by Paul Murrells
Since the House of Lords’ decision in Smith v Eric S Bush and Harris v Wyre Forest District Council [9] 1 EGLR 169 was given on April 20 1989 three cases arising out of the mortgage valuer’s standard of care — all of them decided in favour of the valuer — have come to attention. They are Gibbs v Arnold Son & Hockley, Whalley v Roberts & Roberts and Bere v Slades. The purpose of this article is to consider these cases, which as yet are not fully reported, although it is hoped to publish the complete judgments in Estates Gazette in the near future.
There is indeed life after the House of Lords for the mortgage valuer, and advice given previously not to panic and to continue with existing working practices is even more important.
Now that matters have calmed down, Smith and Harris can be put into perspective. Many lawyers acting for claimants have been of the belief that the decision extends the mortgage valuer’s standard of care to the point that there is no difference between a mortgage valuation and a more detailed form of survey. This is not the case.
The standard remains one of care and skill of the average competent practitioner carrying out mortgage valuations. A competent valuation survey remains very much less than a full survey. As Lord Griffiths said very succinctly in his speech (at p 175K):
It is only defects which are observable by a careful visual examination that have to be taken into account and I cannot see that it places any unreasonable burden on the valuer to require him to accept responsibility for the fairly elementary degree of skill and care involved in observing, following up and reporting on such defects. Surely it is work at the lower end of the surveyor’s field of professional expertise.
Gibbs v Arnold Son & Hockley
On May 12 1989, Mr Stephen Desch QC, sitting as a deputy High Court judge in London, gave judgment in the case of Gibbs v Arnold Son & Hockley.
In 1982 a young couple decided to buy their first house. He was a trainee architect and she a nurse. They found an end-of-terrace Victorian house in Norwich — yes, Norwich again! — and their offer of £19,500, against an original asking price of £21,950, was accepted. The judge was satisfied that the offer was a fair price for the property in good condition.
A 100% mortgage was sought from the Halifax Building Society, who had the property valued by the defendants. The valuation was made by a qualified chartered surveyor who was an assistant with the defendants. He spent 45 minutes over his inspection and his report was vetted and signed by a partner. The report, which was dated December 17 1982, stated:
There is considerable evidence throughout the property of stress cracking and structural movement, repairs have been undertaken and an old and large tie bar has been inserted to restrain a gable wall. In our opinion the movement is old and further movement is unlikely. It is known that chalk workings have taken place in this area.
The last sentence was added by the partner who signed the report. It demonstrates the importance of local knowledge in such cases.
The report continued:
The early soft wood joinery is deteriorating, paint work is worn in parts and if the windows are to be retained a continuing programme of repairs are likely to be necessary. The applicants should undertake to: (1) replace the rear guttering. (2) repair the cement fillet around the chimney where it is cracked. The roof is not underfelted or insulated, and within the roof space there are no party walls between the adjoining properties.
The property was valued at the agreed asking price and certified as being suitable for a maximum mortgage.
The defendants’ evidence at trial was that if the price was about right it was irresponsible for a valuer to protect his own back by reducing the valuation.
Despite the standard building society warnings, the plaintiffs did not have their own survey. There was an early exchange of contracts with completion in January 1983. Soon after moving into the property, the plaintiffs began works with the benefit of an improvement grant. Problems were experienced with the chimney stack and an engineer was called in. His report listed seven faults. At the trial, the judge dismissed some of these as being of no consequence whatsoever or as being capable of remedy at nominal sums, even by current prices, let alone those applying in 1982-83. Indeed, the judge described work to remedy possible separation between the gable wall and the internal partition wall as being a “belt and braces operation”.
It was alleged that ground-floor joists were of a minimal size and that there were signs of rotting at the ends bearing on the basement wall. The independent surveyors who were called to give evidence at the trial were agreed on this, but there was a dispute as to whether it was an inherent defect which would have been visible at the time of the original inspection. In any event, repair costs at the time of trial would have been about £500. The judge was satisfied that the valuer’s comment that “early soft wood joinery is deteriorating” was a sufficient warning. The valuer tested the floors by the approved method of jumping on them. Some rot was inevitable with a property of this age.
Another allegation which the judge had to consider in some detail related to cracking in the main chimney stack. The independent surveyors who gave evidence at the trial were not agreed as to whether the cracks would have been visible at the time of the original inspection. Current repair costs would have been in the order of £1,000. The judge was satisfied that rebuilding was unnecessary. There was no sign of anything at ground- or first-floor level, but there was a hole in the cellar, which was full of furniture. No warning was necessary by the valuer: his duty was no more than a “head and shoulders” inspection of the roof void. Here is another example of judicial acceptance of the “head and shoulders” inspection!
Even at current repair costs, the judge was satisfied that a sum in the order of £1,625 might be needed to repair the property. That was well within the margin of negligence so far as valuation was concerned. It had been suggested for the plaintiffs that the value of the property as at December 1982 should have been £10,000 in the condition described by the engineer.
