Limitation periods in claims against valuers – Court of Appeal provides a useful reminder
On 30 April 2020, the NSW Court of Appeal in Todd Hadley Pty Ltd v Lake Maintenance (NSW) Pty Ltd  NSWCA 81 considered the duty of care owed by a valuer when providing a valuation for mortgage purposes, and how this impacts on issues of limitation.
In doing so, the Court affirmed existing authorities that a cause of action for negligence against a valuer of a property for pure economic loss occurs when the loss is first reasonably ascertainable, which is no later than the subsequent sale of the secured property.
In 2010, MDJ Valuers (valuers) were engaged by Mr Bone to prepare a valuation report for a property known as 137 High Street, Wallalong NSW (Property). Mr Bone was the sole registered proprietor of the property. The valuers, in their valuation report, estimated the current market value of the property to be $7,450,000 and recorded that the report had been prepared for mortgage purposes.
In 2010, Lake Maintenance (lender) entered into a loan agreement with Mr Bone, pursuant to which it advanced $3,073,000 for a first registered mortgage over the Property (Loan Agreement). The Loan Agreement contained a personal covenant that, Mr Bone, as the borrower, was to pay interest at the end of the term at the same time he repaid the principal sum. The mortgage also contained a personal covenant to repay the loan.
The lender alleged it relied on the valuation report when entering into the Loan Agreement.
By late 2011/early 2012, Mr Bone defaulted on the loan and, on 23 May 2012, the lender called on its rights under the mortgage and entered into a contract for the sale of the Property for $1,250,000 (sale contract). The sale of the property completed on 15 June 2012.
On 14 June 2018, the lender commenced proceedings in the Supreme Court of NSW against the valuers claiming negligence and misleading and deceptive conduct. The valuers raised a limitation defence, which, in turn, prompted the separate question of whether the lenders had sustained loss or damage by the time of entering into the sale contract, such that their claim was statute barred. Because of its propensity to end the proceedings due to a statue bar for limitation, the separate question was heard by the Court of Appeal.
The valuers contended the loss accrued when it became clear that the lender would not be able to recoup the money advanced under the loan from sale of the Property. Relying on the same authorities, the lender argued that any cause of action only arose when it was ascertained, or became reasonably ascertainable, that the amount advanced could not be recouped from Mr Bone under a personal covenant. As such, the lender’s position was that the loss that gave rise to the cause of action accrued after the sale of the Property.
The Court of Appeal found in favour of the valuers.
The Court considered several well-known High Court authorities as to the accrual of causes of action against valuers and, in particular, focused on the nature of the interest infringed, and its relationship to the timing of when cause of action accrued. In this case, the nature of the interest infringed was the economic interest of the lender, being the ability to recoup the money advanced under the Loan Agreement from the sale of the Property.
In formulating the valuers’ duty of care, the Court found the risk that called the valuers’ duty into existence, namely the recoupment of the secured money from the sale of the Property, materialised when the Property sold for significantly less than the amount advanced under the Loan. Relevantly, the Court found:
the very purpose for which the mortgage security was obtained was defeated by no later than when the sale of the mortgaged property yielded an amount that was significantly less than that for which the property had been valued.
The Court therefore rejected the lender’s contention that the cause of action did not accrue until after it became reasonably ascertainable that Mr Bone could not repay the loan under the personal covenants. Whilst the Court acknowledged the lender had maintained its rights to pursue the personal covenants, it concluded those rights did not delay the crystallisation of the loss and that any prospect of recovery after the sale of the Property did not impact the time at which the cause of action against the valuers accrued. Rather, the prospect of recovery under the personal covenants, contained in the loan documentation, was only relevant to matters of quantum and mitigation of loss.
The Court found that by the time of entering into the sale contract, the lender had lost the opportunity to turn to the Property to recover the full balance of the loan. The loss suffered, as a result of the alleged negligence of the valuers, was suffered at least by the time the sale of the Property proved to be inadequate to recoup the full amount under the Loan Agreement. As such, the cause of action arose no later than 23 May 2012 and the cause of action against the valuers was statute barred.
The decision provides a useful reminder as to how to determine whether limitation defences exist for the less straightforward claims of negligence and misleading and deceptive conduct (as opposed to breach of contract) where the date of loss is critical. This is not only relevant to valuers but also for most professional negligence claims. Clearly, if proceedings are brought after the expiry of a limitation period, there is an opportunity to shut down a claim at an early stage.