Relying on the Mortgage Lender’s Valuation Report?
Before agreeing to lend money on a property a mortgage lender will instruct a valuer to carry out a basic report, called a valuation report. The report does not go into any great detail but will give a market value figure which the lender will rely upon when deciding how much it ought to lend.
Any buyer would be well advised to obtain his own, preferably, more in depth survey, such as a homebuyer’s report, which goes beyond merely confirming that the property is good security for the loan and looks at issues which are likely to be of interest to a home owner. Nonetheless most buyers, particularly at the lower of the market where money is often tight, do not. When deciding if the price they are paying is far market price then, are they entitled to rely on a statement to that effect made by the lender’s valuer?
A Buyer Cannot Sue the Lender’s Valuer Under Contract
If a valuer over values a property then he may be sued by the person or corporation who instructed him for a breach of contract, since it is a term of the contract, whether express or implied that the valuer provides a reasonably accurate valuation. Where the valuation was instructed by the lender however no contract exists between buyer and valuer therefore that remedy is not available to the buyer.
Another option that has always been open to the lender is to sue for negligence. There does not have to have been any prior legal relationship between claimant and defendant for a claim in negligence to succeed, however the claimant does have to show that the defendant owes him a “duty of care”. One of the requirements of this is that there has to be “proximity” between claimant and defendant, that is, some sort of connection. This can be a manufacturer/consumer, doctor/patient or motorist/pedestrian for example. It was at one time though that there was not sufficient proximity between a valuer acting solely for a lender and the buyer of the valued property for a claim by a buyer to succeed.
The Decision in Smith [1990] and its Impact
In 1990 for the first time a buyer (Smith) successfully sued their mortgage lender’s valuer in negligence for giving a negligent over-valuation. The court ruled that a valuer acting for a lender does have a duty of care to a buyer. This had the potential to open the floodgates for these types of claims and the court made clear that a duty was only owed in respect of a purchase at the lower end of the market for owner occupation.
The rationale was presumably being that, at the high end of the market a purchaser could afford to instruct a more in depth survey and an investor ought to have enough knowledge of the market to know if a property had been overvalued.
Scullion v Bank of Scotland [2010]
The position may now have changed following the decision on Scullion v Bank of Scotland [2010].This was a case where a buy to let investor bought a property for £300,000. The lender was advised that it was to be bought for £353,000 and this valuation was confirmed by the valuer, who also advised the property had a rental value of £2,000 per month.
In the end, the buyer could only manage to rent the property for £1,050 per month. As a result he fell into arrears with his mortgage and the property was repossessed and eventually sold for £270,000. In awarding damages of £72,000 to the buyer for lack of rental income the judge made the point that the valuer was aware that the purchase was a buy to let and that the buyer would be relying on the rental valuation.
No damages were awarded for the valuation of the property because it was actually worth the £300,000 that the buyer paid for it.
It is still accepted that a duty is only owed to non-professional investors, though there are great numbers of these of course. Given the potential risk of multiple claims following it is perhaps not surprising that the decision is being appealed.
Conclusion
No property buyer should see this decision as a green light to go ahead with a proper survey, which should be obtained in every case, and the decision may be reversed on an appeal. If it is not however, it may provide a ray of hope for any non-professional investors who have lost their life savings in the last property boom.
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