept that. A High Street Lender might have done so, but a centralised lender had different concerns. In any event, the evidence was that Mr Ali was meeting his payments on the mortgage that GMAC knew about and, although details of the other mortgages had not been identified in the Experian check, there was nothing to say that he was not making the necessary repayments under those mortgages either. In fact, even now, there is nothing to say that he was not meeting these repayments satisfactorily. If there were problems, those would have eventually led to CCJs and the like and there were none of those other than the £275, which I regard as de minimis. I do not, therefore, accept the suggestion that such other checks were required by a reasonably competent centralised lender
6.7 Allegation 3: Self-Certification
- E.Surv criticized GMAC because they had allowed the application to proceed on a self-certified basis. I have dealt with this point in general terms in paragraph 82 - 83 above. Whilst the FSA have now set their face against self-certified mortgages, that was emphatically not the position when Mr Ali applied for his loan. The evidence was that, at the time, a large proportion of sub-prime mortgage products were based on self-certification. In such circumstances, I could not find that they were of themselves negligent.
- Further and in any event, the evidence relating to Mr Ali suggests that self-certification was appropriate because it had been recommended by the intermediary. Mr Pitt's evidence was that it was reasonable for GMAC to rely on the intermediary in terms of the choice of product. Accordingly, on Mr Pitt's evidence, in circumstances where Mr Ali made a straightforward application for a self-certified mortgage, I find that GMAC were indeed entitled to rely on the intermediary. As we shall see, I consider that rather different considerations applied to Mr Bradley.
6.8 Allegation 4: Self-Funding Mortgages
- Although it was not entirely clear, it appeared that, again through the evidence of Mr Pitt, it was suggested that one of the reason why Mr Ali's other mortgages should have been investigated by GMAC was that they were wrong to assume that such investment mortgages would be paid for by the rent generated, and that they were therefore self-funding. Mr Pitt criticized the GMAC lending policy which stated that "all existing investment mortgages will be treated as self-funding".
- As noted above, whatever the flaws in accepting investment mortgages as self-funding, there can be no doubt that this was inline with the marketplace in 2006. Mr Pitt expressly accepted that in cross examination. He did say that he did not agree with the marketplace, but he agreed that his opinion was contrary to the accepted practice at the time. In those circumstances, again mindful of the standard that has to be applied to these allegations of contributory negligence, I reject this criticism.
6.9 Allegation 5: Defaults
- Mr Pitt suggested that, because of the defaults of £2,477, GMAC were negligent in making the loan to Mr Ali. I do not accept that. As Mr Pitt accepted, defaults were an ordinary feature of the subprime markets. Whilst there was an academic debate as to whether the existence of unlimited defaults might change the lending policy, Mr Pitt was clear that what was reasonable would depend on the circumstances. I agree with that. It seems to me that defaults of £2,477 were not, in the overall scheme of things, such that GMAC should have decided not to make this loan to Mr Ali. There was nothing that demonstrated any extensive credit difficulties on his part, on the contrary, the Experian check showed a good credit performance.
- Mr Wygas was anxious to demonstrate that the subsequent events – the default, the repossession and the significant losses - showed that, because of Mr Ali's impecuniosity, the loan should not have been made in the first place. That is, I think, utilising hindsight to an inappropriate degree. Of course, because Mr Ali had failed the original application for a standard product, there was evidence to indicate that he was credit-impaired, but so were many (perhaps most) of those to whom GMAC lent money to buy properties. I cannot assume that, merely because Mr Ali got into financial difficulties from the summer of 2007 onwards, he was not someone to whom GMAC should not have granted a mortgage in late 2006. I know nothing about Mr Ali's circumstances other than what the documents tell me, and I do not know if something happened between his application to GMAC in late 2006 and the summer of 2007 when he fell behind on his mortgage repayments. It is inappropriate to speculate about such matters.
