Residential valuation cases

Residential valuation cases

The fall guys... for now

25 March 2011
Valuers may feel like the underdogs in this property market slump, but Nik Carle believes it is
only a matter of time before the underwriting practices of lenders are scrutinised more closely
by the courts

Two of 2010’s most commented-upon court decisions were K/S Lincoln v CBRE Hotels Ltd in May
and Scullion v Colleys in October. K/S Lincoln was generally helpful to valuers, restating and further
entrenching as it did the importance of the margin of error principle in negligent valuation
cases. Scullion concerned the extent to which a valuer, engaged by a lender, had to have regard to
the financial expectations of the lender’s customer (who was a buy-to-let investor). The court ruled that
the purchaser here was entitled to compensation based on his being unable to let the investment
property for a rental that ensured him enough of an income to meet his mortgage payments and other
outgoings on the flat.
The evidence of a claims spike in this sector is more than merely anecdotal now. The Ministry of
Justice’s most recent figures reveal a marked increase in new professional negligence cases being
issued in the High Court. Negligent valuation claims, mostly brought by lender-claimants, account for a
significant portion of those cases being tracked. (Interestingly, neither the Scullion nor K/S
Lincoln cases mentioned above were lender actions in the conventional mould!)
Lenders of all shapes and sizes (but particularly those on the lower tiers) have been actively
back-pedalling to avoid any judicial pronouncements about their post-2000 behaviour
We know now, in retrospect, that lender-claimants have been cautious but wily when intimating claims
(or potential claims) against valuers. By the end of 2008, lenders had no doubt sensed the valuation
profession’s consternation about claims to come. In the early months of 2009, a number of lenders
showered their panel valuers with ‘confetti letters’, which casually required a whole host of historical
files to be handed over to auditing lawyers for review.
This confetti letter campaign seems to have been no more than an exercise in ‘shaking the tree’, but
some valuers and their PI insurers were panicked into making nervy payments that they might now
regret. Just a tiny fraction of the jobs targeted has developed into ‘real’ claims of substance today.
There are, in the main, two explanations for this and both are connected to lack of lender confidence
over litigating.
Firstly, this latest recession is yet to spawn its first major reported case in which the underwriting
processes of the lender have been fully scrutinised by the courts. This is no accident. Lenders of all
shapes and sizes (but particularly those on the lower tiers) have been actively back-pedalling to avoid
any judicial pronouncements about their post-2000 behaviour. Behind closed doors, this has meant
lenders submitting to some very hefty claim discounts as a reflection of their risk on contributory
negligence. The overwhelming tendency of lenders now is to settle and not to fight.
Secondly, and despite all the initial sabre rattling, lenders have demonstrated little appetite so far for
chasing down more marginal or ‘straight’ run-of-the-mill cases. A number of rather speculative valuer
claims coming into our office over the last 18 months has proved straightforward to ‘see off’. Broadly
speaking, only the more extreme cases (typically those with the taint of fraud) appear to have been
sifted out for determined pursuit. This may be because lenders can chance litigating in this vein, where
they feel that the gross misconduct of the defendant-valuer will surely overshadow any censure of their
own role in the underlying transaction.
It is perhaps fair to view the last two years as foreplay: a cagey prelude to the main event. It is
probable that, during 2011 and into 2012, we shall start to see some more heavy-duty decisions
emerging. The selection and performance of expert witnesses is likely to be more critical to the
outcome of these cases than ever before.
It also cannot be very much longer before the courts, in the context of professional negligence actions
against valuers or solicitors, have to tackle the lending practices of the claiming lender. Lenders still
look favourite to be cast down (in the courts of law, as well as public opinion) as authors of their own
misfortune in these cases. It may be little comfort given the welter of other difficulties that they have
had to endure in recent times, but in terms of attention from the courts, valuation professionals seem
set to weather the storm of this recession much better than the last.