Negligent overvaluation of land – what’s a valuer’s duty of care?

In a case that will be of interest to landowners, property professionals, and funders, the High Court has rejected a landowner’s claim against a valuer for negligent overvaluation of land.

In the case of Freemont (Denbigh) Ltd v Knight Frank LLP [2014] the landowner instructed a valuer to prepare a valuation report for a plot of land for secured lending purposes. The purpose of the report was made known to the valuer prior to the instruction.

The landowner subsequently relied on the valuation as the minimum price he should accept when selling the land. Consequently, the landlord declined a number of offers to purchase the land because they fell short of the valuation. In the meantime, as a result of the delay in selling the land, it fell into disrepair and lost significant value.

The landlord sued the valuer for the alleged negligent overvaluation of the land. The High Court held that, although the landowner was owed a duty by the valuer, both in contract and in tort, the landlord’s claim for loss of profit on a subsequent sale, or, alternatively, loss of chance of a subsequent sale, was rejected on the basis that it did not fall within the valuer’s scope of duty.

The High Court confirmed that the duty of care, owed by the valuer to the landowner, extended only to producing the valuation for the bank’s consideration. There was no contractual basis for allowing the landowner to rely on the report for any other purpose, and the duty of care in tort was held to extend no further than the duty imposed by the contract.

The case provides a useful reminder of the common law duty of care owed by a valuer which it summarised as follows; that:

• A duty of care in tort is likely to be owed to the person for whom the report was prepared (even though a contractual duty of care may also be owed to the same party)
• The duty of care in tort is likely to be limited to the purposes for which the report was prepared
• A duty of care in tort may also be owed by a valuer valuing premises for mortgage purposes (at least if they are modestly valued residential premises), to the purchaser of those premises, if:
  • The valuer knows that his report is likely to be shown to the purchaser, and
  • The purchaser intends to use the premises for his own residential purposes, not to let them, and
  • The valuer knows that his report is likely to be relied upon by the purchaser for the purpose of deciding whether to purchase the premises; but
• A duty of care in tort is unlikely to be owed by a valuer instructed to produce a report for a lender for security purposes, to an investor who relies on the report for other purposes

The High Court did not accept that the valuer knew (or knew there was a significant likelihood) that the landowner would rely on the report for the purposes of selling the land and so held that the valuer was not liable to the landowner due to the fourth limb of the summary above.

This decision will provide reassurance that valuers providing valuations for secured lending purposes cannot be held responsible for investment losses. According to the judge, it would be “remarkable” if the tortious duty of care were to be more extensive than the contractual duty of care where a surveyor is appointed to value land for loan security purposes.

It also confirms that in order to bring a successful claim for investment losses, the landowner must prove that the valuer knew that the landlord would rely on the report when marketing the land for sale. This will be a significant evidential hurdle to overcome, especially if the valuation report itself clearly highlights that it is intended to be used for loan security purposes only.

However, it is clear that the duty of care that a valuer can owe to a landowner in tort can be quite wide ranging. It is therefore essential that the scope of any report is agreed at the outset and that all limitations are clearly specified in the retainer and the report so that the valuer is not exposed to the risk of unforeseen liability for breach of an assumed duty of care.

For more information on this, or any other matter relating to the Property and Construction sector, contact Colin Fenny or Simon England on 01772 258321