The Court of Appeal has ruled that buy-to-let purchasers are not owed the same duty of care by the lender’s surveyor as someone purchasing a property for their own domestic use.
This was the finding in Scullion v Bank of Scotland plc (trading as Colleys), which has major implications for buy-to-let purchasers, valuers, lenders and insurers.
Mr Scullion, a buy-to-let investor, lost his legal battle after buying a property on the strength of a valuation commissioned by his lender, only to find that both its value and rental income were lower than had been stated.
The result puts an end to speculation that those who joined the buy-to-let rush in the early 2000s, only to see their property prices plummet, would seize the opportunity to make a claim against valuers.
Marie-Louise Gobbi, the solicitor at Walker Morris who represented Colleys, said: “The Court of Appeal’s judgment clarifies the extent of the duty owed by valuers in buy-to-let situations. The decision is good news for surveyors, and provides a clear basis for resolving similar claims brought in the buy-to-let sector.
“Buy-to-let investors are not in the same position as ordinary domestic purchasers, and cannot assume they will automatically have the same rights and remedies. The case also provides crucial guidance on the calculation of damages in rental over-valuation cases.”
Mr Scullion had purchased a buy-to-let property, valued for the lender by Colleys. The rental obtainable was only £1,050 per month, compared to the £2,000 stated by Colleys, and the property was subsequently sold.
Mr Scullion claimed Colleys had negligently over-valued both the capital value and likely rental income, and that he had relied on these valuations when deciding to purchase.
When the case first went to trial Mr Scullion was awarded damages of £72,234 based on the negligently high rental value. No damages were awarded in respect of the capital valuation which had not caused any loss.
Fundamental to Mr Scullion’s case was the assertion that Colleys owed him a duty of care.
However, the damages were never paid as Colleys appealed and the Court of Appeal went on to overrule the decision on the basis that the transaction was commercial in nature.
The court’s reasoning was that in ordinary domestic purchases it is highly likely that the purchaser will rely on the valuation, and if it is incorrect they may suffer losses. Therefore it is right that the duty of care extents to the ultimate purchaser – ie the modest residential owner occupier.
However, due to the investment nature of the purchase in this case, it was not sufficiently clear that it would have been foreseeable by Colleys that Mr Scullion would rely on its report rather than obtaining his own advice; for similar reasons there was no sufficiently clear proximity of relationship; and in any event, it was not just and equitable that Colleys should be liable to Mr Scullion because the transaction was commercial in essence.
The result was that Colleys owed no duty of care to Mr Scullion, and so had no liability to him in negligence and therefore no damages were owed.
The Court of Appeal also recognised that it was not correct to attribute all loss of revenue which Mr Scullion suffered in connection with the property to the inaccurate rental valuation. Clearly there were periods when it would have been unlet and/or unsold for reasons unrelated to the over-valuation.
The appeal decision therefore goes on to give crucial guidance as to how damages in rental over-valuation cases should be calculated and capped.
The decision is good news for surveyors. The Court of Appeal has made a strong statement that it was wrong in principle to extend the duty of the lender’s valuation surveyor to purchasers in commercial cases. Domestic owner-occupier cases are seen as a justified by consumer protection principles, with buy-to-let investors less deserving of protection and more likely to obtain and to be able to afford their own valuation.
Following this decision it is difficult to envisage a commercial case in which the court might be willing to find an implied duty owed by a valuer.
As regards the assessment of damages, the Court of Appeal’s conclusion focuses attention on the losses actually caused by the negligence.
The explosion of interest in the buy-to-let sector and ownership of property as an investment during the recent property boom and bust has prompted a surge in professional negligence claims.
There will continue to be plenty of scope for dispute and debate, as different facts give rise to cases brought by those hoping to recoup losses suffered. However, it is thought that this case, and the important liability and quantum principles established, will encourage the swift and sensible resolution of many such claims.