Any person who is not party to a contract with a surveyor but who comes to rely on their professional advice can be considered a third party, whether a borrower on a property they have surveyed, or someone who has acquired a packaged or syndicated loan that includes a property the surveyor has valued. As the law stands, a surveyor will owe a duty of care to a residential purchaser even if their retainer is with the lender.
Risk but no reward
Unless the surveyor agrees to take on a responsibility to any other third parties, however, they cannot bring claims. The most common way in which a surveyor may expose themselves to a claim from a third party is to allow that party to rely on a report they have produced.
This may either be in response to a specific request from the client or the third party to address the report physically to that party; or by using a wording that makes it clear that third parties, such as future purchasers of any loan secured on the subject property, are entitled to rely on the report.
It is rare that the surveyor will be paid an extra fee for allowing unknown and potentially uncountable third parties to rely on their report, yet they still face significant risks. Permitting such reliance on reports can expose a firm to claims from third parties it does not know, who might look on a survey or valuation differently, and who might have a different attitude to bringing legal action against a surveyor.
For example, it is common for large commercial lenders to have a team of in-house surveyors who will discuss any survey or valuation report they receive, and make suggestions about the way the property's condition or its value is presented in the report, in particular any associated risks.
A problem arises if, for example, that loan is then securitised. A third party such as a hedge fund or any organisation trading in debt that comes to rely on the survey or valuation report may argue the surveyor has misrepresented the condition of the property, or the risks and potential rewards of investment in the loan; and, had they known the full picture, they would not have purchased the loan.
“The most common way in which a surveyor may expose themselves to a claim from a third party is to allow that party to rely on their report”
Case indicates extent of liability
Another example of the risks of allowing a third party to rely on your advice concerns the type and amount of damages that may be awarded against you in the event of a claim. Your contract with your client will set out the scope of your obligations to them. This will then define the scope of your duty to them, and thus the type of loss they can claim from you. By contrast, a third party has no contract with you, and it is therefore open to a court to decide the scope of your duty and the losses that may be claimed in the event you are found to have breached it.
A good example of this issue can be seen in the case of Scullion v Bank of Scotland [2010] EWHC 2253 (Ch). This related to a buy-to-let investment where the valuer, Colleys, was alleged to have overvalued the property and the rental that could be generated from it. As those engaged in valuation work will know, the usual measure of damages is the difference between the value provided by the defendant valuer and the "true" value of the property, as decided by the court.
In this case, the judge found that Colleys owed Mr Scullion a duty of care to ensure that the advice on possible rental value was correct. Having given the wrong advice, Colleys thus had to compensate him for the difference between the rent he actually achieved and the level it had advised.
Fortunately, that decision was overturned on appeal because the court found that Colleys owed no duty of care to Mr Scullion, on the basis that this was in reality a commercial transaction rather than a residential purchase. But the case clearly demonstrates the sorts of risk that a surveyor may run by taking on a duty to a third party where there is no contract to define the scope of that duty.
Allowing third parties to rely on a survey or valuation also gives rise to a risk that a firm’s contractual terms of engagement may not be binding on them. Some of the legal defences it might be able to raise if it faces a claim from a client may be more difficult, or indeed impossible, to raise in response to a claim from a third party.
For example, in Scullion Colleys sought to argue that any claim brought by Mr Scullion should have been subject to the terms, conditions and limitations that governed its relationship with the lender, Bank of Scotland, for which it had provided the valuation. The court disagreed, and held that, since Mr Scullion did not have notice of the terms, he was not bound by them. So all the good work a professional may have done to reduce their risk in relation to a particular retainer may be undone by allowing a third party to rely on their report.
Insurance implications
One final risk arising from allowing third parties to rely on professional advice relates to insurance limitations. A firm’s policy may impose specific conditions concerning third-party reliance on valuations, and exclude the right to an indemnity for certain third-party claims. For example, RICS’ minimum terms allow for only 2 assignments of a valuation report; that is, only the client and 2 further parties can rely on it. At the height of the market in residential and commercial mortgage-backed securities, when lenders were circulating bundles of loans like a game of pass the parcel, a surveyor had no control over how many times the entitlement to rely on their report was transferred to a third party. If the benefit of the report was assigned more than twice, then any claim from the organisation in possession of the loan at the time of the final assignment would not be covered by the surveyor's professional indemnity insurance.
When considering how best to address these risks, the obvious point is that a firm should not allow any party with whom it doesn't have a contract to rely on a report. The safest approach, indeed, is not to allow any third parties to read the report at all, in case they can then argue that they saw it with the firm’s agreement and that it therefore accepted that arrangement. If a firm cannot avoid the report being passed to a third party, it should ensure that the terms state that only the named client can rely on it.
If a surveyor is obliged to address the report to a wider class of third parties – for example where the client intends to securitise the loan – they should make it clear in the report itself that any party who may come to rely on it is bound by the terms and conditions of the firm's contract with the original instructing client. To ensure that any third party who comes to see the report also has notice of the relevant terms and conditions, including any limits of liability, these should be set out in or attached to it.
A surveyor should likewise make clear the purpose for which the original advice was provided, so that a third party cannot make a claim if they rely on it for a different purpose. Following these steps should help surveyors protect themselves should they have to allow a third party to rely on their advice.