Since the early 1990s it has been common place for “the ordinary domestic householder purchasing his own home” to pursue the valuer contracted by the prospective mortgagee for negligent over-valuation.
For a brief period from October 2010 it appeared as if buy-to-let borrowers might, for the first time, also get in on the act. However, the Court of Appeal dispelled any such notions in June of this year when handing down judgment in Emmett Thomas Scullion v Bank of Scotland Plc (t/a Colleys)  EWCA Civ 693 and allowing an appeal against the first instance decision of Mr Richard Snowden Q.C. (sitting as a Deputy High Court Judge) ( EWHC 2253 (Ch)).
The facts in Scullion were as follows:
• Mr Scullion wished to enter the buy-to-let property market to supplement his pension and entered into a contract with a company who found and rented out investment properties (‘POD’).
• POD found Mr Scullion a flat which he agreed to purchase for a stated purchase price of £352,950. (He in fact paid £300,007.50 due to a 15% ‘gifted deposit’ and a deferral of part of the purchase price.)
• Mr Scullion applied to Bank of Scotland (“the Bank”) for a buy-to-let mortgage to assist in the purchase of the flat.
• The Bank commissioned a valuation from the surveyors trading under the name of Colleys, which, at the time had been part of the Halifax plc group but which was subsequently transferred to the Bank. The valuation fee was paid by Mr Scullion.
• Colleys’ valuation report stated that the capital value of the flat was £353,000 and the achievable rental value was £2,000 per month. That anticipated rental would have covered Mr Scullion’s mortgage installments of £1,600 per month.
• A mortgage offer was made and accepted in the sum of £290,766 and Mr Scullion completed on the purchase of the flat on 10 October 2002.
• POD failed to let the flat and Mr Scullion attempted to find a tenant himself. He was told by local letting agents that a rent of £2,000 per month was unachievable, and they eventually found him a tenant in April 2003 at £1,050 per month. The tenant vacated after a year.
• In Spring 2004, Mr Scullion put the flat on the market and it was eventually sold for £270,000 in May 2006 leaving a balance of £61,932.15 outstanding on the mortgage.
Mr Scullion issued proceedings against Colleys for negligent over-valuation of both the capital and rental value of the flat, alleging that he had relied on those valuations when deciding to go ahead with the purchase. The trial was heard over 5 days with a further 2 day hearing on causation and quantum. At first instance Mr Scullion was awarded damages assessed at £76,234.54, representing his net income loss on the flat from October 2002 to June 2006.
The matter proceeded to the Court of Appeal. There were some interesting issues arising on the appeal as to the trial Judge’s approach to the measure of damages, which Lord Neuberger MR (delivering the Court of Appeal’s lead judgment) stated was not “wholly correct”. However, the “most significant point, both to the parties and more generally, [was] 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.”
Smith v Bush
Before considering the judgments in Scullion, it is worth reminding oneself of the House of Lords’ well-known decision in the joined appeals of Smith v Eric S. Bush; Harris v Wyre Forest District Council  1 AC 831. It was in those appeals that the House of Lords confirmed that, at least where the purchase of a ‘modest’ residential property is concerned, a valuer instructed by the prospective lender also owes a duty of care to the prospective borrower.
However, the question of whether such a duty would also be imposed in cases concerning non-residential properties, or of a residential property of more than a ‘modest’ value was left open (per Lord Griffiths at 859G-860A and per Lord Jauncey at 872B-C).
This was because their Lordships’ decision, that it was appropriate to impose a duty because of satisfaction of the ‘threefold’ Caparo test of (i) foreseeability, (ii) proximity and (iii) just and reasonableness, depended upon:
(i) the valuer’s knowledge that the purchaser was likely to rely, directly or indirectly, on the valuation; and
(ii) the fact that the valuer’s fee would ultimately be paid by the purchaser.
