by William Taylor
A predominant issue in recent correspondence columns of professional journals has been the question of liability for mortgage valuations, and perhaps the time has come for a longer look at the whole subject.
For many years the estates profession had been accustomed to the provision, at modest expense, of reports on value to building societies for the purpose of compliance with their statutory requirement to obtain a valuation before making an advance. The reports tended to be brief and expressed in a shorthand which had grown up between the profession and the building society managers.
Both parties knew what was expected, and nobody else was involved: if the valuer made a mistake he put it right (or was dropped from the list for that society). Very rarely did any error cause any harm to the building society at a time when the percentage loans were small and the number of defaults by borrowers infinitesimal.
Then came the Yianni case. This introduced the concept of the liability of the valuer to the purchaser for any errors in the valuation. It is worth stressing that this case arose before the disclosure of reports by building societies. The judge held that the purchaser was entitled to rely on the inference of value arising from the fact and the size of the loan.
Yianni was unusual in several respects — the relationship between the vendor and purchaser; the history of the house; and the extension of the legal principle to cover the case. Since Hedley Byrne v Heller we have known that there could be liability for negligence arising from “mere words” if special circumstances existed (so “special” that although the case established the principle the plaintiff lost!).
What appears to have been established in Yianni is that there can be a liability in tort for conduct amounting to the breach of a contract if that breach injures a third party reasonably likely to be so affected and even if the injured party to the contract does not sue. The only relevant contract in the case was that made between the Halifax Building Society and Edwin Evans & Son for the valuers to provide an accurate valuation of the property in Seymour Park, Hornsey. It is clear from the judgment that the valuation was not accurate and the defendants admitted negligence. The building society did not sue the valuer because they had suffered no loss. Mr and Mrs Yianni were continuing to pay their mortgage sums and unless the society had gone into possession, or exercised its right of sale, there would be no loss to them.
This situation raises a number of points which do not seem to have been drawn together for consideration. The purpose of this article is to examine them.
The contract
Very few firms of valuers have any identifiable form of contract with any lending institution. In the great majority of cases a form arrives, with a cheque or a fee note, and the valuer fills it in. There are no written instructions and no documentation as to the standard of the work required. In the days when the matter was private between the parties this did not seem to be significant, but under current law it becomes a matter of great importance.
Since the parties have not arranged matters between themselves the courts have had a field day imposing, or imagining, terms on which the valuer does his work. The strange thing about this is that in the relevant cases the court is actually considering the tort. The employing party, the building society, has not been a party to any of the actions and so we have the absurd situation of the courts hearing an action brought by C against B which in essence turns on the relationship between B and A who is not in court.
It might be said today that the implied term of the contract is that the valuer shall perform his task in accordance with the RICS/ISVA Guidance Notes, but no case has yet come forward concerning the conduct of valuers since the publication of these notes. I take leave to doubt, however, whether it was in the mind of either the building society or the valuer that they should follow the precepts of Mr Justice Ian Kennedy in Roberts v J Hampson & Co and spend as many hours in the property as is necessary for the fulfilment of the contract as he saw it!
The tort
Since the tortious liability stems entirely from the contract it seems to be jurisprudentially unsound for it to be greater than the liability under the contract itself. This, again, speaks for the case of having a form of contract against which the tort can be measured. So far, all attempts to limit the valuer’s liability have been in the form of exclusion clauses. All such clauses fall to be considered under the Unfair Contract Terms Act 1977.
The courts have held in Smith v Eric S Bush that such an exclusion clause was not valid. In Harris v Wyre Forest District Council the point did not arise since the argument turned, most ingeniously, on the meaning of Hedley Byrne v Heller and the assumption of a special relationship. If the contract spells out the full ambit of the contract and, let us suppose, includes the Guidance Notes as a standard of performance, there will be no need for any exclusion clauses because the matter will be dealt with by the limitation of the contract.
By way of illustration, the RICS House Buyers Report scheme works so well not because of exclusion clauses (it has none), but because the ambit of the task to be performed is spelled out precisely. It does not say that the valuer/surveyor is not liable if a flat roof 14 ft above ground is defective — it simply says that the surveyor will not look at it. If this suggestion were adopted the valuer would remain liable to third parties, but only to the same extent as they are liable to their clients — the building society.
The rule in Hedley Byrne
When the House of Lords decided that liability for mere words could found a case for negligence they were careful to frame the liability with some safeguards. They acknowledged that words were transient, could be overheard, could be misconstrued; so they limited the liability for words in negligence to those persons to whom the defendant had accepted a special responsibility.
