Scullion v Bank of Scotland plc (t/a Colleys) – negligent rental valuation [2010] EWHC www.bailii.org/ew/cases/EWHC/Ch/2010/2253.html

Smith v Bush established that a valuer instructed by a lender owes a duty of care to the purchaser of residential property at the lower end of the market. Earlier this year, Richard Snowdon QC held that this principle should also apply to buy-to-let purchasers of similar property but that it does not apply where the property is being bought by a professional property developer. He held that the valuer in this case, Colleys, had acted negligently in overstating both the capital value of the flat bought by Mr Scullion, a self-employed builder looking to supplement his pension, and the expected rental income.

In this second judgment, Richard Snowdon QC dealt with issues of causation, quantum and rejected an allegation of contributory negligence. Some important findings are discussed below.

Fall in the market

Colleys’ report valued the flat at £353,000. The judge held that it was worth £300,000 with a permissible bracket of between £270,000 and £330,000. In fact Mr Scullion paid slightly less for the flat than its true value when he bought it in 2002 but he claimed damages to reflect the fall in value of the property of £30,000 between the date of purchase and the date on which he sold the flat in 2006.

The judgment restates the principle in SAAMCO (South Australia Asset Management v York Montague Ltd) that a valuer is not liable for all the consequences which flow from the lender or purchaser entering into the transaction. He is only liable for the adverse consequences which are attributable to the deficiency in the valuation. In this case these were Mr Scullion’s losses attributable to the overstatement of the capital value and rental value but not losses caused by the fall in the market.

Rental valuation

Colleys gave a rental valuation of £2,000 per calendar month. This should have been £1,100 pcm with an upper limit of £1,350 pcm. Colleys argued that Mr Scullion should not be entitled to damages flowing from the negligent rental valuation. Their argument was that the rental valuation was merely a further piece of information relevant to the decision to lend and not information upon which Mortgages plc did, or was entitled to, place any independent reliance. This got short shrift from the judge. Mortgages plc made it a condition of the mortgage offer that the estimated rental should exceed the mortgage payments by a specified margin (it required “rental coverage” of £1,600 pcm) and Colleys were specifically requested to give a rental valuation. To suggest in these circumstances that Mortgages plc were largely indifferent to the attainable rental stream was unreal. Damages were assessed at about £72,000 representing the difference between Mr Scullion’s liabilities to Mortgages plc and his rental income.  

Causation

It was argued that Mr Scullion had been misled into completing the purchase by others including the mortgage broker and the solicitors and accordingly that there was an insufficient causal connection between Colleys’ negligence and Mr Scullion’s losses. In his first judgment, Richard Snowdon QC held that Mr Scullion’s losses were caused both by Colleys’ negligence and by the solicitors’ failure to advise him that he could legitimately avoid completion. The fact that the solicitors owed a more extensive duty to Mr Scullion did not relieve Colleys from their responsibility to him for providing inaccurate information.

Application of damages

Colleys argued that Mr Scullion should only be awarded damages on condition that he used them to discharge his debt to Mortgages plc, since they might be exposed to a claim by the lender if he did not. The judge held that he was unable to compel Mr Scullion to use his damages in a particular way, nor did he think it would be right to extract an undertaking from him by threatening to reduce his damages if it were not given. He was concerned, however, at a suggestion that Mr Scullion might be disputing the debt he owed to Mortgages plc and deferred handing down his judgment until written confirmation was received in a form agreed by counsel stating that Mr Scullion did not dispute the validity of the mortgage nor his liability for various sums which included those losses attributable to Colleys’ negligence.

Comment

This is the first reported case in which a buy-to-let investor has recovered damages from a surveyor retained by a lender following a negligent rental valuation. It takes what Colleys described as a high water mark in the imposition of duties of care in tort, Smith v Bush, still higher by extending the duty to quasi-commercial investor purchasers such as Mr Scullion. For this reason, the judge was persuaded to give Colleys limited permission to appeal on the Smith v Bush issue of whether any duty of care was owed to Mr Scullion and, if it was, whether it extended to the losses in respect of the rental valuation.

If surveyors and their insurers are concerned about the outcome of this case, paragraph 29 of the judgment could give them more to worry about. In that paragraph, the judge rejected the argument that the scope of Colleys’ duties to Mr Scullion could not be wider than those owed to Mortgages plc. He envisaged situations in which it was appreciated that the purposes for which reliance might be placed upon a valuation report might differ between mortgagee and mortgagor or in which a contractual limitation was placed upon a valuer’s liability to the mortgagee which did not apply or was not communicated to the mortgagor.

Smith v Bush has been the bane of surveyors since it was decided by the House of Lords in 1990. The policy considerations behind the decision are conveyed by Lord Templeman:

“The valuer knows that 90 per cent of purchasers in fact rely on a mortgage valuation and do not commission their own survey. There is great pressure on a purchaser to rely on the mortgage valuation. Many purchasers cannot afford a second valuation. If a purchaser obtains a second valuation the sale may go off and then both valuation fees will be wasted. Moreover, he knows that mortgagees …are trustworthy and that they appoint competent valuers and he trusts the professional man so appointed. Finally the valuer knows full well that failure on his part to exercise reasonable skill and care may be disastrous to the purchaser”.

Smith v Bush was applied by the Court of Appeal in 2001 in Merrett v Babb. Mr Babb was a surveyor who had signed a negligent valuation. He was held personally liable to the purchaser after his former employer had become bankrupt and the employer's professional indemnity insurance had been cancelled by the trustee in bankruptcy. The House of Lords refused permission to appeal.

And finally, Colleys were also on the losing side in another notable Smith v Bush case back in 2008. In Platform Funding Ltd v Bank of Scotland Plc the Court of Appeal held that where a surveyor accepts instructions to survey a particular property, he assumes an unqualified obligation to inspect that property. If he is tricked into surveying the wrong property, he will be liable for breach of contract even where he has not been negligent.

See also Jonathan Watmough’s briefing on Scullion v Bank of Scotland plc (t/a Colleys) at http://www.mills-reeve.com/Insurance-briefing-A-further-attack-on-valuers-10-13-2010.