Valuation Negligence: Boom, bust and back to basics

23rd June 2015

The law, like the property market, does not stand still. Surveyors’ negligence cases often abound following a boom, bust cycle, as overheated markets can lead to overvaluations and subsequent financial difficulties can lead to increased borrower default. Following the recession of recent years, and against the backdrop of a market that is now rising rapidly again in places, we look at valuation negligence law as it now stands.

Valuation Negligence – where are we now?

At its core, the law of valuation negligence is concerned with a surveyor’s duty of care; whether that duty has been breached; and whether such breach has caused loss. The nature of the commercial and residential property industries today, however, and the intrinsic link with mortgage lending; combined with the unique features of a surveyor’s work and expertise, mean that the law has developed with particular nuances which impact directly on the scope of a surveyor’s duty, the people to whom such a duty can be owed and whether, how and when any breach may give rise to recoverable loss. In this article we highlight some of the key issues to come out of valuation negligence cases over recent years.

Duty

Surveyors will generally be subject to myriad duties when they value a property. Some of these will be expressly and clearly set out in a contract between certain parties and will give rise to defined remedies if and when a contractual breach occurs. Some will lie in regulatory or professional body rules and may or may not give rise to a legal cause of action. Over and above all such duties, however, and the concern of this article, is the surveyor’s duty, in tort, to reach a non-negligent valuation and to exercise reasonable skill and care.

Several recent cases have dealt with the scope and extent of a surveyor’s duty and to whom it is owed.

In Scullion v Bank of Scotland plc [1] the Court of Appeal considered the common situation where a borrower seeks to establish that it is owed a duty of care in respect of a valuation carried out for its mortgage lender. In a move away from the traditional approach (as per the earlier cases of Smith v Bush and Harris v Wyre Forest District Council [2]) the Court of Appeal held that no duty was owed by a mortgage valuation surveyor to a borrower in circumstances where the property was a buy-to-let investment purchase, as opposed to an individual purchaser’s residential home. The court reasoned that an investor was more likely, and more able to afford, to take its own valuation advice.

A similar approach was adopted in Freemont (Denbigh) Ltd v Knight Frank LLP [3], where the High Court took into account the commercial nature of the transaction (the proposed redevelopment of land with mortgage funding) and concluded that the valuer did not owe a duty in tort to the borrower.

In Hubbard v Bank of Scotland plc [4] the property in question was a residential home, but still no duty was found to exist. The bank’s surveyor carried out a mortgage valuation which noted that there were cracks in the wall of the house, but that there was no evidence of recent movement. The surveyor did not therefore recommend further investigation pursuant to a full structural survey. When subsidence occurred post-purchase, the borrower sued. The Court of Appeal dismissed the claim because: (a) despite this being a residential purchase, the borrower could not establish that she had relied on the valuation (by her own admission she did not read the report before buying the house); and (b) because the surveyor’s duty under the mortgage valuation was limited. The applicable RICS mortgage valuation guidelines required a valuer to recommend more extensive investigation only where there is a suspicion of hidden defects, and there was no such suspicion or evidence here.

It is common for valuers to seek to expressly limit their liability. In many cases, the existence and form of any disclaimer will be central to the establishment of a duty of care and the ability of a borrower to rely on a mortgage valuation. In Smith v Bush and Harris v Wyre disclaimers were ineffective, not because they were defective in any way, but because it was not fair and reasonable for them to apply in the case of the residential owner-occupier purchaser of modest means.

In Freemont v Knight Frank the limited purpose of the valuation, which was to enable the bank to consider the loan application, was made clear, not in a specific disclaimer, but in a number of express statements within the report itself and related documentation. In light of the commercial context of this case, and despite not being in the form of traditional disclaimers, these statements prevented a duty of care owing to the borrower.

In another recent commercial case, Brownrigg v Leacy & Another [5] the valuer argued that a letter that he had provided to the claimant stating his opinion of the value of the property in question was not a valuation. Rather, the valuer argued that the letter was a “thinking of selling” letter only. No disclaimer or limitation of liability was included in the letter and Hedigan J held that if the letter was not a valuation, then that should have been clearly stated.

Disclaimers and other express limitations of liability can, therefore, obviate the existence of a duty of care, but they have to be clear, fair and reasonable in their own right and it has to be fair and reasonable in the circumstances of the case for them to apply. That will more readily be in the case in commercial and/or high value transactions.

Of course most lenders have panel valuers and set retainers with defined terms and conditions governing the lender/valuer relationship. It is usual, in such cases, for the lender to require the valuer to be insured and for there to be no limitation of liability to the lender.