6.10 Conclusions on the Ali Loan
- I have some sympathy with the basic position taken by E.Surv. Lending large sums to people like Mr Ali, on a self-certified basis, relying on intermediaries and placing complete faith in computerised tick-box forms, seems to me to be a potential recipe for disaster. But such lending was common in the years 2004 - 2007 and, on the facts of the Ali loan, it is impossible for me to say that the decision to lend to him was irrational or illogical or negligent. Mr Ali's financial position, as revealed by the Experian search and as plugged into the AssetWise program, was not such that further investigations were required and did not mean that the loan should not have been made. Accordingly, in relation to Mr. Ali, I reject the allegations of contributory negligence.
7. THE BRADLEY VALUATION (13, FOXDENE ROAD, SEASALTER, WHITSTABLE, KENT)
7.1 The Facts
- By reference to the mortgage valuation report on 13, Foxdene Road ("the Bradley property") completed by Mr Honeysett of the defendant dated 10 July 2007; the notes of his earlier site visit dated 6th July and the accompanying documents; Mr Honeysett's witness statement dated 30 May 2012 and his answers in cross-examination; I make the following findings of fact in respect of the Bradley property:
(a) Mr Honeysett was an experienced valuer who undertook about 1,000 valuations a year. He had not seen the terms of the GMAC retainer, set out at paragraphs 7 - 9 above.
(b) The Bradley property was a detached four bedroom house with an integral garage. There was a railway line running behind it. It was close to a council estate called Lucerne Court. Next door was an empty building plot, and beyond that were two blocks of four flats each.
(c) Mr. Honeysett was told that Mr Bradley wanted a loan of £280,000 and, to that end, had stated that his property was worth £295,000.
(d) Mr Honeysett spent 15 minutes at the property and carried out a measurement of its external area. He had the Quest data in table form, and although that information had to be treated with care (because it did not show necessarily show sale/purchase prices, as set out in paragraph 37 above), it is not at all clear what regard, if any, Mr Honeysett actually paid to it. He agreed that estimated or asking prices were unreliable when looking at comparables.
(e) He also obtained information from Your Move, a comparison website, which featured seven properties in the area and their asking prices. From that list, his site notes indicate that he paid particular regard to two comparable properties, one at 12, Speedwell Road (which was on the Mariners View Estate in Seasalter) and one at 79, Hazelmere Road, which was a private road. Mr Honeysett was aware that the house at 12, Speedwell Road had sold for £270,000 whilst the house at Hazelmere Road was under offer for £285,000. These were the only two properties he recorded as specific comparables in his site notes.
(f) Mr Honeysett's notes also suggest that he had regard to a property at 18, Major Close (also on the Mariners View Estate), although those same notes indicate that he did nor regard it as a good comparable because it was smaller than the Bradley property. In my view, for the reasons noted at paragraph 128 below, it was a superior property because it had more living rooms, a double garage and a sea view.
(g) Although there was no mention of this in his site notes, Mr Honeysett claimed that he also looked at Land Registry information and the Nationwide price indices. In the absence of any corroborative evidence, I reject that. In any event, it was quite unclear what difference, if any, this further information might have made to the valuation which he provided.
(h) Mr. Honeysett's notes indicate that there was a range in value of £270,000 - £300,000 for the property (although the source of the £300,000 remained unexplained in his notes or his mortgage valuation report or his oral evidence). He concluded that on the basis of that range, the true valuation should be £295,000.
(i) In answer to the obvious question as to why a range of between £270,000 and £300,000 produced a "say" figure of £295,000, Mr Honeysett said:
"I thought it was about £285,000. The estimated value [£295,000] was within our margin of tolerance so I put forward a figure of £295,000. We cannot say that any value is closer than + or – 5%. We tend to value towards the estimated value. I felt the value was in the region of £285,000. I increased it to £295,000 because that was within our acceptable tolerance of 5%."
It was then put to him that he had done that solely in order to hit the figure of £295,000 which had been stated by Mr Bradley. He agreed.
