Perhaps unsurprisingly, this case was appealed.  The Court of Appeal has now delivered its Judgment. 

The first issue to be determined was whether the buy-to-let purchaser, Mr Scullion had relied on the valuation report.  The Court of Appeal decided that the Judge at the first hearing had asked the right question and therefore this issue could not be challenged.

The second more fundamental question was whether the valuers, Colleys owed the purchaser, Mr Scullion a duty of care.  Much reliance at first instance was placed on the case of Smith v Eric S Bush [1990] 1 A C 831 where the court concluded that as valuers know that 90 per cent of purchasers rely on a mortgage valuation and do not commission their own valuation since many purchasers cannot afford another second valuation the valuer owed the purchaser a duty of care.  

The Court of Appeal concluded that Colleys did not owe the purchaser a duty of care.  There was no inherent likelihood that a purchaser buying a buy-to-let flat would rely on a valuation.  The Court took into account the following factors:

• The valuation was to purchase a residential unit not as the purchaser’s residence, but for the purpose of an investment. People who buy to let are likely to be richer and more commercially astute than people who buy to occupy and can be regarded as more likely to obtain and more able to afford an independent valuation.   
• There was no evidence to support the proposition that anything like 90% of the people who bought to let in 2002 relied on valuations prepared by a valuer instructed by their mortgagees rather than obtaining their own valuation.
• A purchaser buying a property to let is at least just as interested in its rental value as in its capital value.   A valuer valuing a property for a prospective lender for a buy-to-let purchaser would expect the purchaser if he is prudent to obtain his own advice.  A rental value can be a tricky and sensitive issue. 
• A valuer instructed by the prospective lender would appreciate that the lender is primarily interested in its capital value because a mortgagee’s principal concern is that any loan is properly secured.

The Court of Appeal also considered how much Mr Scullion could claim in respect of the rental value.  Although this analysis did not assist Mr Scullion it will be of benefit to others who are entitled to claim against a valuer. 

• Since Colleys had suggested that it would take a month to find a tenant, the first month of rent would not be allowed. 
• Whilst the flat was not let because of the unrealistic rent, then damages for that period could be awarded less the first month.  Once a tenant had been found at a lower price, then the recoverable loss would be the amount estimated by the rental valuation less the amount actually paid by the tenant. 
• Once the tenant left the property, Mr Scullion then made a decision to keep the property empty so as to try and sell it so there was a powerful case for saying that no damages would be attributed as he would have received no rental income whatever the valuation.  However, he may well have been entitled to some damages and so could claim the difference between what a correct valuation would have been and what it was valued at. 

This is a decision that recognises the realities of the buy-to-let market as compared to a purchaser of residential properties to live in.  It will be interesting to see whether this case will have an impact on purchasers of high end properties who may also be able to afford their own valuations.  It  provides a helpful way in which the rental loss could be determined and the question will be whether lenders will now be able to claim loss of rental value when pursing valuers.  Perhaps we have not heard the last of this case and it may be that this case will go to the Supreme Court.  Of course, this will not be of any comfort to Mr Scullions who as the Court of Appeal recognised was taken advantage of and misled by the sellers.

 Emmett Thomas Scullion v Bank of Scotland PLC [2011] EWCA Civ 693

Similarities are notable between the Conservative and Liberal Democrat manifestos, which can be used to interpret what impact this Government is likely to have on Property.

The first similarity was clearly the plan to abolish Home Information Packs before a property could be sold. The Liberal Democrats did however wish to retain the Energy Performance Certificate element of the packs. As of today (21 May), this plan has been implemented following the announcement by the Government for their immediate suspension. This would seem to be a sensible move by the Government; many had predicted this move and could therefore have had the effect of sellers withholding their properties from the market, hoping to save the cost of the Home Information Pack. This move will certainly be welcomed by residential developers and sellers alike, and hopefully bring back some spontaneity to the market.

A second point on which both parties are agreed is for a more localised planning policy. The Conservatives want to see a new “open source” policy, with local people being able to specify what type of development they want. The Liberal Democrats want local authorities to determine how and what type of developments are carried out. These proposals are in line with a clear intention to scrap the previous Government’s housebuilding targets, which many commentators state to be unrealistic based on current levels of construction. Whether a more local planning policy will help developers in obtaining planning for developments remains to be seen. One move which developers may not be so keen on is a Conservative proposal to force developers to pay a tariff to local authorities as compensation for the loss of amenities and costs of additional infrastructure.

The Conservatives proposal to permanently scrap Stamp Duty Land Tax for first-time buyers on properties priced under £250,000 may help the lower end of the market. Whilst this is likely to be welcome news, its effectiveness could be watered down by the scaling down of schemes such as Homebuy Direct, which has been suggested by the Liberal Democrats. This scheme has been of assistance to a number of developers and purchasers alike during challenging times.

There has also been much news on plans to increase the rate of Capital Gains Tax, currently at 18 per cent, and thought to be likely to increase to at least 40 per cent. This is not just likely to hit property investors and people investing in property to fund their retirement, but potentially also people who had lost confidence in pensions and may not have made separate provisions. However, if this has the effect of putting off potential buy-to-let investors from entering the market, then this could see an upturn in rental incomes as demand outstrips supply for rental properties.

