UK: Preparing For And Protecting Against Valuation Claims

Last Updated: 25 September 2013
Article by Andrew Taplin

SUMMARY AND IMPLICATIONS

This briefing considers some aspects of valuation claims against surveyors of commercial property, the context of those claims and the steps surveyors may consider to protect against them.

  • Drivers: For claims of this type − losses and reputational damage for investors and institutions; and availability of professionals' PI cover.
  • Protecting against claims: There are steps such as preservation and preparation of files that can be undertaken in readiness for any claim.
  • Protecting against future actions: Terms and conditions of appointment can help limit the scope for claims to be brought.

CLAIMS REFLECTING MARKET CONDITIONS

Over the last two years, there has been considerable interest on the part of lenders in seeking to recoup losses on property investments through claims against the professionals who acted on them. These claims have related primarily to investments made shortly prior to the financial crisis: the timing of claims being driven by the approaching expiry of limitation periods.

However, whilst limitation may now have expired for many claims in relation to valuations undertaken in and before 2006/2007 lenders are beginning to look at claims against professionals (including surveyors, lawyers and receivers) who acted in relation to refinancing/restructuring transactions undertaken during the financial crisis, transactions which themselves are now returning losses for the parties involved.

This note briefly revisits the nature of claims against surveyors in this context and some of the practical considerations for surveyors in dealing with them.

a) The constituent elements of a claim

Allegations of negligence

Claims tend to take the form of allegations that either:

  • the surveyor has breached the specific terms of its contract with the client; or
  • the surveyor performed its role negligently and in breach of the duty of care that all professionals owe their clients when undertaking their work.

This briefing focuses on the second of these categories of claim.

The duty (which is implied by law into the contract with the client and co-exists as a common law tortious duty) is that the surveyor must exercise reasonable skill and care in undertaking the valuation.

The standard against which this is assessed is that of the ordinary skilled person exercising the same skill as the surveyor against whom negligence is alleged. This person is described in case law variously as the "reasonably skilled", "competent", "prudent" or "average" surveyor.

If a surveyor professes to have a particular skill, or does have that particular skill, then the court may also subjectively assess whether a reasonably competent surveyor with that particular skill would have reached the same conclusion.

Valuation is not a precise science

It is natural that surveyors differ in their opinions or views. Differing views do not mean one surveyor is "wrong" and, therefore, negligent and the other is not. Buxton L.J. summarised the position:

"It has frequently been observed that the process of valuation does not admit of precise conclusions, and thus that the conclusions of competent and careful valuers may differ, perhaps by a substantial margin, without one of them being negligent...." *

As a consequence, case law has established a typical "bracket" or range of values into which a non-negligent valuation may fall. Whilst the bracket is not expressly defined (as it will vary from case to case), in practice, it has generally been found by the court to be 10 to 20 per cent either side of a mean figure. However, where a property has no comparables the approach of determining a variance or bracket may not be appropriate.

b) Is the claimant out of time?: limitation

Whilst the question of when a limitation period expires will be fact-sensitive to each case, in general terms:

  • for breaches of contract it will be six years from the date of the breach; and
  • for claims in tort it will be six years from the date of the cause of action arising, or, if that date has passed it may be possible to extend it to three years from the party's date of knowledge of the cause of action arising (provided that date is still within 15 years of the cause of action actually arising).

It is often because of the potentially longer limitation period in tortious actions that claims in negligence against surveyors are brought on the alternative basis in contract and tort.

c) Damages

If the worst does happen and a valuation is found to have been performed negligently, the court will consider:

  • whether the claimant has sustained the loss claimed;
  • whether that loss arises from something within the scope of the surveyor's duty;
  • whether the damage the claimant claims to have suffered is too remote to the cause; and
  • what measure of damages should be awarded.

Each of these issues requires detailed analysis that is beyond the scope of this briefing. However, on the assumption it is established that the claimant has suffered loss consequent on relying upon the surveyor's negligent advice (and not some other cause) then the fundamental starting point for assessing damages is that the claimant should be placed (to the extent money can do this) into the position it would have been in had the surveyor not breached its duty of care.

In the context of valuations performed for lenders and investors that have proved to be inaccurate, the position may be complex. The assessment of damages has been summarised by Lord Nicholls:

"The basic comparison is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property."

This statement does not reflect the complexity of many transactions, and there will be additional variables to consider. As part of any assessment of loss, both rising and falling market values will feature, as will questions of contributory negligence on the part of the lender.

Historic valuations: issues

Consider limitation, do you want to force the potential claimant's hand?

Only provide the documents you are obliged to, make sure your records are complete.

d) Steps to protect against claims

Documents and experts

It is likely that the first indication of a potential claim may be a surveyor receiving a request from a client or its advisers for preservation and provision of documents associated with the original valuation (including market data relied upon at the time). It is not obligatory to hand over all documents to a client. Therefore, a careful review should be undertaken in response to any request to assess what the client (and its advisors) are or are not entitled to receive.

Limitation issues

If the claim is up against the limitation period expiring, the potential claimant is going to have two principal choices:

  • issue a protective claim form; or
  • seek to agree a standstill with the surveyor to extend the limitation period whilst they investigate the claim.

How a surveyor chooses to respond will vary. The first option will mean a claim is issued against the surveyor. However, it will force the potential claimant to move quickly (unless a stay of the proceedings is agreed between the parties or the claimant applies to the court to extend the period). It also exposes the claimant to the potential risk of having to pay the surveyor's costs if they wish to end the action. The second option is less combative and allows the potential claimant to investigate the claim at its expense before deciding whether to pursue it.

Protecting against claims for new valuations

The following are some steps that may be taken to protect against claims arising from new valuations:

Step Comments
Meet the RICS standards and follow the guidance Adhering to the RICS appraisal and valuation standards and guidance. This seems obvious, but in negligence claims, departure from the standards of practice set down by RICS is often put forward as evidence that a surveyor has not exercised reasonable skill and care.
Clearly define the scope of work Very clearly define the scope of work and what the limits of the valuation will be. This avoids disputes over whether a surveyor should or should not have advised on a particular issue.
Limit liability and reliance on the valuation Expressly limit the parties who can rely upon the valuation. Restrict assignment of the benefit of the valuation including any claims arising from it. It has been a feature of negotiations between lenders on individual and portfolios of assets that as part of the terms of compromise around sale of the assets there is an assignment of rights to bring claims by the party exiting the investment.

Limitation of liability clauses may provide a cap on the damages that may be recovered.
Keep good records and documents supporting the valuation Ensure all records relating to a valuation including reference market information is kept together and available for review.

Footnote

* Merivale Moore v Strutt &Parker [2000]

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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