On 8 October 2010 the High Court gave a second judgment in Scullion v Bank of Scotland Plc (2010). The claim arose from a negligent valuation of residential property and is unusual, insofar as the claimant here was not the mortgagee but the borrower. It is also likely to be of interest to insurers as, potentially, it widens the extent and scope of the duty owed by valuers to buy-to-let purchasers.
The first judgment on liability was given in March 2010. In it Richard Snowdon QC (sitting as a High Court judge) held that the principle in Smith v Bush imposes a duty of care to the purchaser of residential property at the lower end of the market upon the valuer instructed by the lender and should apply also to buy-to-let purchasers of similar property. This second judgment deals with issues of causation, quantum and contributory negligence.
The claimant was a self-employed builder who decided to enter the buy-to-let market. In October 2002 he purchased a flat in Cobham, Surrey for £299,800. His intention was to let the flat for an amount which would enable him to pay the mortgage and outgoings and to obtain some extra income. In due course, he also hoped to make a capital profit from selling the flat.
Colleys (the valuation service of BoS) were retained to value the flat by the mortgagee, Mortgages plc. Subsequently, they advised that the market value of the flat was £352,950, whilst the rental value was £2,000 pcm.
After some initial difficulty, the claimant eventually managed to let the flat in April 2003, although the rent achieved was only £1,050 pcm. However, as he was unable to cover his overheads, the claimant sold the flat in May 2006 for £270,000. Of this sum, the claimant paid £260,000 to the mortgagee, leaving an outstanding balance of around £71,000.
The claimant alleged that both of the valuations provided by Colleys were negligent. As regards the market valuation, he alleged that he was entitled to damages of £30,000 (the difference between the actual value of the flat (£300,000) and the price achieved upon disposal (£270,000)), such loss being reasonably foreseeable. As regards the rental valuation, he alleged that but for the advice given he would not have entered into the transaction. Accordingly, he claimed to be entitled to all payments and expenses in relation the purchase and subsequent rental.
Giving judgment, Richard Snowden QC held that:
- A duty of care was owed to the claimant by Colleys in tort.
- Colleys had breached that duty of care in respect of both valuations.
- Colleys knew that the claimant would rely on both valuations to decided whether or not to purchase the flat.
- SAAMCO principles applied, such that the claimant could recover only those losses which were a consequence of the valuations being wrong.
- The claimant could not therefore recover damages of £30,000, caused by a deterioration in the property market.
- The scope of the duty owed by Colleys to the claimant was not necessarily limited by the scope of their duty to the mortgagee.
- The claimant suffered no loss as a result of the market valuation, as he in fact paid less than the market value of the flat.
- The claimant could not recover his costs of purchasing the flat or the first payment of mortgage interest, those liabilities not being attributable to Colleys' negligence.
- Broadly, the claimant could recover the amount of his overheads (including his mortgage interest payments and general letting expenses), less the rental income he received.
- The claimant himself did nothing to cause or contribute to his losses.
Further and importantly, he held that:
- In circumstances where the claimant had acknowledged his outstanding debt to his mortgagee, there were no grounds to reduce the damages payable to the claimant on the grounds that no such liability existed; and
- the claimant could not be compelled to use his damages in a particular way.
This decision is likely to be of interest to valuers and their insurers as:
- It appears to extend the duty of care in tort enunciated in Smith v Bush (1990) 2 AC 605, owed by valuers to residential purchasers, to commercial buy-to-let investors.
- It fails to draw any distinction between the duties owed by a valuer in relation to rental valuation and capital valuations, notwithstanding that the valuer has no control over rental receipts or their use.
- It confirms that valuers (and in turn their insurers) may be held liability for losses sustained by buy-to-let investors, over and above those of any mortgagee.
- It is a reminder that, generally, a borrower will not be compelled to apply any damages to discharge an outstanding debt to his mortgagee.
While the time to lodge an appeal against this decision has yet to expire, in its current form, this decision risks promoting yet further claims against valuers, who have already sustained a vigorous attack by lenders. However, in similar such cases by borrowers, it may be possible to distinguish this decision where there is evidence to show that the borrower is a large scale investor to whom no duty was owed. As part of any negotiated settlement and to avoid the risk of a subsequent claim by any lender, it may also be possible to agree terms for payment of all or part of the settlement sum to the lender direct.