Modest proposal

On 17 June, the Court of Appeal in Scullion v Bank of Scotland [2011] EWCA Civ 693 led by Lord Neuberger MR decided that the purchaser of a flat was not owed a duty of care by his mortgagee’s surveyor for a negligent property valuation.

The court distinguished and limited the application of Smith v Eric S Bush: Harris v Wyre Forest District Council [1990] 1 AC 831. This represents a significant shift against surveyors’ liability for negligent misstatement and is consistent with a trend towards narrowing professional liability in this area. The inevitable consequence of this case will be to leave a large number of purchasers vulnerable to the negligence of surveyors and subject to an unsympathetic judicial approach that will expect them to safeguard their financial interests, independently.

In his conclusion, Lord Neuberger appears to justify what he thinks might be an unpopular decision by reference to features which he feels are inherent in his judgment. He emphasises the importance in any judicial decision of “legal clarity and coherence and fair results in ensuing cases”.

The claimant, Mr Scullion, had been a plasterer and a jobbing builder. In 2002, at the age of 50, he decided to purchase a flat with a view to letting it. He entered into a number of contracts with property experts, including a mortgage broker, an investment property company, a firm of lawyers and the Bank of Scotland (his mortgage providers). The bank’s surveyors and valuers were a firm called Colleys (which at the time of the litigation had become part of the Bank of Scotland).

The mortgage application form was for ‘buy-to-let’ purchasers. It stated that the property inspection would not include a detailed survey and carried an exclusion clause for the bank valuer as to the value of the property. The valuation itself, however, specifically referred to the claimant and, in addition to estimating a capital value of £353,000, estimated the monthly rental value at £2,000 per month. There was a fee of £35 for the valuation, which the claimant paid and contracts were exchanged on the same day as the valuation was received.

On completion, it was clear that the rental valuation of £2,000 was unachievable and, after six months, the claimant accepted a tenant at a rent of £1,050 per month. The tenancy lasted only a year, after which the flat was put on the market and was finally sold at a loss two years later. The sale price was £270,000, which left £61,932.15 still owing to the mortgagee. The claimant sued the valuer in negligence.

The deputy High Court judge, Mr Richard Snowden QC, found for the claimant at first instance and awarded him £72,234.54 in damages. On the question of duty, his position was substantially anchored in Smith/Harris.

On appeal, Lord Neuberger upheld several of the judge’s important findings: that the valuer knew or ought to have known that there was a very high probability that the claimant would see the valuation, that the claimant relied on the valuation, and that he paid for it. Nonetheless, he rejected the existence of a duty on four specific grounds and ostensibly did so by reference to the Caparo Industries plc v Dickman [1990] 2 AC 605 duty criteria, namely: was there a proximate relationship between the claimant and the valuer? Was loss to the claimant reasonably foreseeable and would it be fair, just and reasonable to impose a duty on the valuer?

First, Lord Neuberger was not sure that a relationship of proximity was present. In Smith/Harris, the property involved was a relatively modest house, purchased by the claimant as a residence. In the case before him, however, the claimant had bought with a view to letting and the purchase was, therefore, commercial in nature. Lord Neuberger felt such purchases were “less deserving” of protection by the common law against the risk of negligence. He also supported the view that the Smith/Harris litigation represented a “high water mark” in this area and considered it wrong to extend the principle.

Second, in Smith/Harris, evidence was accepted by the House of Lords, which stated that 90 per cent of buyers relied on mortgagees’ valuations in deciding to make a purchase. There was, therefore, an overwhelming probability that a buyer would rely on a valuation. Lord Neuberger felt that the individual participation in

the buy-to-let market was undeveloped 20 years ago and there was no evidence to support the idea that such a large percentage of this type of buyer was now relying on a mortgagee’s valuation alone for such purchases.

Third, it would not be just, fair and reasonable for a purchaser to impose a duty of care on a mortgagee’s valuer on a buy-to-let valuation. A valuer would reasonably expect a prudent purchaser to make further inquiries and obtain wider independent information, not contained in a basic valuation.

Finally, the primary purpose of a mortgagee’s valuation is to establish the capital value of a property to ensure that it affords good security for the money being lent on it. It is not primarily concerned with rental values except insofar as the mortgagee needs to know that the property is suitable for the purpose for which it is being acquired by the buyer.

Naïve buyer v wealthy professional

The Caparo elements are always a moveable feast. Why is the relationship between the valuer and the ‘modest house’ purchaser sufficiently proximate, but the relationship of that same valuer and a buy-to-let purchaser so different? In Smith/Harris, Lord Templeman found that the relationship between a valuer and buyer was “akin to contract” – the valuation is paid for by the purchaser and the valuation will probably be relied on by him in deciding whether to purchase the property. This is exactly what Mr Scullion did in the instant case.

Is loss in such cases only reasonably foreseeable if the buyer purchases a ‘modest home’? If he purchases a more expensive property, whether commercial or residential, it might be unfair to impose a duty on the valuer as the purchaser might be expected to rely on additional sources (e.g. an independently commissioned survey).