Breach

The next hurdle for a claimant is to establish that a valuer has failed to reach a non-negligent valuation. Case law demonstrates that there is a two-step test for considering whether a valuation is negligent.

Firstly, recognising that valuation is an art and not a science, the courts have long held the notion of a ‘range’ of non-negligent values. If a valuation falls within an acceptable bracket either side of the ‘true’ value then, whether or not errors have been made, it will not be negligent [6]. To decide the acceptable bracket, the courts look at the nature of the particular property. The more unusual the property, the greater the potential for uncertainty, and therefore the higher the potential margin will be.

As a general guide, case law [7] has established that the following are permissible margins of error:

• For a standard, estate-type, residential property, it may be plus or minus 5%.
• For a valuation of a non-standard/non-estate residential property, it would usually be plus or minus 10%.
• For a unique property, it could be plus or minus 15%, or even higher in an appropriate case.

Historically, the courts have therefore generally held the permissible margin of error in the majority of cases to be 10%. However the 2012 case of Webb Resolutions Ltd v E.Surv Ltd [8] allowed a margin of just 5% in the case of both a two bedroomed flat and a four bedroomed house, and a margin of around 10% in the case of a somewhat unique detached property. As the availability and accuracy of data and resources improve and as valuation techniques become increasingly sophisticated, it seems likely that more narrow margins will be the starting point for the assessment of valuation negligence in future.

Whilst the principal of a margin for error provides a degree of protection for surveyors, it does also mean that a valuation which falls outside the relevant bracket can give rise to a rebuttable presumption that the valuer has been negligent. The second step when testing the validity of a valuation, therefore, is for a surveyor to show that, even though a valuation falls outside the permissible bracket, nonetheless the appropriate degree of care and skill was exercised. In Titan Europe v Colliers [9] the judge undertook a very detailed analysis of the surveyor’s methodology in a case where the valuation fell far outside a wide permissible margin of 15%. In doing so, although the court still found for the claimant in this particular case, the judge reinforced the valuer-friendly legal premise that, despite reaching an incorrect figure, a competent and conscientious surveyor may still escape a finding of negligence. It may be that, as the acceptable margin of error narrows, surveyors find their methodologies and analyses come under greater scrutiny than ever before.

Causation

A claimant must also prove, on the balance of probabilities, that but for the surveyor’s negligence, the claimant would not have suffered any loss. Applying the well-established [10] but for test involves comparing the claimant’s actual position with the no negligence position (that is, the position it would have been in if the surveyor had valued correctly). In a lender claim, a bank has to show that it relied on the valuation and, but for the negligent valuation, it would not have made the loan. In other words, had it been aware that the true value of the property was less than set out in the valuation report, the bank would not have proceeded with the loan, or it would have advanced a lesser sum.

Causation arguments generally, and in particular lender’s “no transaction” and “lesser loan transaction” cases can become quite complex, but can make or break a negligence action. We will be writing separately on these issues shortly, so watch out for our next article on the subject.

In the meantime, and as a clear, recent example of the importance of establishing causation, the judge in Platform Funding Ltd v Anderson & Associates Ltd [11] (a case where incorrect, overstated comparables had been provided to the valuer as part of a wider mortgage fraud) found that, even had the surveyor asked all the right questions, he would still have arrived at the wrong valuation. The incorrect, negligent valuation was not, therefore, causative of loss and the claim failed.

Loss

Even when a claimant has proved that a valuation was negligent and caused loss, to obtain compensation (damages) it must still establish that it has suffered loss of a type that was reasonably foreseeable and which it would not have suffered ‘but for’ the surveyor’s breach of duty. The basic measure when assessing negligence damages is to compare what the claimant’s position would have been if there had been no breach of duty, and the claimant’s actual position.  In the case of an overvaluation, the leading case of SAAMCo [12] confirms that recoverable damages will effectively be ‘capped’ at the sum which is the difference between the valuation given and the true value at the date of valuation. (Loss resulting from other causes, for example a fall in the market, would not generally be reasonably foreseeable, and could not therefore form part of any damages award.)

The application of the relevant measure of damages is relatively straightforward when the valuation is for a capital sum. Two recent cases, however, have dealt with the more difficult question of how to quantify loss caused by a negligent rental valuation.