In respect of the former, as Lord Jauncey stated at 872B-C:
“I would not…conclude that the mere fact that a mortgagee’s valuer knows that this valuation will be shown to the intending mortgagor of itself imposes on him a duty of care to the mortgagor. Knowledge, actual or implied, of the mortgagor’s likely reliance on the valuation must be brought home to him. Such knowledge may be fairly readily implied in relation to a potential mortgagor seeking to enter the lower end of the housing market but [it is not certain] that such ready implication would arise in the case of a purchase of an expensive property whether residential or commercial.” (Emphasis added)
Scullion – First Instance
At first instance, the Judge was satisfied that a duty of care existed because of his findings that:
(i) the valuer knew or ought to have known that there was a very high probability that the valuation would be shown to Mr Scullion;
(ii) Mr Scullion relied on the valuation when deciding to proceed with the purchase of the flat; and
(iii) the valuer knew that Mr Scullion would have paid for the valuation, by reimbursing the Bank.
The Judge then applied the House of Lords’ reasoning in Smith v Bush, from which, as the Court of Appeal subsequently stated, it must also follow that he was satisfied that Colleys should, in effect, be treated as knowing that Mr Scullion would probably rely on the valuation. From this, the trial Judge then found that the threefold test was satisfied so as to impose a duty of care.
Scullion – Court of Appeal
There was no appeal against the Judge’s findings at (i) and (iii) above and Colleys were unsuccessful in their appeal against the factual finding at (ii) that Mr Scullion had, in fact, relied upon the valuation.
Nevertheless, the Court of Appeal considered that the Judge had erred in his application of the Smith v Bush principle to the facts of the case and concluded that Mr Scullion’s case was distinguishable on four grounds:
(i) The transaction in Scullion was, from the point of view of the purchaser, essentially commercial in nature and “people who buy to let can therefore be regarded as more likely to obtain, and more able to afford an independent valuation or survey.” (para 49)
(ii) The evidence accepted by the House of Lords in Smith was that surveyors knew that approximately 90% of purchasers relied on valuations provided to mortgagees when deciding whether to purchase and so the overwhelming probability is that the purchaser will rely upon this valuation. There was no evidence that in 2002 anything like that percentage of people who bought to let relied only on valuations prepared by a valuer instructed by their mortgagee, rather than obtaining their own valuation.
(iii) As any valuer would appreciate, a purchaser buying a property to let is at least just as interested in its rental value as he is in its capital valuer. A valuer providing a lender with a valuation on a buy-to-let application would expect the purchaser, at least if he were prudent, to obtain his own advice on some important matters not covered by the mortgage valuation report.
(iv) On a buy-to-let purchase the mortgagee’s valuer would appreciate that his client is primarily interested in the property’s capital valuer to ensure that the loan is properly secured.
On whether there could be a duty of care in respect of the capital valuation alone, the Court said that “if there was no duty of care in relation to the rental valuation in the Report, because one would have expected Mr Scullion to obtain his own rental valuation of the Flat, it follows that one would have expected him to instruct his own valuer. At least in the absence of evidence to the contrary, I would have thought that the natural inference is that the valuer would also have been asked to advise on the capital value” (para 53).
For those four connected reasons, the Court of Appeal rejected the argument that there was any inherent likelihood that a purchaser buying a residential property for the purpose of letting it out would rely on a valuation provided to the mortgagee. Therefore, there could be no implied knowledge of Mr Scullion’s reliance on the valuation and there was no evidence of actual knowledge on the part of the valuer.
The Court of Appeal therefore unanimously held that the valuer owed no duty of care to Mr Scullion.
Each of the four grounds relied upon by the Court of Appeal to distinguish the Scullion case from Smith was said to stem from the fact that the transaction was the purchase of a residential unit, not as the purchaser’s residence, but for the purpose of an investment. On that basis, the Court seems conclusively to have determined that in the overwhelming majority of cases buy to let mortgagees will not be able to establish a duty of care is owed to them by their mortgagee’s valuer.
The only exception to that may be where there is evidence of actual knowledge of reliance by the valuer. That must be likely to be rare where, in normal circumstances, there is no direct contact between the borrower and the mortgagee’s valuer. Some commentators have suggested that there may still be scope for arguing that a duty of care should still be owed to small buy to let investors. However, Mr Scullion himself could not be categorised as a big investor and that seems an ambitious argument to run in light of the judgments in the Court of Appeal.
It has always been prudent for buy-to-let purchasers to obtain their own comprehensive valuation and letting report in order to assess the merits of the proposed transaction. Post Scullion, this must be viewed as being even more important.