Update - Court of Appeal rules against damages for a buy to let investor relying on Lender’s valuation Litigation – Negligent Mortgage Valuation - No liability - Buy to let investor
Scullion v Bank of Scotland  EWCA Civ 693
Case summary by Rudi Ramdarshan
Last week the Court of Appeal provided guidance on the extent to which a lender’s surveyor is liable for negligence to buy to let investor. The case serves as a useful reminder of the legal elements which are necessary to give rise to a liability in such circumstances. In light of the conclusions in the case, it is strongly advisable that buy to let investors obtain their own valuation survey rather than relying on that of the lender.
The case originates from the judgement of the High Court which awarded Mr Scullion, a buy to let investor, (the Respondent) ￡72,234.54 (plus interest and costs) against the Bank of Scotland PLC (the Appellant). The originating case concerned whether a valuation provided for his prospective Mortgagee had been negligent giving rise to liability to Mr Scullion. The valuation had been provided by Colleys, a company which was subsequently transferred to ownership of the Bank of Scotland PLC. The Respondent decided to invest a proportion of the money he had accumulated in his private pension fund into the residential buy to let market.
In May 2002, Colleys were instructed by a division of the Appellant to value ten flats. The valuation visit took place in June 2002. It appears that around this time the Respondent submitted a mortgage application and paid an amount to towards the valuation.
The valuation report stated that the capital value was ￡353,000 and the achievable rental value was ￡2,000 per month. At the time the Respondent did not see the initial report.
In September 2002 Colleys provided a further report for the Respondent’s Mortgage. The report was obtained on behalf of the Mortgagee and was headed “Buy to Let Report and Valuation” and identifies Mr Scullion as “Applicant”. report reaffirmed the rental value of the Flat as ￡2,000 per month and the capital value.
Having completed the purchase, the Respondent was unable to let the flat. He contacted a local letting agent who informed him that a rent of ￡2,000 per month was unachievable. The Respondent eventually found a tenant in April 2003 at a rent of ￡1,050 per month, but the tenant vacated after a year.
The Respondent subsequently sold the Flat for ￡270,000 in May 2006. Mr Scullion paid ￡260,032.17, leaving a balance on his mortgage account of ￡61,932.15 which has remained unpaid. The Respondent thereafter issued proceedings against Colleys for damages arising out of negligence.
The High Court Proceedings  EWHC 572 (Ch)
After a five day trial, the Judge held that:
- Mr Scullion had relied on the capital and rental valuations in the Report when deciding to purchase the Flat,
- Colleys owed him a duty of care when preparing the Report,
- The capital and rental valuations of the Flat in the Report had been negligently high,
- Colleys’ defences based on disclaimer of liability and the principle of ex turpi causa non oritur actio (from a dishonorable cause an action does not arise)were misconceived,
- Mr Scullion was therefore entitled to damages.
With respect to damages the Judge held that the Respondent had not suffered any loss as a result of the negligently high capital valuation, but he was entitled to damages attributable to the negligently high rental value, which was assessed at ￡72,234.54, representing his net income loss on the Flat from October 2002 to June 2006.
The Issues in the Appeal
The 4 issues in the appeal were
- Whether the Judge was right to conclude that Colleys’ valuation actually played any part in Mr Scullion’s decision to purchase the flat.
- Whether the Judge was right to conclude that Colleys, whose valuation was carried out for Mr Scullion’s prospective mortgagee, owed Mr Scullion a duty of care.
- Whether, having found that Colleys’ negligent capital valuation caused Mr Scullion no damage, the Judge was right to assess damages on the basis that Colleys’ rental valuation was also negligent.
- Whether the Judge was right to assess Mr Scullion’s damages as being the difference between the outgoings he incurred, and the income he received, in respect of the period of his ownership of the flat.
The court dealt with these issues as follows:
Was the Report causative of Mr Scullion’s loss?
The Respondent had to show, following the case of Banque Bruxelles Lambert SA v Eagle Star Life Insurance  2 All ER 769, 793h-794d, that the report played a “real and substantial part”in inducing him to enter into the relevant transaction.
