ROYAL Bank of Scotland's lending practices during the property crash have been laid bare after it failed at the Court of Session to recover hundreds of thousands of pounds from two businessmen behind a failed housing development.

The part-taxpayer-owned institution misrepresented a land valuation in order to secure a £300,000 personal guarantee from developers James O'Donnell and Ian McDonald after the value of the land they had purchased plummeted in value.

In a rare insight into bank dealings before and after the downturn, Lord Malcolm's judgment described the action as a "case study of the causes and consequences of the property crash".

Mr O'Donnell and Mr McDonald's company, Whinhill Developments, had planned to sell the site at Greenock, Inverclyde, to a housebuilder with the help of a £1.65 million RBS loan in 2007, when property prices were still buoyant.

However, the land was sold off by the bank for only £65,000 three years later after it put Whinhill into administration.

The businessmen signed the guarantee – which meant the land was valued at £2m – in March 2009 on the basis of an updated site valuation produced by surveyors Ryden which Lord Malcolm said appeared "designed to ensure the end result met the figure previously promised" in discussions between bank and surveyor.

His judgment reveals that after the crash the RBS credit division instructed all property loans needed at least 30% security, and tumbling valuations prompted managers who had advanced big unsecured loans to seek ways of averting embarrassing write-offs.

The £2m valuation was needed to underpin the bank's exposure, but it was based on the assumption of a near-impossible housing density on the Strone Farm site.

In his ruling, Lord Malcolm said: "It would appear vastly differing valuations of the site were obtainable depending upon whatever assumptions the valuer was asked to, or chose to, adopt."

The judge ruled RBS relationship director Leonard Marsh had failed to tell the developers that Ryden had been asked to provide a £500 "desktop updated" estimate rather than a full £2500 revaluation.

He concluded: "Neither Mr McDonald nor Mr O'Donnell would have signed the guarantee if they had known the Ryden revaluation could not be relied upon as a professional opinion from a large and respected firm of surveyors."

However, Ryden had made it clear to the bank that its figure was solely for RBS use and for "indicative purposes only". The judge also noted that Mr O'Donnell had told the bank "Ryden was not to waste money on an overly detailed exercise" and he and Mr McDonald were "remarkably uninterested" in the detail of the report at the time.

He said RBS manager Mr Marsh's "skill had been in expanding the loan book" but by late-2008 there was "a concern a shortfall in security would be brought to the attention of regulators", creating a problem for the bank.

Mr Marsh had made the original loan in September 2007 in order to net the bank a £160,000 exit fee a year later.

In March 2009 the loan was renewed, the developers agreeing to repay £1.7m plus interest by March 2011 and to sign the guarantee, based on "the most recent valuation" report which the developers had not been shown and only eventually saw in early 2010.

Nine months later surveyors Graham & Sibbald gave the site a residual land value of £156,000. All Mr O'Donnell's property loans were called in during 2009. When RBS sold off the site in 2010, it bought back by Mr O'Donnell's wife for £65,000.

The bank, which may appeal, faces paying the defendants' costs and also a counter claim for £80,000 interest paid on the second loan.