In his judgment, the deputy judge made clear that:
there is a world of difference between a valuation survey and a structural survey. The cost of repairing defects is not the same as the difference in value. Usually the former will be greater. The time spent on a structural survey is far greater than in the case of a valuation survey. Valuers may legitimately differ in the preparation of a valuation in that it is a matter of opinion. So before one can say a valuation was negligently wrong, it is necessary to show facts which the valuer failed to take account of and which add up in repair terms to a substantial sum.
It should be said that the deputy judge is a most experienced QC in respect of building matters. As such, his judgment is significant. He went on to say in very clear terms that he had formed a high opinion of the surveyors from the defendants who had given evidence at the trial. They were professional men of thoroughness and integrity. “The firm is a credit to the surveyors’ profession. I hope the firm will suffer no discredit through this unfortunate and ill-advised young couple bringing this action.”
Whalley v Roberts & Roberts
The second case is Whalley v Roberts & Roberts in which Mr Justice Auld gave judgment in Manchester on May 22 1989.
In June 1986 Mr and Mrs Whalley decided to purchase, for £49,950, 12 Hanley Close, Disley, a detached bungalow built by a speculative builder in 1978. It had the benefit of an NHBC 10-year agreement, but no further reference is made to this in the judgment. Mr and Mrs Whalley’s initial inspection of the property lasted some 10 to 15 minutes.
As it appeared to be in good condition, they decided to buy at the asking price and applied to the Royal Bank of Scotland for a mortgage advance of £24,000. The defendants were instructed to inspect the property and prepare a valuation report by the bank. A fee of £64.40 was paid for this by the plaintiffs, who received a copy of the report, which valued the property at the purchase price of £49,950.
It was not until February 1987 that the plaintiffs contracted to purchase and they moved into the property in March 1987. No explanation is given for the delay. The plaintiffs made two further visits to the property prior to contracting to purchase but did not notice any problem.
While moving into the property Mrs Whalley saw that one of the floors sloped and that it was out of level. Subsequent investigations revealed that there was a fall of 3 to 4 in. Mr Whalley became aware of the problem when he had to pack up one end of a chest. He noticed also that furniture was leaning, as were doors. The position was checked with a spirit-level and Mr Whalley noted that the wall plates and brickwork were out of level.
The trial of the case started on the very day when the House of Lords gave judgment in the Smith and Harris cases, and the defendants conceded that they owed a duty of care to the Whalleys, who relied upon the valuation report in deciding to purchase. They were given the option of having a House Buyers Report or a full survey which would have taken considerably longer and would have cost more as a consequence. They decided that neither was necessary. Likewise, it was conceded by the defendants that they would not be able to rely upon the disclaimer even if it were valid.
Independent evidence was given by a surveyor and a civil engineer for the plaintiffs, and by an architect and another surveyor for the defendants. The judge said that there were five reasons why the defendants were not liable:
(1) It was most unusual for a property to be constructed in the way this was and, as such, the floor slope could not be detected. The valuer found no sign of subsidence or structural instability and deduced in a reinspection following discovery of the fault that the property had been constructed out of level and finished in such a way as to camouflage it.
(2) Lack of level is usually accompanied by movement signs in the structure. The independent surveyor called for the plaintiffs’ acknowledgment that he had never inspected a property which sloped without other signs of settlement. The civil engineer for the plaintiffs agreed that the builders had taken steps to camouflage the faulty construction. The judge said it would be wrong to rely upon the engineer’s evidence: the test was what a competent surveyor should or should not have seen.
(3) The detection of a slope in a small furnished property is not easy. Furniture obstructs a person walking in a straight line. The valuer could not walk in a straight line. The property had been constructed out of level and masked internally and externally. The judge was satisfied that an inspection for mortgage purposes would not involve the use of a spirit-level unless a visual inspection revealed problems with the floor level.
A mortgage valuation was a brief report with reasons and a general guide to the condition of the property. The duty of care owed by the defendants to the plaintiffs was only in respect of a brief inspection. In his evidence the valuer said that an inspection for mortgage purposes usually took about 30 minutes and he would be looking for settlement, dampness and rot but would not normally move carpets or furniture unless alerted to defects. He would record details in a form and sign it.
There was no mention in his report of the property being out of level. He stated that its condition was satisfactory but recommended some repairs to the roof.
(4) Mr Whalley was a joiner of over 20 years standing and had worked in the building trade on small extensions. He failed to notice the slope before contracting to purchase the property.
(5) The vendor had lived in the property for some eight years, indeed since it was built, and she was never aware of any problem. She was in court throughout the case and said in evidence that it sounded as if the plaintiffs were talking about a different property. She never experienced problems with furniture or items rolling off work tops.
