To infinity and beyond

In recent years, surveyors have seen a gradual movement of the goal posts in terms of the parties to whom they owe a duty of care and the scope of that duty. Some of those decisions demonstrate how that duty appears to be ever extending.

Before 1990, the general rule was that valuers could only incur liability for giving negligent advice in contract, so only a client with whom a valuer had a contract could bring a claim. In the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, the then House of Lords found that a surveyor might incur a liability in negligence to a third party, but it was not clear from that judgment when that might happen.

In Merrett v Babb [2001] EWCA Civ 214, the court reviewed the main case law on the point, before concluding that the answer to that question would depend on the facts in every case. However, the basic propositions that could be drawn from the previous cases were that there either had to be a sufficient relationship of proximity to make it fair, just and reasonable to impose a duty of care (the Caparo Industries v Dickman [1990] 2 AC 605 line of authority) or that the valuer must have assumed responsibility to the claimant to guard against the type of loss for which it was claiming (the Henderson v Merrett Syndicates [1995] 2 AC 145 line of authority).

However, in 1990, Smith v Eric S Bush [1990] 1 AC 831 came before the House of Lords, which found that a surveyors instructed by a lender to value a house for mortgage purposes would owe a duty of care to protect the borrower against financial losses arising from any errors in the valuation. However, Lord Templeman was clear that the duty would only automatically arise in situations where a borrower was buying a modest residential property. In all other cases, the claimant would have to establish that a duty of care ought to arise, applying either of the lines of authority identified in Merrett v Babb.

Adding to the list

Until this year, it was generally understood that commercial borrowers would be treated differently from residential borrowers, given what Lord Templeman said in his judgment. However, in Scullion v Bank of Scotland Plc (t/a Colleys) [2010] EWHC 572 (Ch), the court has now thrown wide open the categories of person to whom a valuer may owe a tortious duty of care.

This claim involved a borrower who was seeking a loan for the purposes of purchasing a buy-to-let property. The claimant, Mr Scullion, applied for a mortgage to purchase the property in Cobham, Surrey. He stated in his application that the purchase price for the property was £353,000. The defendant, Colleys, was engaged to provide a valuation to the lender. This valuation estimated that the market value of the property was £353,000, with an achievable rental income of £2,000 per month. As the mortgage repayments total just £1,440, Mr Scullion's investment appeared to be viable and he decided to proceed.

Following completion, Mr Scullion was unable to let the flat for anything more than £1,100. Since this was insufficient to cover the mortgage, he decided to sell the property, but realised only £250,000 through the sale. Mr Scullion brought a claim for damages against Colleys, alleging that it had negligently overvalued the property and its rental yield. Colleys denied liability, arguing that it did not owe Mr Scullion a duty of care.

The judge found that Colleys' advice on both the value of the property and its likely rental value were substantially in excess

of the maximum that could have been attributed to the property by a reasonably competent valuer. In finding that Colleys had been negligent, the judge characterised the low-value buy-to-let investment as being similar to a residential purchase. He found that Colleys should have known that Mr Scullion would have placed reliance on its report.

In the context of a residential purchase, the judge considered that the buyer is normally well placed to decide whether his final circumstances will allow him to make mortgage repayments. By contrast, in the context of a buy-to-let transaction, the borrower is often heavily reliant on the surveyor's assessment of the rental yield, which is fundamental to the viability of the investment.

This comment suggests that, at least in the judge's eyes, a private individual entering into a buy-to-let transaction may be even more deserving of the court's protection than an ordinary residential buyer.

The implications for this decision are clearly considerable for valuers and those involved in defending claims against them. It extends the class of case in which valuers will owe a duty of care to a third party who receives a copy of the valuation report. Although Mr Scullion had also obtained advice from a specialist buy-to-let mortgage provider, and had instructed a firm of property agents to act on his behalf, these factors were not enough to persuade the court that the transaction was more akin to a commercial development, rather than a low-value residential sale to an owner occupier.

This decision therefore adds buy-to-let investors to the list of people to whom a surveyor will owe a duty of care when valuing a property.

Not responsible

Had Mr Scullion chosen to obtain bridging finance to fund the purchase of the property, rather than securing a loan against the property itself, the outcome would have been very different. It is not unusual for borrowers to use their main residential property as security, because banks will generally give far better rates of interest for loans secured on a primary residence compared to a buy-to-let property.

However, the recent case of National Westminster Bank v Kathleen Lloyd QBD, 6 October 2009 (unreported) confirms the decision in Saddington v Colliers Professional Services [1999] Lloyds Rep PN 140 that a surveyor is not liable to a borrower who is remortgaging a property. This is because any error by the surveyor valuing the property for the purposes of a remortgage does not cause the borrower's loss '“ it does no more than afford the borrower the opportunity to make the loss as and when they use the money for some other purpose.

Increasing claims

The judge in Scullion did give Colleys permission to appeal his finding on the issue of a duty of care and those involved in claims against valuers can only hope that the Court of Appeal turns the law to the position as set out in Smith.

In the meantime, there is a strong possibility that the significant number of people who entered the buy-to-let market during the mid 2000s may now seek to bring claims against valuers, alleging that they have suffered losses as a result of relying on the valuer's advice.

To make matters worse, it appears the courts are also ready to extend the scope of a surveyor's duty in cases where they consider that justice requires it. For example, in Littlewood v (1) David Radford and (2) Charles Boston [2009] EWCA Civ 1024, the Court of Appeal found that the defendant surveyor was under an ongoing duty to advise the claimant that the deadline for an application under the Leasehold Reform, Housing and Urban Development Act 1993 was going to expire, even though: (1) he had already told her about the deadline four months before it had expired; and (2) he had then advised her that the firm would cease to act for her unless she paid their outstanding fees '“ which she failed to do. Despite both of these facts, the court took the view that the claimant was 'just the sort of client who could be expected to rely on a professional adviser'¦ to remind her, when the time arose, of the need to take appropriate procedural steps in order to protect her position'.

Misleading information

Finally, in Platform Funding Ltd v Bank of Scotland (formerly Halifax Plc) [2008] EWCA Civ 930, a surveyor was misled by the borrower into valuing the wrong property. While the court held that a professional man, exercising reasonable care and skill, would not readily be treated as being responsible for a misfortune caused by the fraud of another (here, the borrower), in the normal retainer of a surveyor to inspect and value a property there was an inherent obligation to inspect and value the right property, such that the inspecting and valuing of a completely different property was a breach of contract.

The instructions issued to the defendant were couched in clear and unqualified terms and could not properly be construed as providing that the surveyor was to do no more than exercise reasonable skill and care to identify and inspect the property. By accepting instructions to inspect and value a specific property, it undertook an unqualified obligation to inspect that property and was in breach of contract in failing to do so.

The court also concluded that, having certified that it had inspected the property when it had not done so, the surveyor had acted in breach of warranty and was therefore liable to the claimant for all losses caused by the failure to value the correct property.

The courts are taking an ever broader approach to the obligations of surveyors involved in the valuation of properties. These obligations extend not just to those involved in buying a residential property, but now also to those involved in more commercial endeavours.

Those obligations may also extent beyond what the valuer understands as the scope of their duty. Valuers need to consider the extent of their duty to ensure they are meeting their obligations to the client. Any failure to do so may prove costly.