- I am in no doubt that Mr Honeysett's performance of the valuation fell below the standard to be expected of a reasonable valuer and was therefore in breach of the requirements of clauses 5.6 and 6.1 of the Supplier Agreement. There are three principal reasons for this conclusion.
- First, like Mr Tomalin in respect of the Masshouse property, he started at the end and then sought to justify the figure which he had been given. He knew that the estimated value of the property for Mr Bradley's remortgage purposes was £295,000. He therefore did not seek to value the property independently, but instead sought to justify that pre-existing figure.
- Secondly, his methodology was entirely awry because, having worked out a range, instead of putting forward a figure that was in the middle of that range, he then tried to justify a figure at the top end of it. He did this, he said, by adding a 5% margin to the middle figure of £285,000.
- In my view, it is wholly unacceptable for a valuation surveyor to add to his own figure an uplift to reflect a margin of tolerance. No justification for that approach was offered. It is contrary to the terms of the Supplier Agreement and the RICS guidance notes.
- Thirdly, he failed to take into account the obvious adverse factors that affected the property. It is Webb's case that the property was affected by a number of adverse factors. These were the railway line at the back of the property; the proximity to the Lucerne Estate; the presence of an empty development plot next door; and the close proximity of the two small blocks of flats with four flats in each on the other side of the empty plot.
- I do not accept that either the empty plot next door to the property, or the close proximity of two blocks of flats, had an adverse impact on the valuation of the property. They were just particular elements of the location. Mr Davis was adamant that these matters did not have an effect on valuation, and Mr Speight did not persuade me otherwise.
- On the other hand, the presence of the railway line was a significantly adverse factor affecting the location of the Bradley property, something which Mr Honeysett, and both experts, accepted at the trial. Yet Mr Honeysett ticked the box in the site notes to say that there was no adverse locational feature. In my judgment, that was a clear error, which Mr Honeysett also accepted. He originally confirmed that he did not apply a discount to reflect the railway, and I reject his belated attempt to suggest that he may have deducted 2.5% (or £7,500), which was not recorded in his notes and was, in any event, much too little.
- Finally, as to the proximity of the council estate, I consider that that too was an adverse feature, although of less significance than the railway line. It was a large estate, with a mixed reputation, but Mr Honeysett agreed that he had paid no regard to it at all.
- Again, however, although I find that Mr Honeysett was negligent in the way he went about his task, and failed to take into account the two adverse matters to which I have referred, the real test is whether or not his valuation figure was negligent.
7.3 Valuation: Mr Honeysett's Comparables
- I consider that 12, Speedwell Road was a good comparable because it had sold for £270,000 on the 7th July 2008. But there were plainly features of 12, Speedwell Road that made it superior to the Bradley property which Mr Honeysett had to value. 12, Speedwell Road was a double fronted house with a separate garage. It had two living rooms and a study, whilst the property had just one living room. Even though the total square footage at 12 Speedwell Road may have been similar to the Bradley property, it was superior in two particular ways. First, it made much better use of the space than the Bradley property which, as Mr Speight noted, had a long hall which wasted a good deal of space. Secondly, it would have seemed bigger downstairs because of the additional living rooms, a point which the experts agreed was important. As Mr Speight put it, "there is a preference for living rooms".
- Mr Honeysett was unaware of the lay-out and size of 12, Speedwell Road because his information had come from another agent, and he had not asked that agent about comparative sizes. He said that he had simply "assumed it was similar". He confirmed that it was because he did not know the lay-out and size that he had not made an allowance to reflect the superior living accommodation at 12 Speedwell Road. And when asked how, therefore, he had come to use it as a comparable, he said: "I can't answer that".
- Secondly, 12, Speedwell Road was on the Mariners View Estate. The experts disagreed about the desirability or otherwise of this estate. I find that, on the balance of the evidence, a location on the Mariner's View Estate was seen as a plus rather than a minus. That was the emphatic view of Mr Speight, Webb's expert valuer, who had greater experience of mortgage valuations and house-selling in the Whitstable area than Mr Davis, E.Surv's expert. It was an estate with sea views (unlike Foxdene Road); it was more convenient for the main transport links (Foxdene Road was very cut-off, requiring a number of turns into roads which became cul-de-sacs in order to reach the main road); and it was surrounded by other, well-designed four bedroom houses (unlike Foxdene Road, where the property types were much more mixed).
