Most professionals are judged on the basis of how they perform the tasks entrusted to them and not on their outcome. However, professional valuers are treated differently and are usually judged by the figures placed on assets valued. In other words, the courts focus on the end result, rather than on the minutiae of how valuers reach their valuations.
In addition, the courts have made it clear that valuation is an art, not a science, and that competent and careful valuers may differ, perhaps by a substantial margin, without being considered negligent. Therefore, although a valuer might be in breach of duty because he falls below the standard of a reasonable valuer, he will not be liable in negligence if he can show that, despite his error, the figure that he put forward comes within the range permitted to a non-negligent valuer.
The “margin of error” principle is not universally accepted. Some commentators have suggested that the figure reached by a valuer is not of itself evidence that he has exercised reasonable skill and care. They argue that the principle should be consigned to the dustbin of history. However, it has emerged unscathed from the decision in K/S Lincoln v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC); [2010] PLSCS 156.
The judge tested the principle in the following way. He asked what the effect would be were he to decide that the valuer had made a mistake but that the figure he had reached fell within the permitted range of values for the property. Where would such a finding lead? The judge concluded that, unless the circumstances were exceptional, there would be no loss. Consequently, the valuer would not be liable in any event.
The judge extracted the following principles from the authorities cited to him. (1) In the case of a standard house on a residential estate, the margin of error may be as low as + or – 5%. (2) The margin of error when valuing other properties is generally + or – 10%. (3) However, in exceptional cases, it may be + or – 15% (and could, in some circumstances, be even higher).
The judge rejected the claimants’ argument that the margin of error should be calculated by reference to the yield used by the valuer. Small adjustments to the yield had a significant effect on value in this case. In addition, the yield percentage was not an element of the valuation process itself; it was produced by the valuation. It would therefore be inappropriate to use the yield to calculate the acceptable margin of error and the court must consider the overall valuation (which was of much more interest to the claimants and their lenders).
Falling property prices have turned the spotlight on valuations. This case suggests that, despite doubts in some quarters, the courts will continue to uphold the principle that valuers will not be liable for sloppy valuations that fall within permissible margins.
Allyson Colby is a property law consultant
