Misleading Valuation of Commercial Property

Background – Chowder Bay Pty Ltd v Paganin

In Chowder Bay Pty Ltd v Paganin [2018] FCAFC 25 the Full Federal Court of Australia considered the circumstance of a valuer being sued for the alleged misleading and deceptive valuation of commercial property.

The matter concerned the proposed redevelopment by the promotors (‘Ibex’) of a caravan park in Western Australia as a residential ‘resort’ (‘Resort’). Investors were provided the opportunity to subscribe money in exchange for a portion of the Resort. A bank loan was proposed for a maximum of $32.3 million to finance the construction and development of the Resort (‘Loan’), the ultimate amount of the loan calculated by reference to a valuation of the Resort.

Two valuations were commissioned from Egan Valuers and prepared by a commercial valuer, Mr Smith (collectively, the ‘Valuations’). The Valuations determined that the value of the Resort, on an “As If Complete” basis, was $67,785,193.

Following the Valuations, the Resort was approved and later constructed. In December 2010, Ibex advised its investors that the value of the Resort was significantly below the value previously advised and any sale to prospective third-party purchasers was unlikely. In April 2011, the Loan had not been repaid, resulting in the bank appointing receivers and managers to Ibex.

Dispute

The appellants, being six of the initial 23 investors, alleged that the Valuations contravened various statutory standards and contended that Egan Valuers, Mr Smith and the directors of Ibex engaged in, or were involved in, misleading or deceptive conduct.

The primary judge, in summary, determined that “a generally reliable estimate” of the value of the Resort, as at the date of the Valuations, was $45,500,000. However, the Valuations were deemed to not be misleading or deceptive, nor was there any evidence to prove that the bank was misled, deceived or relied on the Valuations in providing the Loan to Ibex. Further, it was deemed that the directors of Ibex did not engage in conduct that was misleading or deceptive.

Appeal

On appeal, the appellants referred to the substantial difference in the value provided in the Valuations, being $67,785,193, and the estimate outlined by the primary judge, being $45,500,000. It was claimed that the Valuations were misleading as they were likely to lead the bank to materially overvalue the Resort.

The Court of Appeal upheld the primary judge’s decision, dismissing the appeal and cross-appeal. It was deemed that, viewed as a whole and contextually, Ibex and Egan Valuers communicated that the Valuations may be unreliable. The Court emphasised that the bank was a financially literate and commercially sophisticated recipient of property valuations, and there was no evidence that the bank relied on the Valuations in providing the Loan.

The decisions of the Full Federal Court and the Court of Appeal reiterate that any commercial endeavour carries with it a significant element of risk for investors and other participants If you have any queries about your rights in relation to an investment or other commercial opportunity, feel free to contact our Litigation team by submitting an online enquiry or calling us on (07) 5592 1921.