Surveyors’ PI: extension of duty of care to buy-to-let rental valuations
In a recent decision the High Court has widened the scope of the duty of care owed by surveyors to buy-to-let (BTL) purchasers. The claim was brought by the borrower against the surveyor for an allegedly negligent valuation of a residential property in Cobham, Surrey. At an earlier hearing it had been held that the surveyor owed a duty of care to the borrower and that the duty had been breached. The recent decision addressed issues of causation, quantum and contributory negligence. It confirms the exposure of already beleaguered surveyors to a further raft of claims based upon overstatement of anticipated rental incomes. Permission to appeal to the Court of Appeal has, however, been granted.
During 2002 the borrower, Mr Scullion (a self-employed builder), decided to enter the BTL market. Colleys were engaged to value the flat by the mortgage lender, Mortgages Plc. Colleys produced a valuation report which gave the open market capital value as £353,000 and stated that the expected rental income was £2,000 per calendar month. In relation to the capital market value element of the claim, the principles set out by the House of Lords in South Australia Asset Management Corp v York Montague Ltd were affirmed. The judge found, however, that on the facts Mr Scullion had incurred no loss on the usual SAAMCO measure because he had purchased the premises for less than the true capital value of £300,000 (various discounts and incentives having been used, albeit concealed from the lender). The case and, therefore, this article focuses on the rental income aspect of the claim.
At an earlier hearing in March 2010, Richard Snowden QC (sitting as a High Court judge) found that Colleys had acted negligently in over-stating the expected rental income at £2,000 pcm, 82% more than the true value based on expert evidence. The highest permissible non-negligent rental valuation was held to be £1,350 pcm (a margin of 23% more than the true rental value). Mr Scullion had argued that he would not have purchased the flat if he had been aware of the true likely rental income, because from his perspective the transaction made no sense unless it was at least self-financing (ie: that the rental income would cover the loan interest payments). As a consequence, Mr Scullion contended that he was entitled to recover all of his payments and expenses in relation to the purchase (both under the mortgage and in respect of outgoings spent on the flat), subject only to giving credit for rent actually received.
Judge Snowden agreed for the most part, ruling that Mr Scullion was entitled to recover damages attributable to the negligent rental valuation, to compensate him for the fact that he was unable to let the flat for a rental that gave him adequate income to cover his mortgage payments and other basic outgoings on the property. Certain payments were disallowed on the basis that they were not clearly attributable to the valuer’s negligent report; for example the cost of furnishing the property at the beginning of the tenancy and lender’s legal costs referable to unrelated conveyancing defects, but for which Mr Scullion was still liable to the lender. Mr Scullion was thus awarded the difference between his core losses resulting from the transaction and his actual rental income for the period 2002 - 2006, in the sum of £72,234.54. No reduction in these damages was made for Mr Scullion’s alleged contributory negligence. It was also found that Mr Scullion did nothing to contribute to the losses flowing from the negligent overstatement of the expected rental income and had properly mitigated his loss by re-selling the property in 2006.
This judgment is significant because:
•BTL was one of the fastest growing property sectors prior to the credit crunch in 2007 and it is now the focus of one of the most concentrated ‘toxic’ areas of loss (for both lenders and BTL investors).
•This case affirms that the surveyors’ duty of care applies equally to rental valuations as to capital valuations.
•It extends the surveyors’ duty of care in tort at least to non-commercial BTL investors. The extent to which it might apply to commercial investors remains to be tested. It may be possible to distinguish the decision where the borrower can be shown to have been running a large-scale commercial operation (and therefore could be expected to have relied upon its own assessment of rental income) as opposed to an individual like Mr Scullion building up a personal investment portfolio.
•In respect of costs, Mr Scullion was awarded his full costs to be assessed on the standard basis. The surveyor’s arguments to reduce costs because it had won on some issues was unsuccessful. This was notwithstanding the fact that Mr Scullion had not been awarded any damages in relation to his capital valuation claim. Looked at in the round the judge held that Mr Scullion had won his case and was therefore entitled to recover costs.
We regard the court’s reasoning on the facts of this case as sound and expect any appeal to be unsuccessful. For valuers and their insurers this represents unwelcome further exposure in an already difficult market, with property values falling and unemployment/repossessions likely to rise. Margins of variation (as in the Scullion case) will be higher generally for expected rental income than for capital values. This case serves as a reminder that reliable comparable evidence is essential to sustain every valuation provided.
Finally, it is worth noting that permission to appeal on two legal issues was granted by the trial judge: (1) whether the surveyor owed a duty of care to the borrower and (2) whether the scope of that duty extended to the losses arising from the defective rental valuation. It remains to be seen whether the Court of Appeal will take a different view and thereby stem the rising tide of BTL claims against surveyors.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com