“THE LENDER SHOULD ENSURE THAT THE VALUATION ITSELF IS COMPLIANT, IN PARTICULAR THAT IT HAS BEEN CARRIED OUT ON A ‘WILLING BUYER, WILLING SELLER’ BASIS”
Secondly, the lender needs to take care to appoint an ‘approved’ broker, which the loan agreement will usually either define or confer a right of appointment on the lender to select any reputable, international broker. It should be noted that, since the economic downturn of 2008, most ship brokers have incorporated valuation arm affiliated entities to ring-fence their liability in negligence, to which the loan agreement ought properly to refer.
Thirdly, the lender should ensure that the valuation itself is compliant, in particular that it has been carried out on a ‘willing buyer, willing seller’ basis. That term may mean different things to different brokers. In the legal context, the courts have referred with approval in a number of judgments to the definition of the term by the International Valuation Standards Council[2]. In one case, the court defined ‘willing seller’ to be one not acting under compulsion[3]. In a very depressed market, in which a borrower may not unfairly contend that no ship owner in his right mind would voluntarily sell his ship, this may be a sensitive issue. That aside, the valuation should track the terms of the LTV clause. Valuation ranges, for example, are best avoided, and if the broker insists on valuing a vessel within a range of, say, US$10-11m, the lender should use the higher end of the range to determine LTV, rather than to refer to a mid-point, unless the clause expressly so permits.
Part of the process of verifying the correctness of the valuation is likely to be to review the small print in the desk valuation itself. It is not uncommon for brokers to include, for example, disclaimer language in their desk valuations, such that the valuation may not be relied on in evidence before a court. This would obviously conflict with a bank’s need to do so in the event the validity of its notice is challenged.
