Ten years later: the financial crash and valuer professional indemnity claims
It has been 10 years since the image of customers queuing outside Northern Rock foretold the recession. Northern Rock was the first major UK casualty of the credit crunch, which was triggered by the sub-prime mortgage crisis in the USA.
The events which followed saw property values plummet, repossessions surge and, following the recession, claims against valuers soar.
In the last decade, a number of claims reached the courts. This article will look at how the courts have developed and defined the duty of care owed by valuers through a number of helpful decisions.
Duty of care and the margin of error
- Recognising that valuing a property is an art, not a science, and that two valuers will rarely reach the same valuation figure, the court in K/S Lincoln and others v CB Richard Ellis Hotels Ltd  held that a valuation would not be negligent if it fell inside the reasonable margin of error. For a standard residential property, the margin would be +/-5% of the “right” valuation, +/-10% for a more unusual property and +/-15% for an exceptional property which is difficult to value.
- In Titan Europe 2006-3 plc v Colliers International UK plc , the court insisted that retrospective valuations must properly reflect the market at the time of the original valuation and that a valuer must not be influenced by hindsight or materials that were not available to the original valuer.
- The court confirmed the requirement for causation in Platform Funding Ltd v Anderson & Associates Ltd . In that case, it was not sufficient to prove negligence. The claimant had to show that the valuation figure would have been different but for the lack of reasonable skill and care exercised.
- The scope of valuers’ duties to clients and third parties was more clearly defined in Scullion v Bank of Scotland , where the Court of Appeal held that if a valuer is instructed by the lender to value a buy-to-let property, the valuer does not owe a duty of care to a commercial borrower.
The changing landscape
To tackle the housing crisis, the government invested in various new schemes to assist new buyers such as Help-to-Buy and Property Redress Schemes (‘PRS’). Such schemes, whilst good in theory, pose challenges to valuers who have to consider the value of properties under the scheme, which is aimed at a narrow market. Additionally, the introduction of property schemes has distorted the market in other areas, inflating the prices of non-scheme properties, leading to questions about how the market will react when the schemes come to an end, and whether some properties will be forced into negative equity.
Further, because of the ring-fence rules which apply to most leading high street banks, there has been a drop in funding for smaller (sub-£1 million) developments.
This has forced people to look elsewhere for funding and led to the rise of ‘Challenger Banks’. Whilst these banks have advantages for borrowers, such as higher loan–to-value ratios and longer-term loans, they also often insist on personal guarantees for limited company loans, and are generally assisted by a slice of equity, mezzanine or bridging finance, raised from institutions demanding higher returns than a bank. This is a high-risk form of lending, and is has many similarities with the type of lending which contributed to the last recession.
What does all this mean for the future?
The above demonstrates that the courts understand the difficulties of valuers’ roles, but there remain many challenges facing valuers, especially with the uncertainty surrounding Brexit and how this will affect property prices.
With the uncertainty of Brexit’s effect on property trends, valuers may face an increased number of claims from lenders if property prices drop and repossessions increase. This could be problematic if a valuation is outside a 15% margin of error, especially following Barclays Bank Plc v TBS & V Ltd , which confirmed that a valuer is unlikely to be able to rely on a margin of error defence if the valuation is more than 15% above or below the true value.
In addition to considering the impact of future property and market trends, due to the increasing reliance on technology, valuers should also ensure that they have adequate business interruption and cyber insurance protection, in the event that their systems are hacked or disrupted. Companies must comply with the new EU General Data Protection Regulations, which come into effect in May 2018, and should be aware of the harsh consequences and punitive penalties if they fail to do so.