- For all these reasons, therefore, I conclude that 12, Speedwell Road was in a better location than the Bradley property. In addition, of course, it did not have the railway line at the back and was not in close proximity to a council estate.
- Thus, although it was a good comparable, it should have indicated to Mr Honeysett that the Bradley property could not be worth more than £270,000 and was, for all the reasons noted, probably worth quite a bit less. That it did not do so was because of the inadequacies in Mr Honeysett's valuation process, set out above.
- The other principal comparable taken by Mr Honeysett was 79, Hazelmere Road. That was also a slightly smaller house than the Bradley house, but again it made much better use of the space. Although there was nothing in his site notes to indicate that he knew the size of 79, Hazelmere Road, Mr Honeysett claimed that he did, because a colleague had valued it the week before. The house had a large conservatory which the Bradley property did not.
- Hazelmere Road was a private road. Although Mr Davis, E.Surv's expert, sought to argue that a private road was not a plus factor (indeed he said it was a negative factor) Mr Speight was entirely clear that, in his experience, "people love private roads". Again, I accept Mr Speight's approach: the evidence was that private roads, although sometimes inconvenient, are commonly seen as a significant plus factor by prospective purchasers. They are quieter; there is less traffic; and there is a greater sense of community. As to the condition of Hazelmere Road (which could have been a factor, if it was in particularly poor condition), I find that it was reasonably good and not as bad as many. There was no evidence of any other risks or liabilities stemming from the private nature of the road.
- Accordingly, I find that Hazelmere Road was a more desirable location than Foxdene Road. In addition, of course, 79, Hazelmere Road was not adversely affected by the two negative factors (the railway line and the council estate) to which I have already referred.
- Again, therefore, those factors ought to have made Mr Honeysett realise that the £285,000 offer price for 79, Haslemere Road was higher than that which could be obtained for the Bradley property.
- As for 18, Major Close, the figure which Mr Honeysett had of £295,000 was not a sale/purchase price. Moreover, it had three living rooms, compared to one at the Bradley property, something which Mr Honeysett claimed that he knew about (because he had valued 18, Major Close before) but a factor to which he did not seem to pay any regard for comparison purposes. The points made above about the houses on the Mariners View Estate, such as the better design, more living rooms and their popularity with prospective purchasers, the better location and sea views, all apply again.
- The essence of the problem with Mr Honeysett's three comparables was not that they were not proper comparables; they plainly were. But as Mr Speight remarked:
"They were similar properties. But they are better. They are 4 bedrooms, 2 bathrooms, with more reception rooms, double garages and sea views. So they are better, even though they are of a similar type."
- During the course of his cross-examination, I think Mr Honeysett began to realise that he was struggling to get his three comparables to support his valuation. It was in that context that he made the rather odd remark that his three comparables were inferior to the Bradley property because celebrities lived close by and that Foxdene Road "was favoured by London buyers and some celebrities". Mr De Verneuil Smith was rightly scornful of such an approach to mortgage valuation.
- In any event, based on his two principal comparables, and without any deductions for location and the like, Mr Honeysett should have calculated a figure between £270,000 (12 Speedwell Road) and £285,000 (79, Hazelmere Road). That produces a figure of £277,500, which was much less than the £295,000 which he identified in his mortgage valuation report.
7.4 Valuation: The Experts' Comparables
- Mr. Speight and Mr Davis produced a bewilderingly large number of comparables. Save for those in Foxdene Road, to which I shall return in a moment, I did not consider that the other comparables added very much to the exercise done by Mr Honeysett. The arguments kept coming back to the validity of the comparison between the Bradley property and the houses on the Mariner's View Estate.
