article
The third party principle
7 June 2010
A recent High Court decision focused on the extent to which a
surveyor carrying out a valuation for a lender owes a duty of care
to a buy-to-let-borrower. Tim Johnson examines the issue
Liability with buy to let
As many readers will be aware, the seminal case of Smith v Bush
confirmed that valuers owe a duty of care to purchasers when
providing a valuation report on a property, even if the report is
carried out for the lender. However, Smith v Bush made an important
distinction between small residential properties and commercial or
higher-value properties, in which a duty of care is not necessarily
owed to the purchaser.
In the recent case of Scullion –v- Bank of Scotland (t/a
Colleys), the court considered whether the principle in Smith v
Bush applied to residential buy-to-let properties. Mr Scullion’s
lawyers argued that the principle should apply because a buy-to-let
purchaser of a residential property would be expected to rely upon
the advice of his lender’s valuer in the same way as a residential
purchaser would. Colleys’ lawyers argued that a buy-to-let
purchaser was different, as the purchase was commercial in nature
and a buy-to-let purchaser was more sophisticated than a regular
purchaser.
Weighing up these arguments, the judge in Scullion ruled that,
the purchaser could rely upon the report. The judge stated:
‘Whilst recognising that each case may turn on its own facts, I
also do not think that, as a general proposition, a buy-to-let
transaction is very different from the ordinary residential house
purchase which was in issue in Smith v Bush.’
While the judgment in Scullion was based on the particular facts
of the case, the judge was clearly trying to imply that this
general proposition should apply to all relatively low-value
buy-to-let mortgages. It is important to note that the remainder of
the judgment makes it clear that the judge does not believe this
principle should automatically apply to all buy-to-let mortgages,
particularly where the subject property is of a high value, or the
transaction is commercial in nature. However, for ‘small-time’
property developers, the judge saw no reason to move away from the
principle in Smith v Bush.
Effectiveness of disclaimers
Notwithstanding that the judge held that, as a general
proposition, Mr Scullion could rely upon the valuation supplied to
his lender, the lender had attempted to disclaim any liability from
its valuer to third parties in the mortgage application form. The
mortgage application form, which was signed by Mr Scullion,
contained a declaration that:
“…neither the … qualified valuers … are under any liability
either on the basis of negligence or any other basis whatsoever to
me/us as purchasers in respect of the value or the state of
condition of the property.
The inspection … will not include a detailed survey of the
structure unless specifically requested. I/we understand that the
Lender are not the agents of the valuers and that I/we understand
the … valuer will [not] warrant, represent or give any assurance to
me/us that the statements conclusions and opinions expressed or
implied in the report and mortgage valuation are accurate or valid
and that the report will be supplied without any acceptance of
responsibility on their part to me/us.”
A similar disclaimer was at issue in the Smith v Bush case, in
which it was held that, while such disclaimers would be effective
under common law, they were still invalid if they failed to satisfy
the requirement of reasonableness in section 2(2) of the Unfair
Contract Terms Act 1977, because the surveyor could not discharge
the burden of showing that it was fair and reasonable in all
circumstances to rely upon such an exclusion. The judge in Scullion
saw no reason to differentiate between a regular purchaser and a
buy-to-let purchaser and he therefore concluded that the disclaimer
was ineffective.
Although disclaimers are unlikely to be effective in cases where
the purchaser is an individual and the property is a relatively
low-value dwelling, they are much more likely to be upheld where
the transaction is higher in value or commercial in nature. In
determining the reasonableness of a disclaimer, the court will
consider all relevant issues, including:
- whether the parties were of equal bargaining power
- whether it would have been reasonably practicable for the third
party to obtain the advice from an alternative source
- the degree of difficulty of the task for which liability is
being excluded
- any other practical consequences, such as the sums of money at
stake and whether the parties are able to bear the loss or obtain
insurance.
As a general premise, however, disclaimers are extremely
unlikely to be upheld in relation to the purchase of low-value
residential properties, whether buy-to-let or otherwise.
Conclusions
Although Scullion is only a High Court decision and might, in
due course, be overturned on appeal, it provides some very helpful
guidance as to the duties owed by surveyors and valuers to third
parties. As a general rule, if the transaction relates to a
relatively modest residential property, you should proceed on the
basis that you owe a duty of care to the purchaser, even if you
have been engaged by the lender. Any disclaimers in your report or
the mortgage application form are unlikely to be upheld by the
court unless there is a commercial element to the transaction, or
it is of high value.
This article was first published in RICS
Business
save to PDF