Does a valuer instructed by a lender owe a duty of care to the borrower where a property is being bought to let? Or does the fact that the borrower’s investment is commercial in nature prevent the borrower from relying on the valuation procured by the lender, even though he has paid for it, because there is no contractual relationship between them?
In Smith v Eric S Bush [1990] 1 AC 831; [1989] 1 EGLR 169, the House of Lords ruled that a valuer who was instructed to value a property for a lender was liable to both the lender and the borrower, who paid for the valuation and was acquiring the property to live in. However, it was widely believed that the decision, which extended the scope of a valuer’s duty of care, applied only to ordinary domestic home buyers – and the Court of Appeal has now confirmed this.
The judgment in Scullion v Bank of Scotland plc (t/a Colleys) [2011] EWCA Civ 693; [2011] PLSCS 157 reverses the High Court decision that a valuer appointed by a lender owed a duty of care in tort to a buy-to-let investor. The High Court judge rejected the buyer’s claim that the valuer had overvalued a flat, but upheld his claim for damages on the ground that the valuer had overestimated the potential rental income from the property.
Overturning that decision, the court accepted that the negligent rental valuation had caused some of the buyer’s loss. However, it ruled that home buyers and investors fall into different categories and that investors need less protection against the risk of negligence than home buyers.
Their lordships ruled that, where a property is being bought to let, a valuer instructed by a prospective lender will be aware that his client is primarily interested in its capital value. This is because the lender’s principal concern is that its loan is properly secured and can be repaid from the proceeds of sale.
By contrast, buy-to-let investors are just as interested in rental value and can be regarded as more likely to obtain – and more able to afford – independent valuations dealing with issues such as: (i) how quickly premises can be let: (ii) what rents they might expect to receive; (iii) what rent free periods they might have to offer; (iv) what other terms they might have to agree; (v) what fees they might have to pay; (vi) the likely length of any tenancy; (vii) the probable period of any voids; and (viii) the capital value as well.
Consequently, the court ruled that the valuer did not owe any duty of care to the borrower – and dismissed his claim. It doubted the suggestion that the vast majority of buy-to-let investors rely on valuations obtained by their lender. However, valuers and their professional indemnity insurers will welcome the decision, which clarifies the extent of the duty owed by valuers in respect of buy-to-let properties and confirms that investors would be well-advised to commission separate surveys and valuations.
Allyson Colby is a property law consultant
