The lender sued the valuer for negligence. The valuer used the residual site feasibility method of valuing the site (using the pre-sales as an indicator of the value of the finished units) instead of using the comparable approach.
On the question of negligence the lender argued the valuer should have used the comparable method, or done a cross-check of his calculations using comparables. The judge rejected commenting:
He decided that with only one comparable sale within the last 12 months was not reliable. Even if there were two comparables within the 12 month period, a sample of two is unreliable. The guidelines caution against using comparable transactions that require adjustment, as their usefulness may be destroyed. It is my view that this attests to the fact that Mr Philips engaged in a deliberate and considered approach that he would take into account comparable sales only within 12 month period and that the sample was too small for the comparative sales method to be reliable. Hence he used the feasibility analysis in carrying out the valuation. I agree with this view.
The judge went on to find that even if there had been negligence there had been no reliance because the lender never did due diligence on the pre-sales even thought he valuation stated:
The subject site is considered saleable at the provided valuation and to constitute a satisfactory basis for mortgage security, subject to confirmation of the presales as bona fide and to those general provisions and disclaimers indicated.
The judge commented:
The valuer made it abundantly clear to Provident Capital that it was important to check the presales were bona fide and that the bona fides of the sales affected the valuation figure. Once that had been done it was up to Provident Capital to verify the bona fides of the presales. They, not the valuer, were in a position to find out the true position with regard to the presales. Provident Capital decided to proceed with the settlement of the loan when 17 out of 24 contracts were in trade dollars. Provident Capital’s reliance on the valuation, in circumstances where it proceeded with the loan despite knowing that most of the contracts were in trade dollars, was unreasonable.
Accordingly the lender lost the case.