Scullion v Bank of Scotland Plc

Summary

A buy-to-let (BTL) investor who had bought a £350,000 property was entitled to claim damages for negligent valuation from a valuer he did not instruct because the valuer was held to owe him a duty of care in tort.

In Scullion v Bank of Scotland Plc t/a Colleys [2010] EWHC 572  [2010] EWHC 2253, Richard Snowden QC, sitting as a Deputy High Court Judge in the Chancery Division, had to deal with one of the first BTL cases to come before the courts. His decision is bad news for defendants. There are two judgments and the first and more interesting one is not (yet) on Lawtel or Bailii but can be accessed via the link below.

Scullion v Bank of Scotland - first judgment

Scullion v Bank of Scotland  - second judgment

Background

In 2002, Mr Scullion agreed to buy a two bedroom flat on a BTL basis. He had found the property using an intermediary company called Portofolios of Distinction (PoD), which at the time was promising 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 were instructed by the broker to produce a capital and rental valuation. Whilst there was no contractual relationship between them and Mr Scullion, the relevant report identified Mr Scullion as the borrower and did not seek to exclude a duty to him. The report over-valued both the capital value of the flat and the likely rental income.

Mr Scullion sought damages from Colleys, who in turn denied any duty of care.

Duty?

It has been settled law for the past 20 years that a purchaser of a modest home for residential purposes is owed a duty of care by the lender's valuer notwithstanding an exclusion clause in the valuation report and the absence of a contractual relationship: Smith v Bush [1990] 1 AC 831.

However in this case, the valuer took the point that a BTL investor ought not to fall within the scope of Smith v Bush. It was argued that Mr Scullion was not an ordinary residential purchaser buying a 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 why, in such circumstances, it was fair, just or reasonable to impose a duty of care. It  was argued that this case went well beyond the normal form of reliance placed upon a valuation report in the context of a standard residential transaction as contemplated in Smith v Bush. The Judge disagreed.

The Judge first invoked the reasoning in Smith v Bush.  Lord Griffiths had explained that since the purchaser in that case paid for the report and was an identifiable person it was not an intolerable burden to find a duty owed to him in tort, particularly as knowledge by the valuer of reliance on the valuation on the part of the purchaser had to be established.  Such reliance was likely to be shown, said Lord Jauncey, in the case of  "a potential mortgagor seeking to enter the lower end of the housing market" but would not be so readily implied in the case of an expensive property, whether residential or commercial. In larger transactions it might be reasonable to rely on exclusion clauses; the expectation of the behaviour of the purchaser was also quite different.

Applying those principals in this case the Judge found that the small flat which was the subject of this valuation was of the modest residential type anticipated by Smith v Bush. It was not a very expensive house, a commercial property or a large block where it could be expected that a purchaser would not rely on the report. He found that 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". Indeed the Judge observed, at paragraph 91, that there was no general proposition that a buy-to-let transaction is very different from the ordinary residential house purchase which was in issue in Smith v Bush.

In the event, the purchase price was slightly less than the true valuation and so there was no loss on the capital. However, the Judge did award damages referable to the undervaluation of prospective rental income.

Comment

This is good news for BTL investors and bad news for valuers and their insurers. Defendants might accept that there is a policy reason why a residential purchaser of a modest home ought to have a claim against a negligent valuer but consider the policy to be a lot less compelling when the purchase is for an investment purpose. Indeed defendants may find it particularly objectionable that they are liable for the lost rental income, notwithstanding that there was no loss on capital, since the inability to make a profit from rent would appear to be very different from the policy reasons which justified the extension of the common law duty in Smith v Bush. They might also be surprised that a property being valued at £350,000 (although on the special facts of this case bought for about £300,000) can really be described as "modest". In Smith v Bush the subject property was bought for £18,000 and the modest nature of the damages claims was of obvious relevance to that decision. Claims now being brought often involve properties which were sold for between 5 and 20 times that sum.

Other Points

In a little bit of good news for defendants, there was no criticism of the valuer for relying on the then current RICS guidance on valuations which allowed valuers to have regard only to sales of similar properties in the same development (paragraph 189). Further the Judge found, on the facts, that in the absence of precise comparables, a bracket of 20% on the true rental income was acceptable (paragraph 244).

Appeal

Permission to appeal was granted in relation to whether any duty was owed to Mr Scullion and, if so, whether it extends to losses in rental income.

Imran Benson
Hailsham Chambers
On behalf of Hailsham Chambers Professional Negligence Group