As many in the industry will be aware, in June 2015 the Royal Institute of Chartered Surveyors (RICS) commenced a consultation regarding a proposed new form of alternative dispute resolution (ADR), specifically tailored to deal with residential valuation claims by lenders.
There have of course been a multitude of such claims in the years following the financial crisis, often first intimated in large numbers and on a largely unsubstantiated basis, which has had the effect of reducing the availability and affordability of insurance for valuers.
If and when implemented, therefore, the hope is that the new ADR Service, administered by the Dispute Resolution Service (DRS) at RICS, will serve to streamline the claim process, filter out the purely speculative claims, and ultimately, of course, save money and reduce premiums. Moreover, in circumstances where certain court decisions in recent years have arguably cast doubt on the reliability and persuasiveness of expert valuation evidence in litigated proceedings, the time is perhaps ripe for a change in approach.
The ADR Service
In short, what is proposed in the RICS consultation document is that valuers’ terms of engagement with their lender clients will include a so-called ‘Beale Clause’ (a nod, presumably, to the lawyers who have assisted RICS in the development of the proposal).
If implemented as presently drafted, the Beale Clause will require lenders, before litigation can be commenced in respect of any alleged negligent overvaluation of a residential property:
- To obtain a ‘mean retrospective valuation’ (MRV) based on two indexes from an approved list of index providers
- If the MRV suggests an overvaluation, to serve a notice on the valuer giving details of the lender’s claim
- Depending on the extent of the alleged overvaluation, to refer the dispute to either Independent Valuation or Adjudication
Where the extent of the alleged overvaluation is relatively minor (as determined by reference to agreed parameters), the lender will be required to apply to the DRS for appointment of an Independent Valuer from an approved panel of appropriately qualified valuers.
The appointed Independent Valuer will be provided with details of the lender’s claim and may then also require such further information from the parties as he/she sees fit. Thereafter, within 21 days, the Independent Valuer will produce a written decision determining the lender’s financial entitlement, if any.
Alternatively, where the alleged overvaluation is more significant (again, as determined by reference to agreed parameters) – or if either party wishes to challenge the Independent Valuer’s decision – the dispute may be referred to Adjudication.
Within a maximum of 25 working days of his/her appointment, the Adjudicator will hand down a decision on the dispute on the basis of:
- The evidence and submissions of each party (which may be given in writing or orally at a joint meeting)
- The results of any independent investigations and enquiries the Adjudicator may decide to carry out
- The application of his/her own knowledge and expertise
Significantly, it is proposed that, regardless of the outcome, each party will bear their own costs of the Adjudication, albeit that the Adjudicator will have discretion to determine which party should pay his/her fees.
Effect of adjudicator decision
According to the consultation document, the decision of an Adjudicator will be binding on the parties “until such time as the dispute is finally determined by legal proceedings or by agreement”. Notably, therefore, it does not appear to be intended that the Adjudicator’s decision will be taken to “finally determine” the claim, or that the ADR Service will necessarily prevent the issue of court proceedings.
However, at the very least, one can certainly see that the process should oblige both the valuer and the lender to engage properly with the merits of a claim from the outset and, moreover, that a losing party following Adjudication would have to think very long and hard before commencing legal proceedings in the hope of obtaining a more favourable outcome. That being the case, therefore, the scheme should certainly help to reduce the number of claims currently proceeding to formal litigation.
Our thoughts about the ADR Service
As mentioned above, the idea behind the ADR Service is to provide a more streamlined and economic way of dealing with lender claims. Moreover, by requiring lenders to follow the process, including, in particular, obtaining MRVs from the outset, it is no doubt RICS’ hope to reduce the incidence of what have become known as ‘confetti’ letters from lenders, in which claims – often very large numbers of claims – are intimated without any proper substantiation but which nevertheless require notification by the valuer to insurers, thus potentially affecting renewal terms and premiums even where a claim is not ultimately pursued.
From the perspective of valuers and their insurers, therefore, the appeal of the ADR Service is clear, being targeted specifically at reducing legal costs and filtering out weak claims. It is fair to say though that the proposal is still in its formative stages and certain questions occur to us as remaining to be answered:
How will the process sit alongside the existing professional negligence pre-action protocol?
If it takes place after the Protocol has been followed, it is difficult to see why it would necessarily prevent the much hated ‘confetti’ letters, given those letters are effectively just Preliminary Notices under the Protocol. Therefore, is the ADR Service intended to take the place of the steps currently prescribed under the Protocol and, if so, will valuers be satisfied they have had adequate opportunity to analyse and present their case under what is a significantly expedited timeframe compared to that allowed under the Protocol (particularly in more complex/non-standard claims)?
How rigid is the emphasis on MRV?
Is it suitable in every case to assess retrospective value by reference to approved indexes? We wonder if there may be a risk of oversimplifying the valuation process, potentially even losing sight of the aphorism that valuation is an art and not a science. Certainly, in our experience, different cases call for different approaches and methodologies and we find it hard to believe that a simple MRV based on approved indexes will necessarily provide a proper and satisfactory basis in every instance for a lender’s decision to pursue a claim.
To what extent can or should an Independent valuer or adjudicator assess a lender’s entitlement to compensation?
Assessing whether or not a property was overvalued is one thing but the question of what compensation a lender is entitled to receive as a consequence of that overvaluation is a separate matter and is far from straight forward. Determining the compensation a lender is entitled to involves strict legal considerations, such as the applicability of any SAAMCo cap, the recoverability of claimed losses by reference to Swingcastle principles as well as questions of causation, contributory negligence and mitigation. Is it intended that the Independent Valuer or Adjudicator will be specifically trained in such matters? Alternatively, will they simply determine whether or not there was an overvaluation and leave the question of the compensation payable to be separately debated between the parties?
In any event, it seems to us that whether or not the scheme will be capable of achieving its aims will depend on these and many other factors; not least of course how lenders respond to the proposal (and we understand the Council of Mortgage Lenders was included in the consultation).
The consultation period has now closed and we can presumably expect a further announcement from RICS in the near future. Indeed, the consultation document mooted a ‘soft’ launch of the scheme at the end of Summer 2015 so we wait with interest to learn in exactly what form the ADR Service will be rolled out in light of responses received to the consultation.
There can be no doubting the worthwhile and commendable intentions underlying the proposal and we certainly hope that the scheme, if and when implemented, will at the very least help to ensure a reduction in the number of valuation files having to be recalled from archives on the eve of limitation expiry on account of a lender having suffered a loan shortfall and casting around speculatively for an insured defendant to offset its losses…