Surveyor – Negligent valuation – Public house – Surveyor with defendant firm instructed to value public house for purpose of sale by claimant – Whether taking incorrect approach to valuation – Whether breaching duty by wrongly relying on submissions from parties’ surveyors rather than carrying out own investigations – Whether valuation falling outside acceptable 10% margin – Claim allowed
The claimant owned the freehold of a public house in Honiton, Devon, which was run by tenants under a lease for a term of three years from January 2000, at a rent of £14,000 pa. In May 2002, the tenants exercised an option to acquire the freehold of the premises. K, a surveyor with the defendant firm, was instructed to determine the purchase price, which was to be the market value of the property run as a hypothetical or notional public house business, without taking into account the actual trading performance of the tenants.
After considering submissions from surveyors for each party, K valued the premises at £185,000, apportioned as to £145,000 for the land and buildings, £30,000 for goodwill, and £10,000 for trade equipment. In doing so, he averaged out the figures reached by three separate valuation methods, namely: (i) the “profits method”, applying an appropriate years’ purchase (yp) multiplier to the adjusted net profit; (ii) the investment approach, multiplying the rent by a yp based on the likely yield for the business; and (iii) a valuation per square metre.
Following the sale, the claimant brought proceedings against the defendant, claiming that K had negligently undervalued the property. Various errors in the valuation process were alleged; the claimant also contended that K had relied solely on the submissions made to him by each party’s surveyor on matters such as fair maintenance trade (FMT), contrary to his overarching duty, set out in the RICS guidance note, to investigate matters for himself. K admitted making certain errors but maintained that his overall valuation was correct. He accepted that he had been under a duty to investigate matters for himself, and he claimed that he had in fact done so although the valuation fee negotiated for the exercise had not included the cost of providing a full detailed report into those investigations.
A further issue arose as to whether, on an assessment of damages, the claimant had to give credit for damages that he had already received in an action against his former solicitor for negligently drafting the business sale agreement in such a way that, contrary to the parties’ contemplation, it did not provide for the claimant to receive the value of any goodwill in the business when the option was exercised.
Held: The claim was allowed.
(1) In order to prove negligence, it is not sufficient that the valuer has made errors; it was necessary to show that the resultant valuation fell outside the reasonable range or bracket of acceptable valuations and was one at which no competent valuer could have arrived: Merivale Moore plc v Strutt & Parker [1999] 2 EGLR 171 applied. Before the court could make a finding of breach of duty, the valuation had to fall outside a bracket of 10% from the sum that the court determined as the appropriate valuation.
K could properly be criticised for relying on a single comparable, especially without making proper enquiries. He had erred in placing reliance on the low yp of that comparable without taking into account the correspondingly high level of gross profit margin. He had failed to consider a relevant comparable with a higher yp and lower gross profit margin. The lower fee agreed by K, reflecting his assertion that he was not asked to provide a detailed report, did not diminish the nature of his professional duty as a valuer. Contrary to that duty, he had failed to make his own investigations concerning the trading figures of the comparable he had relied on, but had merely acted on what he had understood the position to be, without making proper enquiries.
Moreover, he had failed to have any regard to the general strengthening of the market at that time, and the hardening of the prices that were being obtained for public houses, notwithstanding the evidence and contentions of the claimant’s surveyor and the evidence of the tenant’s own accountant on that matter. He had simply accepted the agreed figure put forward by the parties’ surveyors as to FMT, without carrying out his own assessment, notwithstanding the powerful evidence before him that the FMT achievable by an average independent operator at the relevant time was above the agreed figure.
K had made further errors when applying the investment approach by assuming that the existing rent for the premises was the market rent, when that rent represented 40% of the net profit compared to the normal figure of 50% of net profit for a market rent. It had also been inappropriate for him to average three different valuations arrived at by different methodologies and to rely on a valuation based on the area of the premises in square metres.
(2) On the evidence, the adjusted net annual profit for the business was £40,000 pa. Taking into account the rise in the market in the South West at the relevant time, a yp of 6 should be applied. Applying that to the adjusted net profit produced a valuation of £240,000. The investment approach produced a similar valuation, based on a market rent multiplied by a yp figure and increased by the premium value of a leasehold business that included trade inventory and trading potential. K’s errors had resulted in a valuation that fell outside the 10% bracket and he was in breach of duty.
(3) In assessing damages, credit had to be given for the full amount of the £46,785 damages paid to the claimant by its solicitor for failing to provide for the value of goodwill to be included in the sale price, given that the valuation of the premises in fact included inherent goodwill.
Stuart Hornett (instructed by Hooper & Wollen, of Torquay) appeared for the claimant; Richard Liddell (instructed by Kennedys, of Taunton) appeared for the defendant.
Sally Dobson, barrister