- This can perhaps best be demonstrated by reference to one of the few joint comparables, which was 34, Thistle Drive. This was on the Mariner's View Estate. It had four bedrooms, and was similar to the Bradley property, although it had three living rooms and more living space than the Bradley property. It was also better designed, according to Mr Speight, maximising the usable space.
- However, in common with other properties on the Mariner's View Estate, when he was doing a comparison with 13, Foxdene Road, Mr Davis added the sum of £40,000 to the sale price of Thistle Drive (£250,000) when arriving at a valuation of the Bradley property. This was to allow for what he regarded as the downside of living on that Estate. In other words, simply because the Bradley property was not on the Mariner's View Estate, Mr Davis was saying it was worth £40,000 more than 34, Thistle Drive.
- I consider that such an approach is wholly unjustified. For the reasons I have already given, I consider that the Mariner's View Estate was a better location than Foxdene Road, prior to any consideration of the railway line and the like. It was certainly not worse. Accordingly, the £40,000 uplift is unjustified, something which Mr Davis all but admitted during his cross-examination. On that basis, even without making an adjustment for the railway line at the back of the Bradley property, it would be difficult to see how, in comparison with 34, Thistle Drive, the Bradley property could be worth more than £250,000.
- Other than possible comparables in Foxdene Road itself, I concluded that the other properties relied on by Mr Davis (63, Hazelmere Road and 8, Speedwell Road) added nothing to the issues already covered. The same is also true of the other properties relied on by Mr Speight: 30, Ladysmith Grove; 5, Tradewinds; 2, Pollard Place; and 3, Warden Point Way. The first of these had subsidence and had been discounted by Mr Speight before trial; the latter three were all on Mariner's View but were less like the Bradley property than those already assessed above.
- Both experts had regard to comparables in Foxdene Road even though they were outside the appropriate date range. I considered them too old to be of very much help. There were also disputes about their size and condition. But I should refer to 43, Foxdene Road, which had sold in April 2006 for £299,950. It was of some relevance because it was a property that was affected by the railway line. However, it was in a different style; it was larger; it had a conservatory; and it was further away from the Lucerne Estate. Although therefore I do not discount it altogether, as Mr De Verneuil Smith asked me to do, I consider it to be of limited value, particularly given Mr Davis' two different attempts (which produced two different figures) to use it to extrapolate a value for the Bradley property.
7.5 Valuation: Analysis and Conclusions
- The two principal comparables identified by Mr. Honeysett were 12, Speedwell Road and 79, Hazelmere Road, at £270,000 and £285,000 respectively, were both better houses in better locations. They therefore provide comparable valuations which required to be discounted to arrive at a figure for the Bradley property. The only other comparable of significance is 34, Thistle Drive (paragraph 133 above) which sold for £250,000.
- On a proper analysis of Mr Honeysett's comparables, and taking account of 34, Thistle Drive, Mr Speight's valuation figure is £250,000. In my view, that appears prima facie reasonable, because it is based on what I consider to be the best comparables, but makes proper allowance for the worse location of the Bradley property and the two adverse factors which particularly affected it.
- There is, however, one qualification to that. As I have said at paragraph 137 above, it does seem to me that a comparison with 43, Foxdene Road, although outside the relevant time zone, does suggest that £250,000 might be a little light. In those circumstances, I would increase Mr Speight's figure to £260,000. In my judgment, that is the correct valuation figure for the Bradley property.
- The accuracy of the £260,000 figure can be tested in another way. 12, Speedwell Road sold for £270,000 and is a comparable that everyone who gave evidence on valuation expressly relied on. Mr Davis said that he would deduct £10,000 for the railway line when valuing the Bradley property. That would give a figure of £260,000, even assuming that there is no difference in location between Mariner's View and Foxdene Road.
