On 17 June 2011 Lord Neuberger MR, with whom Etherton LJ and Gross LJ agreed, handed down the leading judgment of the Court of Appeal in Scullion v Bank of Scotland. The case had attracted considerable attention following the decision at first instance, where the duty of care found to be owed by valuers to residential purchasers in Smith v Bush, was extended to include buy-to-let investors.
A fuller account of the background to the claim can be found in our previous briefing. In short, Scullion purchased a residential flat for approximately £300,000. This was for investment purposes, to then let. He did so in reliance on a valuation report prepared for the mortgagee by Colleys (the valuation service of BoS). This gave the flat a market value of £353,000 and a rental value of £2,000 pcm. Both proved to be excessive and eventually the flat was sold for £270,000, leaving mortgage arrears of around £70,000.
The decision at first instance
In summary, it was held that:
- a duty of care was owed to Scullion by Colleys in tort, which had been breached;
- Scullion relied upon Colleys' report in deciding to purchase the flat;
- applying SAAMCO, no loss arose from the negligent market valuation; and
- broadly, Scullion was entitled to recover, as damages, the shortfall between his letting income and overheads.
The grounds of appeal
Colleys essentially appealed on three grounds, arguing that the judge was wrong to find that:
- a duty of care existed on the facts;
- Scullion had relied upon Colleys' report; and
- damages should be assessed according to Scullion's loss of net income.
In his leading judgment, Lord Neuberger held that:
- No duty of care was owed to Scullion by Colleys.
- The finding of reliance by Scullion on Colleys' report had been open to the judge on the evidence.
- Broadly, and had negligence been established, damages should have been assessed as the difference between the negligence and true rental valuations.
Accordingly, the appeal was dismissed and judgment entered for Colleys.
In determining the issue of breach of duty, Lord Neuberger considered carefully the reasoning behind Smith v Bush and in doing so, and partly for policy reasons, concluded that it could be distinguished on its facts. He noted that here, in contrast to the residential purchase in Smith v Bush, the transaction was essentially commercial in nature and that it was more likely that the buy-to-let purchaser would obtain, and could afford, an independent valuation. Further, he observed that unlike in Smith v Bush, there was not the evidence here to suggest that the vast majority of buy-to-let purchasers relied only on valuations obtained by mortgagees. In addition and as secondary points, Lord Neuberger noted that rental return was a tricky issue and of lesser significance for the mortgagee for whom the valuation report was produced.
Both the reasoning and analysis within Lord Neuberger's judgment appears sound and whilst a further appeal cannot be ruled out, a different result would seem surprising; and more so given the unanimous judgment. For now therefore, there is some respite for valuers and their insurers, the gates to a potential flood of further claims by buy-to-let investors for capital and/or rental losses having been firmly shut.