In the latest in our Protecting Surveyors series, we look at the position now that the market is emerging from the COVID-19 lockdown. The situation poses risk and opportunity for surveyors in equal measure. Following the 2008 financial crisis, surveyors (valuers in particular) became the target of claims which led to a wealth of judicial commentary. As the profession again finds itself operating in turbulent financial times after a period of some stability it is prudent to re-cap those important previous lessons in order to be prepared for whatever the future may bring.
We have, therefore, outlined below some of the key take away points from the past decade:
- Basis of Claims - Where a surveyor reports to a client, the surveyor has a duty to take reasonable skill and care in providing information to the client. If the information is incorrect and the valuer has acted negligently, the valuer will be responsible for the reasonably foreseeable consequences of the information being incorrect. Recently, the courts have had cause to consider the scope of duty further. The Court of Appeal in Scullion v Bank of Scotland Plc (t/a Colleys) (2011) refused to impose a duty of care against a mortgagee’s valuer in favour of a modest buy-to-let purchaser. A similar approach was followed in Freemont (Denbigh) Ltd v Knight Frank LLP (2014). The valuer made clear, in a number of express statements within the report, the purpose of the report was to enable the bank to consider the loan application; consequently, the valuer did not owe a duty of care to the commercial borrower.
- Margin of error - It is a well-established principle that if an alleged overvaluation falls within the permissible “margin of error” it can be considered non-negligent. Once the court has determined the “correct” value of the property it will then apply a percentage margin of error which will vary depending on the type of property. The 2010 decision of K/S Lincoln and Others v CB Richard Ellis Limited, set out guidance on the parameters of the margin of error which can range between +/- 5-15% depending on the type of property.
The twin cases of Webb Resolutions v E.Surv and Blemain Finance v E.Surv, also followed in 2016 by the decision in Barclays Bank Plc v TBS & V Ltd, provided helpful commentary on how a court will settle on the margin in practice, the wealth of comparables being a key element. In 2012 in Capita v Drivers Jonas the Court did apply a 20% margin of error but subsequent judicial commentary indicates that it would be difficult to persuade a Court to apply a margin greater than 15%.
- Methodology - Where the valuation falls outside the margin of error, the valuer’s methodology will require consideration. When there is strong evidence to support a conventional methodology, the Courts have found that it is only acceptable for a valuer to depart from that approach where a) there is evidence that other methodologies are used in the market or b) there is better available evidence which might support a more robust valuation on some other basis (Barclays Bank Plc v Christie Owen & Davies Limited (2016)).
- Reliance - Valuers should beware that where a borrower can show proof that it relied on the valuation and that such reliance was foreseeable to the valuer, a duty of care to the borrower could be imposed. Rehman v (1) Santander and (2) BNP Paribas (2018) highlighted the importance of understanding the potential use of the valuation report and having effective disclaimers which negate any duty of care owed to non-clients. Further, if there is to be a correction of a previous valuation, whether by way of withdrawal or modification, this needs to be clearly stated (Mortgage Express v Countrywide Surveyors Limited (2016)).
- Contributory Negligence - The post financial crisis tightening of lending criteria and practices may have some impact on the scope of future contributory negligence arguments against lenders. However, pre-COVID-19 there were signs of more open lending practices emerging. Accordingly, the potential for such arguments should be borne in mind as the Court has previously applied substantial reductions.
- Monitoring Surveyors - Previously, where valuation surveyors have met with claims, we have seen that monitoring surveyors can equally expect to face some scrutiny. The decisions of Bank of Ireland v Watts (2017) and Lloyds Bank v McBains Cooper (2018) highlighted the importance of the scope of instruction between surveyors and their clients being clearly defined and communicated, and that the level of the surveyor’s fee may be indicative of the limitation of that instruction.
- Emerging Risks - Further, it would be reasonable to assume that any such new wave of claims will raise a host of fresh issues stemming out of market developments in the last decade. Some of these may include;
- The emergence of Peer to Peer lending. A substantial number of claims from the 2008 financial crisis originated outside of traditional lending institutions and from bridging and mezzanine lenders. With that in mind, it will be interesting is to see what impact the growth of new funding options has on potential claims;
- The impact of technological innovations like automated valuation models; and
- How state and private initiatives to provide more affordable housing to first time buyers and the like have impacted upon and been factored into valuation methodologies.
The aftermath from the 2008 financial crisis tells us that where loan facilities run into distress, the valuations that underlie the secured property may be the subject of significant scrutiny and future claims. The financial instability caused by COVID-19 may lead to such circumstances again. The existing caselaw should provide some clarity to surveyors and their Insurers in dealing with future claims but also provide guidance on the measures that can be taken now to reduce the risk of such claims arising or succeeding. Given the unprecedented and volatile current climate, valuers should be alert to changes in market practice and have regard to updates in industry guidance so that their advice has the best chance of standing up to any challenge.
For commentary on the recent challenges and developments affecting the Surveying profession, please see our previous bulletins in the Protecting Surveyors series here and here.