- Since the actual valuation figure of £295,000 is significantly more than 10% higher than the correct valuation figure of £260,000 it again does not matter very much what my views are in relation to the appropriate margin. But, for very similar reasons to those noted in paragraph 60 above, I have concluded that the appropriate margin here was 5%. Indeed, for the Bradley valuation, the case for limiting the bracket to 5% was overwhelming. That is not only because there were a wealth of comparable properties (as the experts demonstrated) but it was a 5% margin that Mr Honeysett said he was endeavouring to work to, and a 5% margin which Mr Davis, his expert, said "would be my personal objective".
- Accordingly, for all the reasons set out in Section 7 above, I conclude that as Mr Honeysett's valuation figure of £295,000 in respect of the Bradley property was negligent. The correct figure was £260,000, which was more than 10% lower. But for that negligence, the loan would not have been made to Mr Bradley.
8. BRADLEY: FAILURE TO MITIGATE
- I can deal with this shortly. The principal point advanced by Mr Wygas was that, once Mr Bradley got into difficulties in early 2009, GMAC were wrong to enter into a subsequent agreement with him whereby he paid the reduced amount of £600 per month. The submission is that they should have effectively sought possession at that stage, and that the losses were much greater because they did not seek repossession straight away.
- As I indicated during the course of argument, I am profoundly opposed to that submission. It seems to me that lenders like GMAC have a duty to their customers to take all possible steps which might leave the borrower in possession of his or her property. The arrangement of January 2009 was entirely reasonable and gave Mr Bradley of at least some hope of being able to stay in house. Unhappily, that did not prove possible but no criticism can be made of GMAC in such circumstances.
- It was unclear to me whether Mr Wygas pursued any of the other allegations of failure to mitigate contained in his pleadings. However, to the extent that he did, it seems to me that they are essentially covered by my comments relating to the other allegations of failure to mitigate in respect of Mr Ali. There was no unwarranted delay in how GMAC dealt with Mr Bradley; on the other hand, as I have already noted, I consider that they dealt with him with all due sensitivity. Moreover, there was no question of any claim on Mr Bradley's personal covenant. In all the circumstances, the allegations of failing to mitigate in respect of the Bradley loan are all rejected.
9. THE ALLEGATIONS OF CONTRIBUTORY NEGLIGENCE / BRADLEY
9.1 The Relevant Law
- This is set out is Section 6.1 above.
9.2 The Appropriate Standard
- This is set out in Section 6.2 above.
9.3 The General Evidence About Lending
- This is set out in Section 6.3 above.
9.4 The Evidence in Relation to the Bradley Loan
- Mr. Bradley was applying for a remortgage on his property and needed £295,000. His application was made in early July 2007; again there was an intermediary involved. The purpose of the loan was said to be debt consolidation. Although it was not said to be an application for a self-certified mortgage, in essence it was treated as such, because no evidence of income was sought or provided, save the sum declared on the form. How and why this application was treated as if it was for a self-certified loan was not explained.
- In his application form, Mr Bradley identified that the nature of his self-employed business was scaffolding and that he had been doing it for sixteen years. His income was declared to be £75,000 per annum. He gave details of his accountant. He did not supply any accounts.
- In relation to the credit history questions, the answers in the application were unsatisfactory. He failed to answer the question "do you have any adverse credit history"; he also failed to answer the question "whether you have failed to keep up payments under any mortgage, rental or loan agreement in the last twelve months?" In addition, he denied having any judgment for debt recorded against him in the last six years.
- In fact, as the Experian search showed, Mr Bradley was the subject of an outstanding CCJ in the sum of £956. Much more importantly, Mr Bradley had two credit card defaults which totalled around £18,000. Indeed, it appears to have been these defaults, and the need to pay them off, that led to the application for the remortgage in the first place.
- Following the Experian search, the AssetWise programme concluded that the loan of £280,000 could be made. A call was made to Mr Bradley's accountants for them to confirm that he had said about his business, but no questions were asked about his income.
- I then turn to deal with the particular allegations of negligence. Although broadly similar to the allegations in respect of the Ali loan, there are factual differences which mean that the analysis, and the outcome, is not the same.