Clearly, some uncertainty remains as we wait to see whether any such plans are watered down following consultation and the parliamentary process.  

The expected rise in CGT – a key plank of the Liberal Democrats’ election manifesto – will particularly hit buy-to-let landlords and property investors. This is because when a property is sold, the entire gain made on that property is potentially liable for CGT in that tax year. Consequently, there is likely to be a sudden rise in landlords and investors selling their properties in the coming weeks, before the impending tax rise.

At the time of writing, it is not known when the CGT rise will take effect, though it is likely to be in April 2011. There is, however, the possibility that it will be brought in immediately following next month’s emergency budget.

The full details of the change have yet to be decided; in fact all the Government has said is that it “seeks to agree a detailed agreement” on raising CGT, so that it falls in line with income tax rates. However, with the proposed change only affecting “non-business” assets, the key issue will be how the Government defines “business” in the forthcoming legislation. The National Landlords Association has called on the Government to treat buy-to-let property as a business asset, so that investors ‘escape’ the rise.

Landlords and investors who have been thinking about disposing of their property portfolios would be advised to consider whether they should act sooner rather than later, so that they benefit from the current 18 per cent CGT rate. However, it may not always be practical (or desirable) to sell a property or portfolio on the open market in such a short timeframe; aside from a lack of purchasers, property values are still depressed. With careful tax planning it may, however, be possible to dispose of the asset and trigger a taxable gain without making such a sale. If this is of interest, please contact our tax department or your usual Matthew Arnold & Baldwin contact.

In the meantime, we, and the property industry as a whole, await the Government’s emergency budget with great interest.

The Court ruled that Natasha Rashid must pay Ballymore the £279,200 balance due on the flat she agreed to buy, plus interest and legal costs. Ms Rashid had put down a £69,800 deposit on the luxury flat, agreeing to pay the remainder of the purchase price once the flat was completed. The Court also said that if Ms Rashid fails to comply with the order by the end of April, Ballymore will be able to resell the property and seek a court order for damages against her.

This ruling highlights the growing number of claims being brought by housebuilders and developers against purchasers who renege on their contracts. A recent investigation by the property journal Estates Gazette found that between August 2008 and December 2009, nearly 300 claims were lodged against buy-to-let investors who had not completed on off-plan purchase contracts. These findings came to the fore when, in December 2009, the High Court backed housebuilder Prestige Homes South West in its attempt to obtain payments from an investor over two failed completions in its Zero 4 scheme in Plymouth, awarding it damages of £133,000.

There is no doubt that these two recent rulings are good news for developers and housebuilders, who have invested a lot of time and money in their developments and rightly expect purchasers to honour their contracts. However, off-plan buyers have become victims of the decline in the property market, with many of the properties they put deposits down on now worth much less than when they agreed to purchase them. Buyers have been unable to obtain mortgages once the value of their properties fell and buy-to-let investors have been unable to sell their properties on at a higher price than they paid.

It is an unfortunate situation for all concerned, and, although similar disputes are being settled out of court, more court cases should be expected.

If one spouse or partner has a higher income than the other, this presents an opportunity for tax planning by diverting more of that rental income to the spouse with a lower rate of tax. This balancing exercise can give rise to significant savings opportunities with careful tax planning. This will be of particular importance come 6 April with the introduction of the 50% rate of tax, but is also relevant for those whose income is taxed at 40%.

If you would like some advice on how best to achieve this, please contact Shimon Shaw or James Odds.

One of the key proposals is to consider the “linked transactions” rules for residential property. These are the rules which say that if you buy 10 properties for, say, £120k each, you’ll pay the rate of tax based on £1.2m (i.e. 4%). Without this rule, this example would result in zero tax. The worry is that it would, in theory, be easy to split up a property in lots of little bits all under the tax threshold. It seems to me that they are going to struggle to introduce changes without opening up the rules for abuse. As it is, the rules are vague and poorly drafted, any changes will no doubt give rise to additional confusion.  That said, investors will welcome the changes.

The idea in the consultation is that institutional investors, who buy portfolios should not suffer as a result, and for them the linked transactions rule would be disapplied.  This would, of course, be a welcome development, although I doubt it will impact too much on the UK property market as a whole.

The consultation also touches on the role of REITs in the residential property investment market. So far pretty little, other than for the largest commerical property investment companies. The impact on residential property is negligible, and this consulation is looking at whether this can or should be addressed.

The consultation is open until 28 April, and if you would like to have a look at it, it is available on the HM Treasury website.

The proposals, published in the mortgage market review discussion paper, reflect the FSA’s changed approach to a more intrusive and interventionist style of regulation.

The review’s key features are:

• Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
• Banning ‘self-cert’ mortgages through required verification of borrowers’ income;
• Banning the sale of products which contain certain ‘toxic combinations’ of characteristics that put borrowers at risk;
• Banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears;
• Requiring all mortgage advisers to be personally accountable to the FSA; and
• Calling for the FSA’s scope to cover buy-to-let and all lending secured on a home.