The argument in the Court of Appeal which succeeded in Harris v Wyre Forest was that the words used in the mortgage literature, and repeated on the report form, were not to be considered as an exclusion of liability but as a denial of the special relationship. This case, with Smith v Bush, is down for appeal to the House of Lords. It is argued that the Unfair Contract Terms Act can be made to apply to such clauses, but this was not advanced in the Court of Appeal.
Although, for technical reasons, the two appeals are not “consolidated” they are to be heard together and one might expect that neither judgment will be delivered until both cases have been heard. This may clear the air, but it is still conceivable that both decisions could be upheld on appeal! This might do much for the science of jurisprudence but nothing much for the profession. It is more likely that the House of Lords will arrive at a decision which will settle the matter of exclusion clauses. Even so this will not be the end of the matter. If the parties will adopt a simple form of contract, as explained above, it will still leave open the possibility of the valuer being able to escape from a duty to third parties in circumstances which would not amount to a breach of the contract. Indeed, should they ask for anything more? The problems of today stem from the unexpected nature of the claims made by purchasers which, in the view of many, exceed the duty expected by the client building society.
Another possible answer
Throughout these arguments I have consistently used the building society as the model party commissioning the report. But the fact of the matter is that today the societies represent only some 60% of the lending for house purchase. The rest comes from local authorities, banks, commercial mortgage lenders and the like. Of these, only local authorities have a similar duty to obtain a valuation report. The rest can lend money without any safeguards at all: in point of fact they rarely do. They normally commission a similar type of report — but they have no legal duty so to do. Is this right?
Since the advent of the Financial Services Act the investment industry has been hedged about with a great many restrictions for the safeguard of the investor. Yet this area remains untouched. Imagine going to your bank manager and asking him to lend you four times your annual salary to invest in, say, ICI. He would probably caution you about putting too many eggs in one basket. He would almost certainly not lend you that amount of money for investment purposes. Now try going to borrow a similar sum to invest in “The Tin Pot Co Ltd” about whose affairs you have read an auditor’s report, prepared for a totally different purpose, and he will throw you out of the office. Yet that same manager will almost certainly lend you a similar sum to buy a house based on the most casual information.
He will not ask for a formal survey to be carried out or even suggest that you have one for your own comfort and knowledge. Some solicitors and financial intermediaries have actively discouraged their clients from such surveys. They give as their reasons (a) the speed of the market is such that you will lose the house, and (b) you can always sue the surveyor on a valuation, just as you could on a survey, and it will cost you less money. The fact that they will lose their own fees if the transaction falls through has never, to my knowledge, been mentioned as a further — and perhaps more compelling — reason.
Yet consider the difference between house purchase and other forms of investment. If a financial investment is unwise you may lose some or all of your money. You will not, however, be obliged to spend even more money in the maintenance of your investment. Bad investments will not fall down and cause you physical injury or death and you would have to be reckless in the extreme with your investments to make yourself homeless. All of these can be the result of a poor investment in residential property.
What could be done to change this? It seems from the decided cases that the courts already think that valuers perform structural surveys (or HBRV) on each mortgage application. Perhaps we should take them at their word, and do just that. Why should not every lender of money on residential mortgage security be obliged to commission (or see that the borrower commissions) a survey at least to HBRV standard and satisfy himself that the borrower knows just what it is he is buying? Failure to comply with the requirement would place the defaulting lender in the position of insurer of any risk which might reasonably have been foreseen had such a survey been carried out. This would not “get the valuer off the hook” but it would give him reasonable remuneration for the task which it seems the courts are ready to expect him to carry out.
On those terms I doubt whether many valuers would complain. Their present justifiable complaint is that they are being blamed for not doing that which they are not paid to do, not expected to do, and not given the time in which to do it. The process proposed might slow down the house market a little at a time when the Government has set up a working party to speed things up. But if the ground rules were established so that they are the same for all, and we abolished the unseemly and dangerous rush to get a report in at the earliest moment this would seem a small price to pay. This suggestion seems to me to be far superior to the idea of the vendor’s survey. I do not see a survey report as being like an insurance policy which can be hawked around. Survey reports are not absolutes. They are prepared for clients after inquiry as to the clients’ needs. They should never be regarded as a new form of chose in action.
It would seem to me that the Government’s working party, in searching for a better property exchange mechanism, should not sacrifice security in the search for speed.