The High Court decision in Scullion v Bank of Scotland plc (t/a Colleys) [2010] EWHC 572 (Ch); [2010] PLSCS 89 attracted much interest. The judge held that a valuer employed by a lender had negligently overstated the capital value of and the expected income from a flat that had been purchased as a buy-to-let investment and that he owed a duty of care to the purchaser (even though not employed by him) for incorrectly valuing the flat.
The parties have returned to court so that the judge can assess the purchaser’s: see [2010] EWHC 2253 (Ch); [2010] PLSCS 256. The buyer argued that he was entitled to damages to reflect both aspects of the negligent valuation.
The court rejected his claim for damages in respect of the overvaluation of capital value. The judge decided that the buyer had paid slightly less for the flat than its true value and refused to award damages for the subsequent reduction in value caused by the economic downturn: South Australia Asset Management Corporation v York Montague Ltd [1996] 2 EGLR 93; [1996] 27 EG 125.
However, the claim for damages for overestimating the rental income succeeded. The judge ruled that, in the context of a buy-to-let transaction, a small-scale investor will often rely heavily on the valuer’s assessment to confirm that the transaction will be self-financing. Consequently, the buyer was entitled to compensation for the losses suffered because he was unable to charge sufficient rent to cover his mortgage repayments and other outgoings on the property.
The judge rejected his argument that the lender had requested a valuation simply to confirm that the flat would provide adequate security for the capital value of the loan and that, because the rental valuation was not relevant for this purpose, neither the buyer nor the lender were entitled to rely on it.
The judge ruled that it was unrealistic to suppose that the lender was indifferent to the rental valuation. It should have been obvious that the lender would want to ensure that the borrower could service the mortgage from rental income so that it would have a profitable performing loan. The rental valuation was therefore important to both parties – and the letter engaging the valuer had specifically stated the rental coverage required.
Valuers will be concerned by the extension of their liability following both these decisions and by the judge’s remarks that the scope of the duties owed to lenders and borrowers are not necessarily synonymous (especially if limitations on a valuer’s contractual liability to a lender are not communicated to the borrower).
They will be relieved to hear, however, that the judge granted the valuer permission to challenge his ruling that it owed a duty of care to the buy-to-let investor, which extended to the losses flowing from the negligent rental valuation. The profession no doubt hopes that the Court of Appeal will have the opportunity to consider the case and can be persuaded to take a different view.
Allyson Colby is a property law consultant
