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

 In the recent Court of Appeal case of Haugesunde Kommune and another –v- Depfa ACS Bank (2011) EWCA Civ 33, an appeal was allowed which overturned an order against Norwegian Solicitors to pay significant damages after they gave negligent advice. This case emphasises that solicitors’ liability for negligent advice will very much depend on the scope of their duty.

 The Usual Position

 In Professional Negligence cases, the principle applied in order to establish the existence of loss, as set out in South Australia Asset Management –v- York Montague Limited (1996) (“SAAMCO”), is that the court will compare the position the Claimant finds itself in having heeded the advice, with its position had there been no breach of duty.

 In order to establish what losses are recoverable the first point is to define the scope of the duty for which the professional is responsible.  This is often a case of easier said than done.

 The recent European case of Haugesunde Kommune and another –v- Depfa ACS Bank (“the Bank”) has highlighted the importance of this distinction.

 Background

 In Haugesunde Kommune, the Bank took legal advice from Wikborg Rein and Co (“Wikborg”), a Norwegian firm of solicitors, regarding its proposed transaction to enter into Swaps Contracts with two Norwegian municipalities.  The Bank was to pay a lump sum to each municipality and would then be repaid over a period of time.  It required advice from Wikborg as to whether the municipalities had the legal power to enter into these contracts.

 The Bank was advised that this transaction would not constitute “a loan” and that the municipalities did have authority to enter into them.

 The Bank paid the sums.  The municipalities invested the money which sustained losses.  Shortly after the investments were made, the Norwegian Ministry of Defence published a decision that Swaps Contracts, such as these, did in fact constitute loans.

 Following their losses the municipalities sought to establish they had no liability to the Bank under these contracts.  Part of their argument was that they did not have the power to enter into the contracts in the first place and as a consequence the contracts were void.  Not surprisingly, the Bank counterclaimed.  The Bank’s position was that either the contracts were valid or, in the alternative it made a claim of restitution for the advances.

 Wikborg were joined into the action by the Bank, with a claim for the losses they suffered resulting from Wikborg’s negligent advice on the validity of the contracts.

 The municipalities succeeding in showing the contracts were void, but were not successful regarding the Bank’s counterclaim for restitution.  Wikborg also failed to defend the claim for negligence against them but issues relating to quantum were left undecided.

 The Bank’s position was that it had suffered a loss of the total sums paid to the municipalities at the time of payment.  The Bank argued that they were entitled to recover this total loss as a result of the negligent advice it had received, less any sums it recovered from the municipalities.

 The court agreed, finding that the Bank would not have made the advances if it had received advice from Wikborg that there was a risk that the contracts were void and therefore there was no contractual relationship between the Bank and the municipalities.

 Wikborg were ordered to pay millions in damages to the Bank. 

 Appeal

Wikborg appealed against the decision, its argument being that the principles set out in SAAMCO applied.  Wikborg contended they should only be responsible for the losses resulting from negligence regarding advice within the scope of its duty.  Wikborg contended that although its advice was incorrect regarding the ability of the municipalities to enter into the contract, and it was acknowledged that the Bank would not have entered into the contracts but for the advice given, they should not be responsible for the losses suffered because its advice was relied upon.  They should only be responsible for the consequences of the advice being wrong.

 The consequences were that a contractual obligation to repay the advances in the future at a low rate of interest, as agreed with the municipalities, became an obligation in restitution to repay the advances immediately or to incur a higher interest rate.

 Decision

 Rix LJ was of the opinion that Wikborg’s retainer was not a general one but they were asked to advise on a specific point regarding the legal standing of the municipalities to enter into the contracts.

 Wikborg, as part of its advice, warned the Bank that they would be unable to execute a judgment against the municipalities.  The Bank was in the position therefore that it was making up its own mind on the creditworthiness of the municipalities.

 Attention then turned to what extent the Bank’s losses fell within the scope of Wikborg’s duty.  If the losses were due to the contract being invalid, then that was within scope.  In this case though, the losses suffered were due to the bad investments made by the municipalities.  Without the bad investments the sums would have been repaid. 

 The losses would only have been within the scope of Wikborg’s duty if the municipalities had been prevented from repaying the sums back to the Bank as a result of their lack of legal power to enter into the contracts in the first place.

 Rix LJ found that the Bank did acquire a right in restitution.  That right was acquired immediately the advances were made because there was no contractual remedy due to the invalidity of the contracts.

 Wikborg were found not to be responsible for any loss the Bank suffered following the advances.  Even if the Bank suffered a total loss upon the transfer of sums, such loss was not within the scope of Wikborg’s duty.

 Gross LJ arrived at the same conclusion, although through a different avenue.

 Gross LJ simply held that the Bank could not recover from Wikborg loss for which Wikborg was not responsible.  Gross LJ’s position was to establish the proper scope of Wikborg’s liability.

 There was, by Gross LJ’s reckoning, no evidence that the loss resulted from the invalidity of the contracts and hence the Bank was not entitled to a finding that its loss was attributable to Wikborg’s negligent advice.