The Court of Appeal found that the Judge had asked the right question and had reached a conclusion based on the evidence which was open to him.
Did Colleys owe Mr Scullion a duty of care when submitting the Report?
The Court of Appeal found that the Colleys obviously owed the Mortgagee a duty of care. In answering the question of whether the duty of care extended to the Respondent, the Court of Appeal started by examining the reasoning of the House of Lords in Smith v Eric S Bush  1 AC 831. That case concerned a relatively modest house and a vital point in that case was the valuers’ knowledge that the valuation fee was paid by the purchaser. Therefore the Court found that it was likely that the valuation would have been relied upon by the purchaser. The Court of Appeal further considered the comments in Smith that 90 per cent of purchasers rely on a mortgage valuation and do not commission their own survey due to the costs involved.
When applying this test to the legal elements of foreseeability, proximity and whether it would be just, fair and reasonable to impose the duty of care on the Appellant, the Court of Appeal found that the facts of the case were distinguishable from Smith  AC 830on the basis that Smith concerned an “ordinary domestic”purchase whereas Mr Scullion had purchased the property as a buy to let investment. The Court of Appeal concluded that it was not sufficiently clear that it would have been foreseeable to the valuer that the Respondent would rely on the report rather than obtaining an independent valuation. In reaching this conclusion the Court placed weight on the commercial nature of the transaction and considered that it is more likely for people involved in such transactions to be “richer and more commercially astute”and therefore more likely to obtain an independent valuation or survey. Whilst the evidence before the Court in Smith suggested that the vast majority of “ordinary domestic”purchasers relied on valuations provided to mortgagee, there was no evidence to suggest that this was true for commercial buy to let transactions
The Court of Appeal considered the practical differences between an “ordinary domestic”valuation and a buy to let valuation. Given the complexities of valuing the anticipated rental value, the Court of Appeal expected the purchaser to obtain his own advice on other matters not covered in a Mortgagee’s valuation report, such as the level or expected rent, management fee amongst other matters. The Court considered that with respect to an “ordinary domestic”valuation, the principal concern shared by the lender and the purchaser will be the Capital value of the Property. With respect to a buy to let valuation, the Court of Appeal took the view that such a report would not necessarily be concerned with the rental value of the property. This was reflected in facts of Scullion where, in relation to rental, the purpose of the report was “to confirm to the mortgagee that the property was suitable for the purpose for which it was being ostensibly acquired by the purchaser”.
The above conclusions also meant that there was insufficient proximity and that it would not be just and equitable that the Appellant should be liable to the Respondent. In summary, the Court of Appeal concluded that “there is no inherent likelihood that a purchaser, buying the Flat for the purpose of letting it out, would rely on a valuation provided to the mortgagee.”
With respect to the lower courts’ assessment of damages, the Court of Appeal found that whilst the judge correctly identified that damages would be based on the guidance given by Lord Hoffmann in South Australia Asset Management Corporation v York Montague Ltd  AC 191 and therefore that damages be limited to “the consequences of the [relevant] information being inaccurate”, the judge appeared to have applied too harsh of an assessment, effectively ascribing all the loss of revenue suffered by Mr Scullion to the inaccurate rental valuation. The Court of Appeal considered that there were periods where the property would have been vacant in any event as well as other factors.
The case demonstrates that the factual matrix which underpins most domestic purchases is inherently different from that of a buy to let investment. The key considerations for a buy to let investor are inevitably the rental income in addition to the capital value of the property. In the judgement of the Court, a buy to let investor is likely to have more resources available and is more likely to have obtained independent advice. In those circumstances the Court will be reluctant to extend liability to investors in the same way in has done in the past with respect to residential purchases.
An individual considering entering into a buy to let transaction ought to obtain their own valuation rather than relying on the Mortgagee’s valuation.
It is understood that the Respondent is considering appealing to the Supreme Court.
Rudi Ramdarshan is a Solicitor at Ronald Fletcher Baker LLP based at the Baker Street office. He can be contacted on his direct number 020 7467 5765 and firstname.lastname@example.org
29 June 2011