A valuer will be liable in negligence for incorrect advice given to a purchaser of a buy-to-let transaction, including for rental loss
Key points |
? A mortgage valuer’s duty to a residential purchaser may extend to one who buys to let ? Such liability may cover a rental as well as capital valuation |
Fifty years ago, the legal responsibility of professional advisers was simple and straightforward. They owed their clients a contractually duty to carry out their professional task with all reasonable skill and care. Beyond that, no liability arose; a third party that suffered loss as a result of relying on free professional advice would have no comeback against the adviser if the advice proved to be negligently wrong.
Advent of responsibility
This cosy picture was shattered by the landmark decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. The court ruled that as long as certain criteria were satisfied, a party giving advice that was likely to be relied on would be taken to have assumed responsibility for that advice and would owe a legal duty of care to the party to which it was given, even though that party was not a client and had not paid for the advice.
Hedley Byrne was concerned, not with real estate, but with a bank providing a credit reference on behalf of a client company. However, in the notorious case of Yianni v Edwin Evans & Sons (1981) 259 EG 969, the ruling was applied to a residential mortgage valuation. Here, the chartered surveyor, who was instructed by a building society to value a modest house for mortgage purposes, was held liable to the purchaser of the property.
Within a decade, and notwithstanding protests from the property profession, the principle that a mortgage valuer owes a duty of care to a housebuyer had been endorsed by the House of Lords: see Smith v Eric S Bush (a firm); Harris v Wyre Forest District Council [1989] 1 EGLR 169. Between them, those decisions covered a range of facts: independent and in-house mortgage valuations; building society and local authority mortgages; 90% and 25% loans; and reports disclosed and not disclosed to housebuyers.
There seemed to be few, if any, loopholes. However, the House of Lords provided one possible restriction on the valuer’s duty of care by emphasising that the cases concerned modest houses at the lower end of the market and by expressing doubts as to whether the principle would extend to commercial properties or expensive houses (on the basis that purchasers in those categories might be expected to commission and pay for their own professional advice). In effect, their lordships saw their ruling as a matter of consumer protection.
In the past 20 years, the profession has come to accept, grudgingly, that mortgage valuers owe a duty of care to purchasers as well as lenders. However, defendants have sought to explore the limits of Smith in a couple of cases that did not concern a modest house. First, in Qureshi v Liassides unreported 1994, a mortgage valuer was held liable to the purchaser of a small greengrocer’s shop, the judge regarding the purchaser as just as much a consumer as a housebuyer.
Qureshi must surely be as far as liability will stretch. At any event, in
All this brings us to Scullion v Bank of Scotland plc (t/a Colleys) [2010] EWHC 572 (Ch); [2010] PLSCS 89 and [2010] 2253 (Ch); [2011] PNLR 5 (the two references are because the issues of liability and quantum of damages were heard separately). In 2002, the claimant acquired a two-bedroom flat from a developer, intending to let it at a rent that would cover his mortgage and all other outgoings. The money for the purchase came from a specialist buy-to-let mortgage provider, which commissioned a valuation report from the defendant. The report, which was shown to the claimant, valued the flat at £353,000 (the apparent purchase price, although discounts offered by the developer meant that the true price was around £300,000) and stated an achievable rent of £2,000 per calendar month.
Following the purchase, the claimant discovered that his actual rental income was no more than £1,000 per month. Disillusioned and in financial difficulties, he put the flat on the market and sold it in 2006 for £270,000. He started an action for negligence against the defendant, based on its valuation report.
Of the various defences raised by the valuer, including disclaimers in the valuation report form, illegality (in that the claimant had misrepresented the true purchase price in his mortgage application) and non-reliance on the valuation, most were swiftly rejected by the judge. However, more attention was paid to the argument that a buy-to-let transaction was commercial, rather than residential, and thus fell beyond the scope of the valuer’s duty of care. Having reviewed the Smith principle, the judge concluded that it did apply; the property in question was a modest residence and buy-to-let was an increasing phenomenon in the residential market. The defendant therefore owed the claimant a duty of care.
Further twists
However, this was not the end of the matter. On the evidence, the true value of the property at the date of acquisition was held to be £300,000, fractionally more than the claimant paid for it. It followed that the defendant’s negligent capital valuation had not caused the claimant actionable loss.
There was yet another twist. The judge held that the defendant’s duty of care covered not only the capital valuation but also its prediction of the property’s rental value. Since this had also been negligent, the defendant was liable to the claimant for the loss that flowed from it during the period in which he had to meet mortgage repayments and other outgoings from his resources, rather than from rental income. Having examined the figures, the judge awarded the claimant around £72,000 under this head.