Buy to let owner recovers costs from inaccurate valuation

In a recent case compensation was awareded to a buy to let purchaser after he was unable to let his flat for the rental predicted by a valuer.

The case

C was planning to purchase a buy to let flat. The mortgagee (M) instructed V to value it. V's valuation report gave the flat an open market valuation of £353,000 and indicated it should achieve rental income of £2,000 per month. C actually paid £299,800 for the flat, but then discovered he could only let it for £1,050 which did not cover his mortgage payments. C sold the flat three years later for £270,000, leaving a shortfall on his mortgage debt. C sued V, arguing that he should recover the fall in value between the purchase and the sale, and all payments and expenses incurred under the mortgage.

The decision: V had not been engaged to advise generally on whether or not C should go ahead with his purchase, so C could not recover all losses flowing from the decision to buy the flat. He could only recover those which were attributable to the deficiencies in the valuation report, ie the overstatement of the capital value and the rental value.

As far as the capital value was concerned, C had suffered no loss because he paid £200 less than the property's true value of £300,000 at the date of purchase.

V had known that C was a buy to let investor, so should have appreciated that he (and M) would have expected the rental income to cover the mortgage payments and normal outgoings. So C was entitled to recover compensation for his inability to cover those payments. This included charges such as direct debit rejection fees and administration charges caused by cash flow difficulties - but excluded acquisition costs which would not necessarily be funded from rental income, such as stamp duty and the cost of carpets.

This article was written by Bond Dickinson and has been reproduced with their permission. Bond Dickinson is a leading UK business law firm and one of the fastest growing - sustained growth based on strong client relationships and a national reputation for excellence. For more information please visit www.bonddickinson.com.