Negligent Valuation

Property Litigation - March 2012

The volatile property development sector has led to increased pressure on surveyors. The problem arises in relation to the valuation of distressed property where there are:

forced sales revaluation as part of renewed or restructured lending for exiting property portfolios mezzanine lending with a mortgage lender agreeing to take a higher risk Valuers face substantial difficulty in attempting to arrive at a market value in circumstances where very little market exists. The conventional valuation process involves the consideration of transactions which compare with the current property transaction (i.e. is truly "comparable" in terms of being recent, of a similar/same location and of similar/same property characteristics).

However the market is currently so suppressed that there are little or no comparables available for some locations. Often a valuation is needed immediately and the parties can not/will not wait for the market to improve to provide comparable evidence. The financial crisis has tested the mettle of the valuation industry. There have been numerous cases where valuers have been criticised for looking at circumstances which would not have been known at the valuation date or where valuers have relied on hindsight and not actual comparable transactions (MrJustice Lewison in Marklands v Virgin Retail [2008]).

The case of Paratus AMC Ltd v Countrywide Surveyors Ltd [2012] demonstrated how valuers can be caught out by the downturn in property prices. The loans in that case were made when the property market was booming in 2005. The valuation was then brought into question after the financial crisis in 2008 and proceedings issued alleging negligence. Mr Justice Keyser QC accepted that a valuation did not have to be accurate providing it fell within a "reasonable margin of error" but did have to be based on more than mere guess work. There was no real substitute for comparable evidence.

The point was also emphasised by Mr Justice Coulson in 2010 (K/S Lincoln v CBRE) who allowed only 10% as a margin of error. He emphasised the dangers of making valuation assumptions where there "were limited comparables, an immature investment market and a changing market at the material time".

The extent of a valuer's liability to a mortgage lender (for negligent advice) was summarised in South Australia Asset Management Corporation v York Montague Ltd [1996] 27 EG 125 as follows:

If an accurate (i.e. non-negligent)...