  Conclusion

 The fact that the two judges did not agree on the reasons for reaching their conclusions illustrates how difficult it can be to apply to principles of the SAAMCO  case.

 It is important in all cases to remember that that it is only when the professional’s scope of duty extends as far as advising on whatever is the direct cause of loss that the professional, if negligent, can be held liable for that loss.

Or, in possibly simpler terms, it is a pre-requisite for the claimant to demonstrate that their loss has been suffered as a result of the negligent advice.

 It cannot, after all, be reasonable for the professional to be liable for losses which would have been sustained even if the professional gave their client the correct advice.

In March, this year the court held that a valuer had breached duties owed to a buy-to-let investor where the valuation report had been provided to the mortgage lender Scullion v Bank of Scotland PLC [2010] EWHC 572.  The Judge found that the valuers had acted negligently both in over-stating the capital value of the property and the expected rental value.  The court has now ruled in the same case as to what damages could be claimed.

Applying the principles set out in the House of Lords case of SAAMCO, the court held that Mr Scullion, the buy-to-let investor, was only entitled to recover the difference between the price paid for the property and the true value of the property.  In this case because Mr Scullion had ended up paying £200 less than the true valuation, he had suffered no loss.

More interestingly was the court’s assessment of the damages owed in respect of the overstatement of the rental value.  The court noted that Colleys who were the valuers, knew that Mr Scullion was a buy-to-let purchaser and so should have appreciated that the statement of rental value was critical as Mr Scullion needed to ensure that when he committed himself to make periodic payments under the mortgage and to pay the normal outgoings, that he would receive sufficient rent to discharge those liabilities. 

Counsel for the valuers argued that the scope of the duty owed to Mr Scullion could not exceed the scope of the duty owed to the mortgage lender and the rental value was merely a further piece of information relevant to the decision whether to lend rather than a piece of information upon which the lender had placed, or was entitled to place any independent reliance.

The Judge disagreed.  First, he took the view that the scope of the duty owed to Mr Scullion could be wider than that owed to the lender.  He explained that the purpose for which reliance may be placed on the valuation may differ between lender and the borrower and that there may be a contractual limitation which will not apply to the borrower or which was not communicated to the borrower. 

Secondly, although the capital value was of great importance, “it was also very important to both lender and borrower in this buy-to-let transaction that the rental which could be achieved by letting the flat should exceed the mortgage payments by a specified margin, and that Colleys knew or ought to have appreciated this.”

In calculating the damages, the court excluded any items which were relevant to the market value of the property such as legal fees for the purchase of the property, stamp duty and carpets to furnish the property.  Mr Scullion was entitled to recover damages to compensate him for losses caused by the fact that he was unable to let the property to cover his mortgage payments.  On a year to year basis, the court calculated his mortgage payments and then deducted the rental obtained and added his costs incurred due to the cash flow difficulties he had encountered.

The valuer asserted that the claim for damages should be reduced because of contributory negligence.  However, the claim of contributory negligence failed because Mr Scullion did not do anything to cause or contribute to these losses.  The anticipated rental value was entirely of the valuer’s own making. 

It is believed that this may be the first case where a court has held a valuer liable in respect of its valuation of the rent to be obtained on a property.  It was significant in this case that the valuers knew that this was a buy-to-let mortgage and therefore the valuers knew or ought to have appreciated that the rental to be achieved was important to both the lender and the borrower.  There may now be the possibility that other cases can be brought where there has been a negligent overvaluation of the rent, where the valuer is aware or ought to be aware of the importance of its rental valuation and where the rental value has been relied on. 

The question remains as to whether such claims will be open to lenders as well as borrower landlords.  The Judge noted that the rental valuation was of importance to the lender and the borrower.  If it can be established that a lender had relied on the rental valuation when agreeing to lend and it had placed independent reliance on this valuation rather than it being merely a factor in deciding to whether the property was adequate security then this may give rise to potential claims by lenders.  Not surprisingly, however, the Judge gave permission to appeal on the legal issues of (1) whether the valuer owed a duty of care in tort to Mr Scullion at all; and (2) whether the scope of that duty extended to the losses in respect of the defective rental valuation.  No doubt how the Court of Appeal approach these two questions, will be followed with interest by all concerned.

Scullion v Bank of Scotland PLC [2010] EWHC 2253

The investigation found that there were 25 High Court cases in 2009, compared to only one case in the previous five years. Claims were brought against valuers for many reasons, including:

• negligently overvaluing commercial premises that dropped in value because tenants became insolvent during the recession;
• negligently overvaluing residential property development sites which dropped in value because of falling house prices and a big increase in similar new build properties built during the housing boom;
• negligently underestimating the cost of putting a development project on hold; and
• negligently valuing a property that was subject to a fraud.

Banks and building societies have launched legal action against surveyors, claiming that they had overvalued properties that they had repossessed and been forced to sell for much lower sums. However, surveyors have hit back at these claims, stating that many of these properties had securitised loans against them and that lenders, rather than valuers, were to blame for the upward pressure on prices.