The Court of Appeal has overturned a decision by the High Court in 2010 that a surveyor owed a duty of care to a buy-to-let (BTL) investor on a rental valuation.
The borrower, Mr Scullion (a self employed builder), decided to enter the BTL market. Colleys were engaged to value the flat by the mortgage lender. Colleys gave an open market capital value of £353,000 and assessed rental income at £2,000 p.c.m. The trial judge found that, on the facts, Mr Scullion had incurred no loss on the capital valuation because he had purchased the property for less than the true capital value (various discounts and incentives having been used, albeit concealed from the lender).
The High Court held that Colleys owed a duty of care to Mr Scullion in respect of the rental assessment and that Mr Scullion had relied on it. The judgment was significant as the BTL sector was one of the most toxic areas of loss for lenders and investors, giving rise to many claims. For more detail on the High Court’s decision see our previous Law-Now article.
Court of Appeal decision
At the time of the housing market crash in the 1990s, the House of Lords held in Smith v Bush that a surveyor carrying out a mortgage valuation for a lender ordinarily owed a duty of care to the borrower as well. The Court of Appeal in Scullion considered that the special feature of valuation reports prepared for homeowner purchasers was the “overwhelming possibility” that the borrower will rely upon that valuation. It was reported to the Court in Smith that around 90% of purchasers would not commission their own valuation report.
Furthermore, the Court considered that the facts in Scullion, and the principles in Smith, had to be considered in light of the key decision in Caparo v Dickman (where an auditor owed no duty of care to prospective purchasers of a company). The Court reiterated Caparo’s 3-stage test:-
1. Whether it was foreseeable that a claimant would rely on the professional’s advice;
2. Whether there was sufficient proximity between the professional and the claimant;
3. Whether it was fair, just and reasonable on the facts of a case to impose a duty of care.
The Court of Appeal said it was not convinced that the trial judge had tested points ‘1’ and ‘2’, i.e. foreseeability and proximity. It did not, for example, ask what the surveyor knew of how sophisticated an investor Mr Scullion was or what the surveyor knew of the transaction generally. It held that it was not, in any event, fair, just and reasonable to impose a duty. That finding stemmed from “the fact that the underlying transaction was a buy-to-let rather than a purchase for owner occupation”. The Court considered that Mr Scullion had been a victim of a scam by an investment advice company, possibly also his solicitors, and had been “mis-informed” by the surveyors. However, this did not affect the Court’s conclusion on the third limb of the test.
The Court of Appeal made it clear that, as a matter of policy, a duty should not apply, but did leave the door slightly ajar for potential future claims by BTL investors against surveyors. The Court noted the particular feature of BTL transactions was that investors are more likely than an ordinary residential purchaser to obtain an independent valuation of their own. This finding appears to have been based on the following assumptions which might be rebutted on the particular facts of other cases:-
(a) BTL investors are more commercially astute and, having at least a second property, can afford a separate valuation;
(b) Rental assessment is not a matter on which a surveyor instructed by a lender usually researches or comments on in a lot of detail. A BTL investor is expected to obtain specialist advice on rental valuation as it would need to consider various other matters like rent free periods, lease terms, insurance etc.
(c) Rental assessment is not as important to the lender – for whom the valuation report is prepared - as the capital valuation. The predominant concern for the lender is whether the loan can be repaid from the equity in the property in the event of loan default.
The Court of Appeal’s decision will be a welcome relief to the surveying profession and its PI insurers, although the possibility of an appeal to the Supreme Court remains.
Interestingly, the Court of Appeal said whether the claimant relied on the valuation report, as a matter of causation, was a question of fact. It was not determinative that Mr Scullion did not receive the valuation report until after exchange of contacts for his purchase, because on the facts he had not given his solicitor authorisation to exchange and could therefore have refused to complete. In any event, proof of actual reliance was insufficient to show that a duty of care existed. The same point is also of significance to disclaimers of liability. In the mortgage valuation report there was a notice that it was not for Mr Scullion’s benefit. Whilst the Court held that the inclusion of the disclaimer was not determinative on the issue of existence of a duty, it did however go to the question of whether or not it was reasonable for Mr Scullion to rely on the valuation.
Finally, the Court of Appeal agreed with the High Court that a defective rental assessment could give rise to a claim against a surveyor. It reiterated previous authority and held that the SAAMCO cap principles and measure of damages would apply and any loss would be limited to the difference between the true rental valuation and any negligent value in an original report.
Scullion v Bank of Scotland Plc (trading as Colleys)  EWCA Civ 693.