The linked cases of Smith v Eric S Bush and Harris v Wyre Forest District Council were decided by the House of Lords as long ago as 1989. Since then they have been used in countless claims to support the argument that a mortgage valuer owes a duty of care to the purchaser of the valued property to exercise reasonable skill and care, which cannot be avoided by the use of a disclaimer. While there has been very little challenge to this, there is some scope in the judgments to limit the extent of this liability, and the case of Scullion v Bank of Scotland (t/a Colleys) is a well-known example of this. We consider whether there is further scope to limit the extent of a mortgage valuer’s liability.
Smith v Bush and Harris v Wyre were both cases about residential mortgage valuations. In them, their Lordships identified three questions:
- Was there a duty of care owed by the valuer to the mortgagees?
- Did the Unfair Contract Terms Act (UCTA) 1977 apply to the disclaimers?
- If so, were the disclaimers “fair and reasonable”?
It is noteworthy that in Smith v Bush, the existence of a duty of care was conceded, and the only issue was whether the disclaimer was effective. The question of whether a duty of care existed was considered in Harris – particularly in the context that the borrowers hadn’t seen the valuation report – but ultimately it was held that a duty existed. In both cases, the disclaimers were not effective to avoid liability, not because they were defective in themselves but because it was not fair and reasonable for them to apply in these circumstances. Many of the factors which applied to the issue of duty of care, also applied to whether the valuers could rely on the disclaimers.
The judgments in Smith v Bush
While the judgments are not easy to reconcile, reliance was clearly a critical factor; in other words the valuer had to know that it was likely the borrowers would rely on the valuation. This knowledge didn’t have to be express; it could be implied, and indeed readily implied at the lower end of the housing market. Their Lordships were also clearly influenced by the statistic that at the time about 90 per cent of borrowers relied on mortgage valuations, and that this must have been widely known to valuers: this was a decision based on public policy.
There are clear caveats in the judgments. There are repeated references to purchasers of modest houses and to young, first time buyers of modest means: the general theme which emerges is that reliance is easy to imply where those factors exist, and less easy where a property is more expensive. Lord Griffiths went further and expressly reserved the position in the case of valuations of industrial property, large blocks of flats, or very expensive houses, where the general expectation may be quite different.
The approach taken in Scullion
These issues came under the spotlight in Scullion, decided by the Court of Appeal in 2011. There, Mr Scullion (whose overall description could have put him in the ranks of the “purchaser of modest property”) decided to invest in a buy-to-let flat, for which he required a mortgage. He intended to pay the mortgage from the rental, so the projected rental income was just as important to him as the capital value. The defendant negligently overvalued both, and Mr Scullion was awarded damages on the basis that (following Harris) the valuer owed him a duty of care.
The Court of Appeal rejected this, and distinguished Harris on four grounds, all of which were linked to the fact that this was an investment purchase of residential property rather than the purchase of residential property for owner-occupation. Because of this, Mr Scullion was more likely to obtain and afford his own advice and was less deserving of protection. Also, while the evidence in Harris was that 90 per cent of purchasers relied on the mortgage valuation, there was no similar evidence for buy-to-let purchasers. There was no inherent likelihood that a purchaser of buy-to-let property would rely on a valuation provided to the mortgagee, and it was wrong in principle to extend Harris, where there was no basis in policy to do so.
One interesting feature was the similarity of position between Mr Scullion, and the borrowers in Smith and Harris. The flat Mr Scullion purchased was in Surrey and in 2002 cost him £350,000; it was his first buy-to-let purchase and in that sense he was a first-time buyer – this was not a full-blown commercial purchase by an experienced entrepreneur. Nonetheless, the court had little hesitation in distinguishing the case from Harris, and in doing so they significantly limited its scope.
It seems probable that Harris should be regarded as the high water mark on this issue. It is already the norm that defendant valuers will reject the existence of a duty of care where there are commercial or quasi-commercial aspects to the transaction. This gained further support from Freemont (Denbigh) Ltd v Knight Frank LLP (2014), where the court followed Scullion in the context of a valuation for commercial financing purposes - no extended duty was owed in respect of the property’s investment prospects.
True residential purchases
What about the true residential purchase? Arguably the circumstances that existed in the 1980s no longer apply: purchasers are generally better informed and more affluent, and many mortgage companies take serious steps to inform purchasers of the different valuation and survey options available to them. In addition, fearful of the risk of reflected claims where a negligent mortgage valuer proves to be a man of straw, many conveyancers now routinely advise their clients of the wisdom of obtaining separate advice.
There has yet to be a test case on where the line should be drawn between the purchase of a modest residential property, and an expensive one. This will depend on the individual facts, but it is always useful to consider those two factors to which the Court of Appeal gave such weight in Scullion: how likely is it that there was reliance, and does public policy dictate that a duty should exist?
While few of us would expect to succeed on the argument that a first time buyer of a modest property with a 95 per cent mortgage is not owed a duty of care, what about the purchaser of a £5 million mansion? Can it really be said that the valuer in such circumstances would have expected the purchaser to rely solely on his valuation, and does such a purchaser need the protection that public policy will supply? In each case the answer must be no.
In any case where there is a more expensive or unusual property, an astute purchaser, or one who can reasonably be supposed to have funds available to obtain their own report, there is the serious opportunity to argue that a Harris duty of care does not exist. Given the shift in the tide signalled by Scullion and Freemont, it may be that there is a case waiting in the wings which will further limit the scope of a valuer’s duty of care.