Court of Appeal rescues valuers and their insurers from claims by buy-to-let investors: Scullion overturned on appeal.
On Friday 17 June, the Court of Appeal (Neuberger MR, Gross, Etherton LJJs) handed down its decision in Scullion v Bank of Scotland t/a Colleys [2011] EWCA Civ 693. It had been held by Richard Snowden QC that a negligent valuer, instructed on behalf of the lender, owed a buy-to-let ("BTL") investor a duty of care both with respect to a capital and a rental valuation. The Court of Appeal disagreed, holding there was no such duty on the facts of the case.
Background
In 2002 Mr Scullion bought a two-bedroom flat on a BTL basis as part of his pension planning. He found the property using an intermediary company called Portfolios of Distinction ("PoD"), which promised to provide clients with a portfolio of property worth £1,000,000 for a fee of £25,000. PoD promised to locate properties, negotiate discounts, employ brokers, procure lending, obtain tenants and manage lettings.
Colleys was instructed via a mortgage broker to produce a capital and rental valuation and this was sent to the prospective lender. Whilst there was no contract between Colleys and Mr Scullion, the valuation report identified Mr Scullion as the borrower and it contained no disclaimer. The valuer was paid £35 for the relevant report (which was a retype of one already prepared) and, although the evidence was not clear, it was likely this was ultimately funded by Mr Scullion. Contracts were then exchanged on Mr Scullion's purchase before the valuation report was shown to Mr Scullion.
The report over-valued both the capital value of the flat and the likely rental income.
Mr Scullion sought damages from Colleys. Colleys denied any duty of care and, given that the report was only provided to Mr Scullion after exchange, causation.
Mr Scullion won at first instance as the judge held that Colleys owed and were in breach of a duty to him with respect to the capital and the rental valuations. Whilst on the facts there was no loss on the capital valuation, Mr Scullion recovered damages reflecting the extent to which he was out of pocket because the rental income was less than he was entitled to expect, effectively the difference between his property-related outgoings and the rental income he actually received during his ownership of the flat.
Colleys appealed.
Duty?
Mr Scullion relied on Smith v Bush and Harris v Wyre Forest (HL) [1990] 1 AC 831. In those cases a purchaser of a house was able to recover from a valuer on the basis of a valuation report commissioned by the lender which had been relied on for the purposes of the purchase and paid for by the purchaser. The House of Lords held it was fair to impose a duty in favour of the purchaser where the valuer knew that the purchaser was likely to rely on the valuation. Lord Jauncey said that it was foreseeable there would be such reliance in the case of "a potential mortgagor seeking to enter the lower end of the housing market" but that a duty of care would not be so readily implied in the case of an expensive property, whether residential or commercial. In larger transactions, the expectation of the behaviour of the purchaser was different and it might be reasonable to rely on exclusion clauses.
In Scullion Colleys argued that a BTL investor was different from the purchaser in Smith v Bush. It argued that Mr Scullion was not an ordinary residential purchaser buying a modest home for himself and his family but was instead buying the property using funds in his pension for the purposes of an investment, with the involvement of PoD and with the ambition of acquiring a £1m property portfolio. There was no reason in such circumstances to impose a duty of care in the absence of contract.
The judge had held that the small flat purchased by Mr Scullion was of the modest residential type anticipated by Smith v Bush. It was not a very expensive house where it could be expected that a purchaser would get his own report. Mr Scullion was, like many other people at the time, seeking to get involved in buy-to-lets as an investment and was "in no sense a professional property developer". He saw no basis for distinguishing between the purchaser of a modest house and someone, like Mr Scullion, engaged, as the judge saw it, in a BTL business in a modest way.
The Court of Appeal disagreed. It proceeded on the basis that the valuer knew that the report would be shown to Mr Scullion, that Mr Scullion relied on it, and that the valuer knew Mr Scullion would have paid for the report. However, this was not enough. The case did not involve an "ordinary domestic householder purchasing his home" and it was not necessarily foreseeable to the valuer that Mr Scullion would rely on the report, rather than obtaining his own advice. For much the same reasons there was no proximity and it was not just and equitable to impose a duty of care.
The Court of Appeal regarded the reasoning in Smith v Bush as at the outer limit of what was justifiable. It held that it was not to be extended in a case like Scullion where the policy reasons underpinning Smith v Bush did not exist.
Smith v Bush could also be distinguished for a number of reasons.
First, this was essentially a commercial transaction and persons entering commercial transactions were more likely to obtain and to be able to afford an independent valuation. They were, in any event, less deserving beneficiaries of the common law's protection. Second, there was no evidence to suggest that BTL purchasers generally did not obtain their own valuations. Third, only very limited advice about anticipated rental income was given by the valuer and one would expect a prudent BTL purchaser to obtain his own advice on matters not covered by the report to the prospective lender. Fourth, the lender was primarily interested in the capital value of the property and the valuer's comments on its suitability for letting were likely to be included to confirm to the lender that the property was suitable for the purpose for which it was being acquired, rather than being directly concerned with the anticipated rental yield.
Of less importance was the considerable value of the flat. It was priced at around £300,000 (after discounts) compared to the £10,000 house in Harris v Wyre Forest and it was argued that that was a reason for distinguishing the case. The Court of Appeal did not regard the difference in value, after allowing for house price rises, as of sufficient magnitude to warrant any distinction. The low level of the £35 valuation fee funded was also not significant; it was sufficient for Mr Scullion's argument that he had made the payment and it did not matter that it was a modest one.
The Court of Appeal also made some brief, obiter, observations on the judge's assessment of damages. It considered he was right to follow SAAMCO [1997] AC 191 and to hold that the damages should be limited to the consequence of the rental prediction being inaccurate. Conversely, he was wrong effectively to ascribe all the loss of revenue suffered by Mr Scullion to the inaccurate rental valuation so as to ensure, in effect, that Mr Scullion was not out of pocket in terms of revenue as a result of buying the flat. That came close to treating the negligent misstatement as a warranty when in fact there would have been outgoings not covered by the anticipated rent in any event (because the flat would never have been let in those periods).
A copy of the full judgment...