9.5 Allegation 1: The LTV
- The LTV applied in Mr Bradley's case was 95%. Mr Pitt said that on any view that was too high; Mr Denman said that it was not uncommon, although he did not support that view with any third party material.
- The evidence in relation to the alleged market for loans at 95% LTV at the relevant period was markedly thin. On the relevant Moneyfact print-out, only three of about 35 lenders appeared to be prepared to lend at 95% LTV. Moreover, each of those three had small print qualifications which were not explored in evidence but which seemed to me to indicate that they may not have permitted the loan in these circumstances. It does not appear that such a high LTV rate would necessarily have been accepted on a self-certified remortgage by any of these three lenders. All the other lenders had a lower maximum LTV.
- Accordingly, I consider that, by reference to this evidence of the marketplace at the time, it was negligent for GMAC to allow Mr Bradley's application for a remortgage at a 95% LTV ratio. A reasonable centralised lender would not have done so.
- In any event, leaving aside the evidence about what other lenders were doing, 5% was just not enough of an equity cushion. To that extent, therefore, I disagree with Mr Denman's evidence on this topic. Indeed, the counterpoint can be made quite simply. It is accepted on behalf of the claimant that a 5% bracket was appropriate in respect of the E.Surv valuation figure. Thus Webb must accept that the property might only have been worth 95% of the stated value. In this way, the equity cushion is removed at a stroke.
- But even if I was wrong to conclude as a matter of principle that lending at 95% LTV was negligent, the real issue remains whether there were other factors in respect of the Bradley loan which should have told a reasonably prudent centralised lender that a 95% LTV ratio was not, in these particular circumstances, appropriate. In my view, there were.
9.6 Allegation 2: The Application Form
- The errors and omissions in the application form have been set out above. It does not appear that anything turns on them, because of the comprehensive information produced by Experian.
9.7 Allegation 3: Self-Certification
- The application form completed on behalf of Mr Bradley does not state that this was a self-certified mortgage application. Yet that was how it was treated. Mr Bradley stated an income figure of £75,000 but he provided no third party support for that claim, and he did not produce any accounts. Even more bizarrely, although he gave the name and contact details of his accountant, and even though the accountant was rung by GMAC, the accountant was simply asked to verify that he was Mr Bradley's accountant, and that Mr Bradley had been a self-employed scaffolder for a long period. He was not asked to verify Mr Bradley's income.
- Accordingly, the first issue was why Mr Bradley's application was treated as being for a self-certified mortgage. In cross-examining Mr Denman, Mr Wygas put to him twice that there was no reason for Mr Bradley's application to be treated as a self-certifying mortgage. On both occasions, Mr Denman ducked the question, and I conclude that this was because there was no answer to it. At one point Mr Denman said rather lamely that the reason for self-certification should have been sorted out by the intermediary. I do not accept that. Because a self-certifying loan was not sought in the first place, the intermediary had a complete answer to any criticism that may now be made about why such a loan was advanced. The key question was why it was treated as an application for a self-certifying loan by GMAC, and there was no answer to that, either on the facts, or as a matter of rational logic.
- I consider that Mr Bradley's financial position made it imperative that the application was not treated as self-certifying, but was instead required to be accompanied by proper proof of earnings. It seems to me axiomatic that GMAC should have asked themselves why there was no third party evidence of income. Although Mr Denman had various arguments as to why self-employed people like Mr Bradley might struggle to produce accounts and the like, that cannot be anything other than speculation, particularly in circumstances where Mr Bradley gave details of his accountant and his contact details to GMAC. In any event, his was not a start-up business. Even if the mot recent accounts had not been available, some of the previous 15 years of accounts from his self-employed business should have been provided.
- What is more, it appears that GMAC spoke to the accountant to confirm that Mr Bradley was a scaffolder and had been for sixteen years. This throws into stark relief a later exchange during Mr Denman's cross-examination on the topic of that telephone call:
"Q: They could have asked what his last accounts were? What profit did the accounts show?
