In what will come as a welcome relief to residential surveyors (and their insurers), the Court of Appeal has now overturned the controversial decision of the High Court in Scullion v Bank of Scotland plc (t/a Colleys)1 in which the High Court held that a residential surveyor owed a duty of care to a buy-to-let investor is respect of future rental yield.
Mr Scullion, a self employed builder, decided to purchase a new build flat in Cobham, Surrey in 2002 and enter the buy-to-let market. As is usual, the mortgage lender commissioned a valuation survey, which was undertaken by Colleys. The flat was valued on an open-market basis at £353,000 and assessed a rental income of £2,000 per calendar month. Mr Scullion was only able to let the flat out at around half this figure and brought a claim against Colleys for negligence.
The High Court found that Mr Scullion had suffered no loss on the capital value of the flat (mainly due to incentives that were offered by the vendor at the time of purchase). More worryingly for surveyors, the High Court held that Colleys owed Mr Scullion a duty of care despite the fact that he was a buy-to-let investor purchasing a property using finance from a specialist buy-to-let mortgage provider.
The High Court’s reasoning was that Colleys “knew or ought to have known that there was a very high probability” that Mr Scullion would have relied on the valuation report in his decision making process when deciding whether or not to proceed with the transaction. In fact, on the facts of the case, the report was not received until after exchange of contracts, which had been undertaken by his solicitors without his approval.
The Court of Appeal’s Decision2
The Court of Appeal followed the leading case of Smith v Bush3 which held that although a duty of care was owed by the valuer to a purchaser of low-end residential property in circumstances where a valuation was produced for the lender, the duty did not extend to those transactions which were “essentially commercial in nature”. The Court of Appeal held that Mr Scullion’s transaction was one such transaction and that no duty of care existed, allowing the appeal and dismissing Mr Scullion’s claim.
Although residential surveyors may now breathe a sigh of relief (particularly given the impact that turbulence in the housing market has had on buy-to-let investors who are looking to recover significant losses), the Court of Appeal did not entirely rule out the possibility that a claim could succeed on this basis in the future. The distinction between a straightforward residential purchase and a more commercial buy-to-let purchase remains. However, the Court of Appeal made three assumptions which, although they will apply in most cases, if rebutted on the facts of a particular case, would not stand as a barrier to a claim against a valuer succeeding:
- Buy-to-let investors can afford a second valuation of their own and are more commercially minded.
- Rental assessment is not commented on or researched in much detail by the surveyor; this should be a matter of specialist advice for the buy-to-let investor.
- Rental assessment is not as important to the lender as the capital value, as it is this which will be used to repay the loan should the borrower default.
Therefore there are some (albeit limited) circumstances in which a claim against a valuer by a buy-to-let investor could still succeed on the basis of rental yields and residential surveyors should continue to exercise caution when advising lenders in relation to buy-to-let property.
It is also useful to note that the disclaimer in the mortgage valuation report warning the borrower not to rely on the report and to seek his own independent advice was not sufficient to defeat the claim but was determinative on whether or not it was reasonable for Mr Scullion to rely on the valuation.
Whilst there remains the possibility of an appeal, this looks very unlikely. The decision has been broadly welcomed, with the RICS commenting that the decision provides “welcome relief to valuers facing a barrage of claims from lenders.” Lord Neuberger, who gave the leading judgment in the case, was less excited about the judgment and clearly felt sympathy for Mr Scullion, suggesting that this decision may not be the end of the new wave of valuer negligence claims coming in the wake of the financial crisis.