In the past two years the property market has soared; in January 2021 for instance, 37% of homes in England and Wales were sold for their asking price or more. Fast forward to 2023 and there is growing uncertainty in the market as the cost of living continues to rise.
The results of the March 2023 RICS UK Residential Survey depicted a generally weak market, with house prices continuing to dip. With respect to commercial property, it is expected that sales prices per square foot are also expected to dip by 1.6% in the second quarter of 2023, albeit this is an improvement on the previous quarter.
Lenders are therefore exercising far more caution when approving mortgages and the Bank of England has reported that lenders only approved around 35,000 mortgages in December 2022 – the lowest figure since January 2009 in the aftermath of the global financial crisis, apart from during pandemic lockdowns.
In this context, it is imperative for valuers to ensure that they are limiting their liability as far as possible when accepting new instructions. As house prices continue to fall it is expected that – as happened after the 2008 crisis – lenders may not be able to recover all their losses by way of repossession, so surveyors may be subject to potential claims.
During the 2010s, a range of legal issues came to the forefront in claims made against surveyors – but these in turn offer lessons to valuers who want to prevent the risk of claims today.
In claims brought by a lender against a surveyor, limitation does not necessarily begin at the date the loan agreement was entered into. As established in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd  1 WLR 1627, the date of loss is defined as the first day on which the loan amount plus interest is deemed to be higher than the market value of the property.
Limitation issues are likely to be subject to expert evidence if it has been more than six years since the loan was advanced. If primary limitation has expired, the lender may also have recourse by way of section 14A of the Limitation Act 1980, where it can show that it has been less than three years since it had enough knowledge to make it reasonable to investigate a potential claim. This was considered by the court, in Su v Clarksons Platou Futures Ltd and Anor  EWCA Civ 1115.
It is important for valuers to bear in mind, therefore, that even if more than six years have passed since a lender advanced a loan to a borrower, this does not necessarily mean that a potential claim against the valuer will be time barred.
It was decided in South Australia Asset Management Corp v York Montague Ltd  UKHL 10 that where a valuer provided information to a lender that influenced its decision on whether to advance the loan, losses would be capped at the difference between the surveyor's valuation and the true market value of the property at the time, plus interest.
The courts recognised the potential limitations of this test in Khan v Meadows  UKSC 21 and Manchester Building Society v Grant Thornton UK LLP  UKSC 20 and put forward a six-stage alternative. This centres on first ascertaining the purpose of the advice or information provided, and analysing whether the losses sustained follow from the risk that this advice or information was intended to prevent.
It was held in Khan and Manchester that the South Australia test is still a useful cross-checking exercise to assess the scope of duty, and in many cases will still lead to the same measure of losses.
However, if a lender can demonstrate that the loan would not have been made at all but for the surveyor's valuation, it may be able to recover all its losses caused as a result. However, we have yet to see any judgments relating to surveyors showing the application of the tests set out in Khan and Manchester in the English courts.
It is commonly debated in claims against valuers what the permissible range or margin of error is in their valuations. In K/S Lincoln v CB Richard Ellis Hotels Ltd  EWHC 1156 (TCC), it was decided that:
It was also decided that even if a surveyor were negligent in the methodology they used to reach a valuation figure, it would not be considered negligent in court if that valuation still fell within a reasonable range.
In Capita Alternative Fund Service (Guernsey) Ltd and another v Drivers Jonas (A Firm)  EWCA Civ 1417 it was held that where a property has multiple components – for instance, a residential flat and a retail unit – then a different margin of error should be applied to each.
This case related to the development of a factory outlet, and one of the components the surveyor provided advice on was the rental value of this after seven years.
The judge held that this component should have a permissible range of ±20%. In circumstances where a surveyor has provided a development appraisal valuation, therefore, it may be possible to argue that ±15% is not the maximum permissible margin of error.
'It is commonly debated in claims against valuers what the permissible range or margin of error is in their valuations'
A lender must demonstrate that it relied on the advice provided by the surveyor when advancing the loan and that this caused the losses suffered.
In Bank of Ireland v Watts Group Plc  EWHC 1667 (TCC), it was found that the lender failed to comply with its own lending policies before advancing the loan; if it had done so, that loan would never have been advanced. The case failed entirely on the grounds of causation, as it was found that the lender should never have advanced the loan in the first place.
However, Justice Coulson also commented that he would have ordered a deduction of 75% on any losses ordered against the valuer due to the lender's contributory negligence if the case had not already failed on causation.
Other common factual causation issues include where there is evidence that a lender has disregarded valuation advice provided on other occasions, or failed to carry out due diligence that should have put it on notice that there was a risk the borrower would not be able to repay the loan.
In order to argue contributory negligence, a valuer must show that a lender's failure caused or contributed to the loss, and there must be evidence of this. A lender is to be judged by the standards of the market sector in which they operated.
Common contributory negligence arguments include whether the lender has adequately mitigated its losses when selling the property.
'A lender is to be judged by the standards of the market sector in which they operated'
With the above in mind, it is imperative for surveyors to limit their exposure where appropriate and in accordance with RICS standards when issuing their valuation reports, to prevent future liability.
Surveyors should ensure the scope of their instruction is clearly recorded. If there are any changes to this scope, that should be reflected in writing. In the valuation report itself, any assumptions made or any parts of the property that were inaccessible on the date of the inspection should be clearly recorded.
Furthermore, we at Beale & Co have seen scenarios where the methodology to reach a market value or the comparables used have not been set out in full in the report. This means that a lender could argue that the market value provided has not been adequately backed up with evidence.
Finally, surveyors should ensure that the terms of engagement that apply to their valuation reports include, where possible, a financial cap on liability or exclusions for certain types of loss and limitations on any third-party reliance. The purpose and basis of the valuation must also be stated in the terms of engagement.
RICS has produced this guidance note to assist both members and their clients in understanding the main risks and liabilities associated with surveying. It guides members in the negotiation of equitable contracts with clients and the avoidance of major risks and pitfalls.
PII is a key part of managing risk and, in arranging PII, regulated firms should ensure that the amount of cover purchased is consistent with the nature of their practice, proportionate to the risks taken by the firm and consistent with the RICS PII requirements.