Hope Capital Limited v Alexander Reece Thomson LLP – a breach of duty with no actionable loss

Hope Capital Limited (the "Claimant") lent approximately £2.2m (the "Loan") to St Anselm Heritage Properties Limited ("St Anselm"), a company owned and controlled by Mr Evangelos Pieri in March 2018. The Loan was secured against a Grade II listed property, Cedar House. Mr Pieri had the benefit of a long lease over Cedar House and the National Trust was the freehold owner. The Claimant's business involved providing short term, bridging finance on a low Loan to Value ratio.

Before making the Loan, the Claimant retained Alexander Reece Thomson LLP (the "Defendant") to value Cedar House. The valuation instructions required the Defendant to "[p]rovide a valuation of the property based on its existing planning/condition excluding any 'hope' value or goodwill". Mr Jeremy Mussett, then of the Defendant, valued Cedar House at £4m (the "Valuation").

St Anselm defaulted on the Loan and receivers took possession of Cedar House in November 2018. Ultimately, the value of Cedar House was substantially impacted by the service by the National Trust of a (second) section 146 Notice[1] – issued shortly after the receivers had taken possession –due to unapproved and unsatisfactory building works undertaken by Mr Pieri on Cedar House, as well as the serious consequences of the Covid pandemic on the property market, before it was eventually sold in October 2020 for approximately £1.4m. 

The Claimant brought a claim against the Defendant alleging that the Valuation was negligent, and that no transaction would have taken place if the Valuation had reflected the true value of Cedar House. A late application by the Claimant to amend its Particulars of Claim to advance additional allegations against the Defendant was not successful.

With respect to its negligence claim, the Claimant alleged that due to the crucial nature of the Valuation to the Claimant's decision to provide the Loan, this case fell into the rare situation in which the Defendant should be held liable for all of the financial consequences of the Claimant entering into the Loan transaction and not only those losses flowing directly from the Valuation being wrong.

The Claimant argued that this encompassed its: (i) loss in capital, namely the advanced amount plus the net costs of extraction less the sale proceeds realised in 2020; (ii) loss of contractual interest on the Loan; and (iii) a claim for loss of profits which would have been realised using the capital tied up in the Loan in the intervening years in other successful bridging loans.

Interestingly, in its closing submissions, the Defendant accepted, for the first time, that it had breached its duty of care and that, when compared with the Valuation, the true value of Cedar House fell outside of the margin within which a reasonably competent value should have fallen. However, the Defendant argued that, in circumstances where the true value of Cedar House exceeded that of the Loan at the date of default, there had been no loss suffered. It further argued that the loss of value in Cedar House between that date and the sale price in 2020 was caused by the second 146 Notice issued by the National Trust and the impacts of Covid – thereby: (i) falling outside of the scope of its duty of care as the valuer; and/or (ii) being too remote; (iii) and/or being caused by an intervening act (novus actus interveniens). 

It was not in dispute that the Claimant would not have entered into the transaction but for the negligent Valuation; however, as Lord Sumption's explained in BPE Solicitors v Hughes Holland [2017] UKSC 21 ("Hughes Holland"), it is not enough that the material or advice that the defendant supplies is critical to the decision to enter into the transaction, the crucial question for determination is whether the party providing the service, has assumed responsibility for consequences flowing from the whole transaction, or whether the assumption of responsibility was more limited. Mr Justice Constable reiterates the central guidance for determining the scope of the duty of care in professional advice cases, as previously expressed by the Supreme Court in Manchester Building Society v Grant Thornton UK LLP [2021] 3 WLR 81, namely that the scope of a professional advisor's duty of care is to be determined objectively by reference to the purpose for which the advice was being given.

Constable J also considered the legal principles surrounding the availability of contractual interest on the basis of the House of Lord decision in Swingcastle Ltd v Gibson [1991] 2 A.C. 223 HL.

In considering the overall losses sought by the Claimant, Constable J found that this was a typical case where the valuer's responsibility was limited to their particular area of expertise and that the purpose of the Valuation was to provide the Claimant with an opinion, on which it was entitled to rely, as to the current market value of the property being offered as security for the Loan. Constable J rejected the Claimant's argument that the Valuation was the sole piece of information upon which entering into the transaction turned, to the effect that the Valuation was tantamount to advising on entering into the transaction as a whole.

Constable J reasoned that while such an extension beyond the ordinarily restricted purpose for a valuation was possible, it was unlikely that such an extension would come into existence without any instruction between the parties to that effect. Constable J further pointed to evidence of the other criteria that were, or should objectively have been, relevant to the Claimant's decision to enter into the transaction. Constable J's judgment was particularly critical of the Claimant's decision to disregard evidence of dishonesty by Mr Pieri in the Loan application process and Mr Pieri's lack of an exit strategy for the end of the term of the Loan – two matters which ought to have been relevant to the Claimant in deciding to enter this commercial transaction and in relation to which the Defendant played no part. Accordingly, the Claimant's actionable loss was to be determined by comparing the true value of Cedar House, that is the security held by the Claimant, with the Loan amount. Constable J held that at the time the Claimant took possession of Cedar House, the value of the security exceeded that of the Loan.     

Constable J also considered the claim for contractual interest (on an obiter basis). The Claimant had claimed its losses with respect to the contractual interest on the Loan on the basis: (i) of an apparent track record of the profitability (and full repayment) of the loans it had previously offered; (ii) the limited funds available to it from its third-party institutional funder; and (iii) that it had rejected other loan applications while the Loan funds were tied up. However, Constable J found that the evidence presented by the Claimant was either inconsistent with those propositions or was otherwise unreliable and, therefore, that the Claimant had not established any entitlement to contractual interest, or to loss of profits as damages.

This case makes clear that even where a piece of information or advice provided by professional advisors was critical to a party's decision to enter into a transaction, that does not, of itself, meant that the professional adviser is liable for all of the financial consequences of that transaction, even where a party would not have entered into the transaction without the information or advice.

This case therefore highlights that the key analysis, when applying the approach set out in Manchester Building Society, is to assess the purpose for which the information or advice was provided. In this instance, the Court was not satisfied that the purpose of the Valuation was to provide the only green light needed for the transaction to go ahead. As the diminution in the value of Cedar House was caused by the unlawful acts of the borrower and the consequences of the Covid pandemic, factors which were beyond the scope of the Defendant's duty, the Claimant's actionable loss was nil.