A: They could have asked those questions. The nature of the product meant that they weren't going to ask the questions. It was not the scheme.
Q: They should have asked those questions as a matter of common sense?
A: That does not come into it."
- A lending system in which common sense plays no part is, I think, a negligent lending system. Mr Bradley was not expressly seeking a self-certified loan so, at the very least, his accountant should have been asked the relevant questions in order to prove his income. I find that the failure to ask those questions was negligent.
- Furthermore, it seems to me likely that those enquiries would have indicated that Mr Bradley's financial position was particularly problematic. As I indicated during the course of argument, I am sure that a self-employed scaffolder could have been earning £75,000 gross a year in 2007. But once allowance was made for tax and National Insurance, and once the scale of his others debts, dealt with below, had been taken into account, the position was much less good. The obvious question which was not asked was this: if he was earning £75,000 a year, how has he amassed these debts/defaults? In the circumstances I consider that, on the balance of probabilities, if the right questions had been asked and the necessary proof sought, the loan would probably not have been made at all.
9.8 Allegation 4: Defaults
- I have made the point above in relation to Mr Ali that there was nothing of substance in 2006 to demonstrate that, at the time of the loan, he was in financial difficulties. That was not the position with Mr Bradley; indeed, the opposite was the case. Mr Bradley was plainly in financial difficulty: that was the whole purpose of the remortgage. He had £18,000 worth of defaults as well as a CCJ for nearly £1,000. Because the remortgage was designed to consolidate Mr Bradley's debts, and because an LTV of 95% was itself beyond what I consider the edge of acceptability, GMAC were obliged to consider this loan very carefully. And that, so it seems to me, brings us back to self-certification, and the importance of the verification of his income, which I have already addressed.
- The contributory negligence in the case of the Bradley loan was as a result of a particular combination of circumstances. The LTV at 95% was unacceptably high; the remortgage loan was required to consolidate significant debts/defaults; and there was no supporting evidence of income for a loan that was not originally sought on a self-certifying basis. In dealing with this loan in the way that they did, GMAC were negligent; they failed to look after their own interests and made a loan of £280,000 which a reasonably competent centralised lender would not have made.
9.8 What is the Relevant Percentage Deduction for Contributory Negligence?
- I have set out the relevant authorities at paragraphs 72 - 73 above. I consider that the 90% deduction (Archdeacons) is too high: on my analysis, both parties were to blame for the unsuccessful loan to Mr Bradley. I consider that Judge Keyser's 60% in Paratus is more realistic. However, on a proper analysis of the facts of this case, I conclude that both GMAC and E.Surv were equally at fault. Mr Honeysett made a complete mess of the valuation of 13, Foxdene Road, and wrongly appropriated to himself any margin of error. GMAC should never have lent £280,000 at 95% LTV to a man who was already significantly in debt and who had not proved his income. In those circumstances, I consider that both parties are equally to blame and the right deduction for contributory negligence is 50%.
- In relation to the Ali valuation I find, for the reasons set out in Section 4, that E.Surv were negligent. That gives rise to damages calculated by reference to the difference between the E.Surv figure of £227,500 and the correct valuation of £204,658. That is a loss of £22,842. To that is to be added interest for the whole of the relevant period, less the four months referred to at paragraph 67 above. The appropriate interest rate is 2% over base.
- In relation to the Bradley valuation I find, for the reasons set out in Section 7, that E.Surv were negligent. The actual losses suffered in consequence of this are agreed at £51,219.24.
- For the reasons set out in Section 9 above, I would reduce the actual loss by 50% to reflect GMAC's contributory negligence. This results in a figure of £25,609.62, which is an actual loss below the difference between the E.Surv valuation figure of £295,000 and the correct valuation of £260,000, namely £35,000. Interest is due at 2% over the base rate on the sum of £25,609.62 for the whole of the relevant period, there having been no failure to mitigate.
- I would ask the parties to agree the interest calculations and draw up a consequential order. I have not dealt with any issues of costs.