UK: Scullion – The Trend Is Nigh

Last Updated: 27 June 2011
Article by Martin Paxton and Tony Nursh-Marsh

Claims by lenders against valuers have now become commonplace, particularly in the buy-to-let arena, following the well publicised property crash. However, valuers and their insurers had hoped to avoid claims from buy-to-let borrowers by arguing that no duty of care could be owed in circumstances where such purchases were not standard residential transactions.

This issue (along with the effectiveness of disclaimers and the quantification of loss in borrower claims) was addressed in the March 2010 High Court decision of Scullion v Bank of Scotland plc (t/a Colleys). The trial judge found for the borrower, Mr Scullion, giving rise to the possibility of a new and, for the surveying community, an unwelcome trend of new claims.

Given the judge's findings, perhaps unsurprisingly the decision was appealed by Colleys. The Court of Appeal unanimously allowed the appeal.

The facts

Scullion concerned the purchase in 2002, by Mr Scullion of a flat in a new-build residential block in Surrey. Mr Scullion applied for an 80 per cent mortgage from a specialist buy-to-let mortgage provider, Mortgages Plc. In his application form, Mr Scullion stated that the purchase price/estimated value was £352,950. In actual fact, he had been given a 15 per cent "gifted allowance" by the developer and the developer had deferred a further 10 per cent of the purchase price for one year. The result was that the total amount payable to the developer up front to complete the purchase, was only £264,712.50.

Colleys assessed the open market value as the price at which they believed Mr Scullion was purchasing the flat, £353,000. They assessed the rental that could be achieved at £2,000 per month – sufficient to service Mr Scullion's mortgage payments of around £1,440 per month. After completion, Mr Scullion was only able to let the flat for around one half of the figure that Colleys had predicted. The flat was eventually sold in May 2006 for £270,000 and Mr Scullion sued Colleys.

The first instance decision

Mr Richard Snowden QC sitting as a deputy High Court judge made the following findings:

Reliance

He accepted Mr Scullion's evidence that it was essential the property was worth the value which Colleys had placed upon it and rejected Colleys' assertion that there could be no reliance in circumstances where the report had not been seen prior to exchange of contracts.

Duty of Care

Following Smith v Bush (1990), and rejecting Colleys' submissions, he found that Colleys owed a duty of care to Mr Scullion as the flat purchased was a small residential property and the valuer accepted in evidence that he knew that Mr Scullion would probably be shown his report and was probably paying for it. As a general proposition the judge was not prepared to accept that a buy-to-let transaction was very different from an ordinary residential house purchase.1

Damages

The Court found that the correct capital value for the property at the relevant time was £300,000. However, Mr Scullion had in fact only paid £298,000 for the property and the judge concluded that Mr Scullion had not, therefore, suffered any capital loss. That said, having assessed the correct rental achievable per calendar month as being £1,100, the judge found that Mr Scullion could recover losses including his extra financing costs incurred to cover the difference between the mortgage payments he had made and the rental income he had in fact received. The judge therefore awarded just over £72,000, plus interest and costs.

The appeal

Colleys appealed on the grounds that there had been no reliance on the valuer by Mr Scullion, no duty of care arose and that Mr Scullion was not entitled to damages to reflect the negligently high rental valuation.

The Court of Appeal unanimously allowed the appeal (with Lord Neuberger MR giving the leading decision) for the following reasons:

Reliance

The Court of Appeal considered that this issue is one of fact and one very much for the trial judge who had correctly addressed the issues.

Duty of care

The trial judge's findings that the valuer knew or ought to have known that there was a high probability that the report would be shown to Mr Scullion, that he might rely on it and that Mr Scullion would pay for the report could only take Mr Scullion so far.

The Court of Appeal noted that in addition, following Smith v Bush and Harris v Wyre Forest (1990) and Caparo v Dickman (1990), in order to establish a duty of care, the purchaser would need to establish foreseeability of damage, proximity and that it would be "fair, just and reasonable" to impose a duty of care on the valuers.

The Court of Appeal found that this was not a case such as those considered in Smith v Bush involving an ordinary domestic householder purchasing his residence but rather a purchase purely for the purpose of investment. Accordingly, it was not sufficiently clear on the evidence available to the judge that it would have been foreseeable to the valuer that Mr Scullion would rely on the report rather than, say, advice from an estate agent or his own valuer.

Lord Neuberger MR specifically found that the decision in Harris v Wyre Forest should not be extended when the perceived policy basis for the decision did not exist because:

  • this was a commercial transaction;
  • there was no evidence to support the suggestion that purchasers of buy-to-let properties relied on mortgage valuations in the same way as residential purchasers;
  • there would be important matters a purchaser would want to know not covered in the report to the mortgagee such as the likely length of time it would take to rent the property and any rent free period necessary (these considerations would not of course apply in a residential purchase situation); and
  • the mortgage company would primarily be interested in the capital value of the property, the rental value section being included primarily to confirm it was suitable for the purpose for which it was being acquired.

Damages

Although Lord Neuberger MR considered that no duty of care arose, he went on to deal with the question of damages, albeit briefly. He found that the trial judge's approach had not been "wholly correct" and had come close to treating the valuer's negligent misstatement as a warranty.

The trial judge had correctly accepted that the approach in this case should be governed by the guidance of the House of Lords in SAAMCo v York Montague Ltd (1997), namely that the damages must reflect "the consequences of the [relevant] information being inaccurate". However, Lord Neuberger MR considered that the trial judge had effectively ascribed all the loss of revenue suffered by Mr Scullion to the inaccurate rental valuation which was incorrect. Instead, the correct measure of loss would have been the value of the rental income given by Colleys less the rent actually achieved over the relevant period (ie £2,000 less £1,050). It was also necessary to consider and discount periods during which the property would have been unlet for reasons other than delay caused by marketing the property at unrealistic levels of rent.

Conclusion

Scullion involved an intricate buy-to-let web, involving specialist packagers, developers' incentives and multiple valuation re-types by the valuers. Notwithstanding this, the first instance decision clearly paved the way for amateur investors, who in some cases had taken something of a gamble in the hope that property prices would continue to increase, to seek to recover their shortfall from the valuer when that gamble had not paid off.

Whilst there is no sign of the wave of lenders' claims coming to an end, the Court of Appeal decision is clearly good news for valuers and their insurers. Whilst it is arguable that the first instance decision did not give rise to the volume of claims feared, it will now be harder for even the most opportune disgruntled buy-to-let borrower to seek redress from the valuer.

Of course where there is a will there is a way and it is conceivable that there will be circumstances where a buy-to-let borrower might be able to recover from the valuer, such as where a valuer is expressly aware that the borrower is not obtaining his own report or where the valuer has given more advice about the rental potential than was the case in Scullion.

Footnote

1 It is worth noting that although not subject to the appeal, the trial judge found that Colleys could not avoid liability by relying on the disclaimer clause in the mortgage application form (in which Mr Scullion declared that the valuers would not be liable to him in relation to the valuation) because they could not discharge the burden under the Unfair Contract Terms Act 1977 of showing that the disclaimer was fair and reasonable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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