Skykomish Ltd v Gerald Eve LLP

This was a first instance trial about a professional negligence and contractual claim by Skykomish Ltd (the Claimant) against Gerald Eve LLP (the Defendant) arising from a RICS Red Book valuation prepared in February 2015 for a proposed purpose built student accommodation development in Aberdeen. The court held that the Defendant owed and breached duties to the Claimant in a number of respects (notably failing to inspect the property and failing to give particular cautions about the ground rent mechanism, the sensitivity of the residual valuation and the relative saleability of long leaseholds) but that those breaches did not cause the Claimant's loss.

Key legal principles applied were: (i) contractual interpretation and the scope of express contractual duties (with reference to the Engagement Letter and RICS Standards such as PS2 and VPS3); (ii) the scope of incidental duties to warn arising from the retainer and the separate tortious duty where an assumption of responsibility exists; (iii) causation in reliance cases (the Capita/Drivers Jonas test that the advice must have a real and substantial part in the decision); (iv) the proper role and limits of discount cash flow modelling under the RICS guidance; and (v) the validity and reasonableness under UCTA 1977 of limitation and exclusion clauses contained in valuation engagement terms.

Background and parties: Skykomish Ltd provided mezzanine finance with a profit share to a development special purpose vehicle (Visage, later novated to Visage (Aberdeen)) to fund the construction of PBSA at 140 Causewayend, Aberdeen. Gerald Eve prepared a February 2015 RICS Red Book valuation (the Valuation) of the leasehold interest which the Claimant says it relied on in advancing funds. The Development later sold for a fraction of the Valuation and the Claimant seeks damages for negligent valuation and breaches of the Engagement Letter.

Procedural posture: First instance trial in the Chancery Division. The parties agreed a focused list of issues. The Claimant alleged negligent valuation, failures to comply with RICS Standards and failures to warn; the Defendant defended on breach, causation and on limitation/exclusion and reasonableness under UCTA.

Issues framed:

• What duties (contractual and tortious) did Gerald Eve owe and did it breach them?
• What was the true value or a reasonable range for the leasehold at the valuation date and were valuation methods (net initial yield v DCF v other approaches) appropriate?
• Did the Claimant (through its decisionmaker Mr Tellwright) rely on the Valuation and did any breach cause the Claimant’s loss?
• Were limitation or exclusion clauses incorporated and reasonable under UCTA 1977?

Court's reasoning (concise): The judge accepted the Defendant owed RICS-compliant duties and that the Engagement Letter and accompanying terms required an inspection (which did not take place) and represented that the firm had requisite experience. The Valuation contained a number of deficiencies: it falsely recorded that a Red Book inspection had been carried out; the adjustment of 40 basis points to convert heritable comparables into a leasehold yield was not explained; and the report did not adequately warn of the particular risks created by the upward-only, uncapped, multi-form ground rent mechanism, the limited comparables and the sensitivity of the residual method. Those matters constituted breaches of the firm’s contractual and professional obligations or failures incidental to the retainer.

On valuation methodology the court preferred the Defendant's expert (CBRE) approach of valuing the unencumbered heritable and a comparable encumbered heritable and deriving the leasehold value by subtraction rather than the Claimant's DCF/IRR-led approach. The judge found the Defendant's method to be logically supported by available evidence and concluded the correct market value of the leasehold at the valuation date was £15.1 million. The Defendant's Valuation figure (£16.58 million) fell within the accepted margin of valuation uncertainty (the judge accepted a 12.5% band) and therefore was not negligent.

On causation the judge found that Mr Tellwright’s decision to fund the project was driven by his relationship with the borrower (Mr Taylor/Visage), the perceived market opportunity and primarily the headline Valuation figure rather than the detailed caveats. Even had the appropriate warnings been given in the form required by RICS VPS3/VPGA9 they would have been caveats of the kind that did not, on the facts, alter his decision to proceed. Further, the later novation and restructuring (Visage to Visage (Aberdeen) and increased exposure) meant Skykomish could not reasonably rely on the 2015 Valuation for the 2016 refinancing. Finally, contractual limitation and exclusion terms were incorporated and, on the facts, reasonable under UCTA.

Disposal: The claim failed. The Valuation breaches identified did not cause recoverable loss to the Claimant, so the claim is dismissed.

The claim is dismissed. The court found that Gerald Eve breached some contractual and professional obligations (including failing to inspect and failing to give several material warnings required by RICS VPS3/VPGA9 and by the incidental duty to warn) but that the headline valuation figure was within an acceptable margin of error and that the Claimant’s decision to lend was driven by other factors. Any appropriate warnings would not have changed the claimant's decision and the later refinancing/novation further undermined causation. Limitation and exclusion clauses in the engagement were incorporated and reasonable under UCTA, but those points were not decisive given failure on causation.