Prior to Scullion there was no authority in England and Wales as to the measure of recoverable loss in a rental overvaluation claim. In that case, by analogy with quantification of capital overvaluation claims, the surveyor argued that the SAAMCo cap should apply, albeit recognising that it was difficult to reconcile the operation of the cap, which is founded (like the industry-wide fundamental definition of ‘market rent’ itself) on a ‘date of’ valuation, with a rental valuation which is concerned with a continually moving and changing rental income ‘stream’. The first instance judge agreed that the SAAMCO cap was relevant. He therefore awarded damages to cover the shortfall between the negligent rental overvaluation and the actual rental income that the claimant derived from this investment property during the claim period. The judge also awarded landlord’s expenses, letting fees, sums in respect of void periods, and the like. The Court of Appeal, however, decided that in attributing all of the claimant’s losses in respect of the rental property to the inaccurate rental valuation was wrong, as it effectively made the valuation a guarantee. The correct approach was therefore to take the difference between the rental overvaluation and the correct valuation and then deduct an amount to cover void periods and other expenses and losses that might reasonably be expected to arise in respect of any comparable rental investment property.

Even more recently, in Capita Alternative Fund Services (Guernsey) Ltd & Anr v Drivers Jonas [13] the court analysed in detail the nature of the property and concluded that it was particularly difficult to accurately assess the rental market. A generous margin of error of 20% was therefore adopted but, again despite the claimant’s attempts to argue that the rental valuation was tantamount to investment advice and that all losses should therefore have been reasonably foreseeable and legally recoverable, the surveyor was held to be liable for the amount of overvaluation only.

And finally…

If a claimant has managed to prove that it is owed a duty of care that a surveyor has breached in providing a negligent valuation, and that it is entitled to recover damages in respect of loss arising from that negligence, there are some final matters that may reduce or extinguish the surveyor’s liability. For example, has the claimant been contributorily negligent in any way or has it failed to properly mitigate its losses? At what point did the claimant suffer loss, what is the applicable limitation period and might the claim be time-barred? These are all issues which could merit an article in their own right. The recent case of E.Surv Ltd v Goldsmith Williams Solicitors [14], however, reminds us of one quick question which might well be worth asking in any valuation negligence scenario: might any other professional also be in the frame?

The High Court held that a firm of solicitors was equally liable with a surveyor who had negligently over-valued a residential property for a mortgage lender, pursuant to the Civil Liability (Contribution) Act 1978. The conveyancer failed to inform the surveyor that the buyer had paid £390,000 for the property less than six months’ earlier than provision, by the surveyor, of a valuation at £725,000. The case highlights that, by virtue of the ‘Bowerman duty’ [15], solicitors are obliged to advise of facts, discovered by them in the course of investigating title, which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender’s security. That means that it is not always possible to ascertain exactly where a solicitor’s duty ends and a valuer’s begins. It could mean that a claimant has an additional party to pursue and/or that a defendant has someone with whom to share liability.

WM Comment

In terms of property valuation in practice, the effect of the last credit crunch and post-boom recession really started to bite in mid 2007 and early 2008. Professional negligence claims are often seen as last-resort claims (because they are hard-fought as a professional’s reputation is at stake; courts can be sympathetic to the professional; and the man on the street is often reluctant to challenge his professional advisors), but nevertheless we are now outside the typical 6 year limitation period and the post-bust rush on overvaluation claims is largely over – for the time being at least. Section 14A of the Limitation Act 1980 can extend the limitation period by three years from the date the claimant acquired the requisite knowledge of his loss and the professional’s potential breach of duty to bring a claim, so we are still seeing valuation negligence claims filtering through, but this is otherwise a good time for surveyors, lenders and legal advisors to reflect on the law as it has developed recently and the lessons that can be learned. In particular, as reports of house price bubbles start to abound again, especially in locations such as Central London and Manchester where house prices are reportedly set to rise some 20 – 30% over the next 5 years [16], it is entirely possible that the boom, bust, claim cycle will soon be repeated again.

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[1] [2011] EWCA Civ 693
[2] [1990] UKHL 1
[3] [2014] EWHC 3347 (Ch)
[4] [2014] EWCA Civ 648
[5] [2013] IEHC 434
[6] K/S Lincoln and Others v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC): where a valuer has used the wrong methodology (or perhaps no methodology at all) but luckily arrives at the right valuation or one that falls within an acceptable margin of error, the valuer will not have been negligent.
[7] K/S Lincoln and Others v CB Richard Ellis Hotels Ltd (see above)
[8] [2012] EWHC 3653 (TCC)
[9] Titan Europe 2006-3 plc v Colliers International UK plc [2014] EWHC 3106
[10] Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] UKHL 53
[11] [2012] EWHC 1853 (QB)
[12] South Australia Asset Management Corporation v York Montague Ltd [1996] UKHL 10
[13] [2011] EWHC 2336 and [2012] EWCA Civ 1417
[14] [2014] EWHC 1104
[15] Mortgage Express v Bowerman [1996] 1 PNLR 62
[16] CBRE House Price Growth Across UK 2015 – 2019 Forecast