It was for these reasons that the judge dismissed the plaintiffs’ claim. He emphasised that so far as independent evidence was concerned only surveyors were competent to give evidence on what a competent surveyor should or should not have seen.
The defendants could not have detected that the floor was out of level. The judge did indicate that if there had been a finding of liability against the defendants then he would not have found the plaintiffs contributorily negligent for not having a more detailed inspection carried out prior to purchase. The judge was not satisfied that the plaintiffs were fully aware of the different types of survey.
Bere v Slades
The notable hat-trick of judgments relating to the mortgage valuer’s standard of care was completed on July 20 1989, when His Honour Judge Newman QC, sitting as an official referee, gave judgment in Bere v Slades.
The plaintiffs intended to buy 8 Burdett Road, Croydon, a property built about the turn of the century, with an endowment insurance mortgage. They paid a surveyor’s fee to the insurance company. They did not deal directly with the Halifax Building Society, who instructed the defendants to carry out a scheme 1 report and valuation for mortgage. On the basis of the valuation report, the plaintiffs purchased the property.
The second plaintiff thought she was getting a surveyor’s report and not a valuation. Had a major problem been disclosed, she maintained, she would not have bought the house.
The valuer’s report was dated December 31 1984. He described the property as consisting of a left-handed semi-detached dwelling constructed of 225 mm solid brickwork under a pitched slate-covered roof. It had been previously occupied as two flats (not entirely self-contained) and it was a condition of the valuation that the property be recombined and restored to a single-family dwelling-house. Indeed, the purchasers already occupied the top flat of the property. In giving his valuation, which was also the purchase price, namely £31,000, account was taken of the sitting-tenant element in reaching such valuation.
In the general observations section of his report, the valuer said there was evidence of historic structural movement and crack recurrence to repairs over a long period, but this was not considered to be serious or progressive. However, it would be a wise precaution for the mortgage applicants to commission a test on the subsurface drainage system to eliminate this cause, which could become progressive if left untreated. The slate roof covering was entirely defective and required immediate renewal complete with all rainwater disposal equipment and waste-water downpipes. A retention of £2,500 was recommended for this.
Also, it was considered essential that in any roof covering works due regard should be taken of the adequacy of the present timber structure and reference made to the building inspector. There was widespread rising dampness and active decay to suspended floor structures and a further retention of £1,000 was recommended in respect of guaranteed specialist eradication treatment which should specifically include remedial plastering, the repair as necessary of subfloor timbers and improvement to subfloor ventilation.
Following completion of the mortgage advance, the purchasers arranged for a damp-proofing contractor to inspect in accordance with one of the retentions.
During such inspection it was discovered that some of the external cellar walls had been built of a form of concrete consisting of a sand and aggregate mix with some cement which was unstable. The only practicable remedy was reconstruction in brick. In his judgment, Judge Newman was satisfied that such “freak” construction would not have been directly discoverable even on a full survey, let alone on a scheme 1 valuation survey.
However, the judge had to decide whether there were any visible defects in the property sufficient to put a competent valuation surveyor on notice that greater problems might exist which warranted detailed following up before valuation in accordance with the “following the trail” principle laid down in Roberts v J Hampson & Co [8] 2 EGLR 181. In his evidence, the valuer had said that he allowed one hour for each local visit, including travelling time. He thought the inspection of this property had lasted about 45 minutes, but it was obvious that he had no recollection of this visit other than from his notes, save that his memory would have been refreshed by his subsequent visits. These, he admitted, might have coloured his recollection of his original visit. (This decision demonstrates the importance of making and retaining careful site notes.) Clearly, the judge was impressed with the notes. So far as the report was concerned, the judge went on to say that it was thoroughly competent, carefully done, and masterly succinct.
In accordance with the House of Lords’ decision in Smith and Harris, the defendants acknowledged that they owed a duty of care to the plaintiffs. The judge was satisfied that the plaintiffs relied on the report in deciding to proceed with the purchase. In considering the plaintiffs’ submissions that the defendants should have followed the trail and recommended further investigation, the judge considered evidence relating to internal cracking, the state of the cellar walls, external crack recurrence and also a submission that the valuer should have inspected the roof space.
Even if this had been necessary, the only effect of doing so would have been to lead the valuer to the reasonable assumption that the flank walls were constructed of brick and would have negatived any suspicion, if there had been any, to the contrary.
The valuer had discharged fully his duty of care and there was no evidence to the effect that he should have recommended further investigation. The plaintiffs’ claim was dismissed.
Conclusion
In all three cases the plaintiffs were legally aided. As their cases were all dismissed they were ordered to pay the defence costs. However, such orders have little practical effect and cannot be enforced without the court’s permission. Defence costs in all three cases would have been considerable. Nevertheless, it is hoped that the judgments will offer appropriate encouragement to the mortgage valuer. The standard of care has not been extended as a result of the House of Lords’ decision in Smith and Harris. Indeed they have proved to be most helpful in considering subsequent claims.
