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Published 25 November 2016
Not quite as glitzy as The Strip, but the setting for a recent High Court case which casts real doubt on the prudence of relying on unverified comparable evidence provided by fellow professionals as part of the valuation process. Arguably not appreciating the prevalence of this established means of the information gathering process, the decision illustrates that greater caution needs to be exercised in the future.
On the plus side, this case provides encouragement to those professionals seeking to diminish exposure risk of this type wherever a borrower's honesty can be called into question. Experience tells us that the utilisation of funds for purposes different than that stated is not an uncommon occurrence.
Deputy Judge Richard Spearman QC so decided in the recent decision of Barclays Bank Plc v Christie Owen & Davies Ltd (trading as Christie & Co)  EWHC 2351 (Ch). The underlying valuation by Christie & Co was of three adjacent family entertainment centres (amusement arcades to you and me) – Circus Circus, the Golden Nugget and the Flamingo in Great Yarmouth.
The borrower operated two already and applied for £1.8m funding from Barclays to purchase the Flamingo and to alter all then incorporate all three centres together. Having obtained funding, purchased the Flamingo and carried out the works, the business got into financial difficulty and was placed into administration in October 2010. It was eventually sold for £1.35m leaving Barclays substantially out of pocket.
Barclays sought to recover its losses from Christie & Co contending it had provided two negligent over-valuations in February 2007 of (1) Circus Circus and the Golden Nugget at £2.7m, and (2) the Flamingo at £1.5m, and that it had lent, sustaining loss, in reliance on those valuations. It alleged that the true values were £2.1m and £1m respectively.
Christie & Co denied it was negligent. The parties and their experts (both valuation and lending) were unable to agree on many issues in advance of trial meaning the court had many things to consider and the judgment was lengthy. As appears increasingly to be the fashion, the court did not prefer one valuation expert over the other, but instead considered "the weight to be placed on different aspects of [the experts'] evidence…and then [reached] its own conclusion". Respective experts were, therefore, preferred on some points whilst the Judge went with his own views on others, an outcome likely to give a few sleepless nights to anyone trying to advise a client as to the merits of a valuation case.
Much of the detail in the judgment is attributable to the "long and complex history of borrowing" and the many valuation points that Christie & Co took. Although the judgment was fact-specific, the following is of note:
Although not eye-watering, there were some interesting concepts that were considered at length, not least the fact that valuers often rely on comparable information provided by other valuers regarding purchase prices, yields, rents, floor areas, etc. In this case, the Judge found that Christie & Co "did a poor job of researching and analysing comparables and placed too much reliance" on the information provided by the third party valuer.
Professionals providing this type of information to their peers would be well advised against exaggeration and to be confident in the source, whereas those relying on such should endeavour to obtain independent verification and, if not forthcoming, be reluctant to rely on the same to reach final conclusions without appropriate qualification in their reports. Failures to do so could heighten the risk of negligence claims if the data proves to be erroneous. The additional cost of certainty is likely to prove by far the cheaper option in the long run.
1Earnings before interest, tax, depreciation and amortisation i.e. subtract expenses from revenue (excluding interest and tax) without depreciation and amortisation (depreciation of tangible and intangible assets); this is a measure of a company's operating performance and enables profitability to be analysed between companies as it eliminates the effect of financing and accounting decisions.
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