Lord Griffiths was sympathetic to this view in Smith/Harris. This position recognises a naivety or innocence in the buyer who is unused to the purchase process and needs additional legal protection against careless seasoned professionals. On the other hand, it seeks to limit duties owed to wealthier, more commercially astute, purchasers who are, or should be, more aware of the risks entailed in a purchase and can be expected to rely on more than a bare mortgagee’s valuation before proceeding with a purchase. Criticism of this position is well documented. There is a basic academic dissatisfaction in deciding duty questions, not on degree of fault but simply on the wealth of the buyer.

That said, there is clearly a difference between an inexperienced buyer and a property developer which affects the issue of fairness in duty questions.

In Smith/Harris, it was accepted that approximately 90 per cent of buyers rely on mortgagee valuations and that, according to Lord Jauncey, this was more likely “at the lower end of the housing market”.

In the Scottish case of Wilson v DM Hall & Sons [2005] PNLR 375, an experienced commercial property developer, surrounded by architects, engineers and property agents, who sought funds to build a block of flats, failed in his action against the mortgagee’s surveyor. Lady Paton found that that, in the face of the developer’s commercial expertise, the bank’s surveyor could not reasonably expect such a developer would base his sales price and marketing strategy on a valuation carried out by the bank. This case was referred to by the deputy High Court judge at first instance in Scullion to illustrate the cut-off position in the application of Smith/Harris.

By any reckoning, Mr Scullion was not a wealthy man. His purchase of a flat with a view to letting it was not the act of a large property developer or industrialist, but the prudent efforts of a modest, middle-aged man, planning for his future. He was as naïve as any ‘modest home’ buyer could be and was misled and exploited by the many professionals he paid and turned to for assistance. To deny a duty in these circumstances, just because the purchase is a buy-to-let, without consideration of other factors is unfair. It assumes that all such buyers have, or should have, commercial acumen. Why should he not rely on a valuation for which he had paid? Why should he be expected to make further enquiries when he had a valuation which purported to provide both capital and rental values?

Defining ‘modest’

The acquisition of a rental property is not the preserve of the wealthy. In an article published in The Guardian on 22 February 2008, it was estimated that the UK had nearly a million buy-to-let landlords. Lord Neuberger himself accepted that over 40 per cent of buy-to-let purchasers own only one or two properties. A modest home in the south of England might today exceed £350,000. Alternatively, a family might not be able to afford to buy and may be forced to rent a home. One way they might plan for retirement would be to buy and let a small home for, say, £200,000 in a cheaper part of the country, hoping the rental charge would substantially meet the costs of the mortgage.

These must both surely be obvious examples of ‘modest’ buyers. If anything, our buy-to-let purchaser could be more vulnerable than the buyer in the first example. However, as a result of the Scullion decision, his purchasing position is less protected in law than his better-off neighbour who has been able to buy the home he lives in. To deny him a duty may provide a deceptively clear position in the law, but it does constitute a blunt instrument.

Notions of the ‘modest’ buyer clearly depend on one’s definitional framework. The deputy judge at first instance thought Mr Scullion fell squarely within this group and, therefore, unlike Lord Neuberger, did not think he was extending existing principles by finding a duty. A rejection by Lord Neuberger of dated statistical purchasing habits, without offering alternatives, is not evidence that purchasing habits have changed or that there is any

less reliance on expert valuations than before. A mortgagee’s valuation on a freehold purchase is mostly concerned with capital value. But that information is equally important to any buyer, and no less so on a buy-to-let purchase, where, as in this case, capital and rental values were both important.

Ultimately, what is fair, just and reasonable in determining these duty questions? Lord Neuberger was keen to find “a principled and coherent” way forward. Denying a duty between valuers and buyers in all buy-to-let cases may offer a clear rule, but it is not principled.

In Smith/Harris, the House of Lords was prepared, in ordinary purchases, to distinguish (however problematically) between ‘modest’ and more expensive/commercial purchases. In the name of fairness, however, the same flexibility should be applied to buy-to-let purchases. A distinction should, therefore, be made between the seasoned property developer, who, having made his own enquiries, has simply made a bad deal and is looking to recoup his losses and a modest, but commercially naïve, purchaser, who may be just entering the property market.

As Lord Neuberger accepts, a well-established insurance sector is already in place to absorb such losses and it is hard to see why, in terms of principle or policy, he should take such an inflexible approach.

It is accepted that applying the familiar Smith/Harris approach in the context of buy-to-let purchases is vulnerable to criticism in definition and application. This is not new. The difficulty for a court would be in determining those cases at the margins. However, it would mean that clear-cut cases, like Mr Scullion’s claim, would not fail and the courts would be applying duty principles that are familiar and well serviced by the insurance sector.

The alternative, in denying a duty to all buy-to-let purchasers regardless of other factors, may be to sacrifice justice for clarity in more situations than is acceptable.