Negligent valuations - the blame game

A valuer produces a negligent overvaluation of residential property. The lender relies upon that valuation and then sues its solicitors when it discovers that the valuation was wrong. Barking mad? Not so thought the High Court in Goldsmith Williams Solicitors –v- E. Surv Limited. The solicitors were found liable.

The facts of the case were that in November 2005, surveyors were instructed by a lender to produce a valuation of a residential property for remortgage purposes.  The surveyors valued the property at £725,000.

In February 2006, the lender instructed solicitors to deal with the remortgage.  The letter of instruction to the solicitors enclosed a copy of the valuation report valuing the property at £725,000.

During the course of the instruction, the solicitors discovered that the borrower had in fact purchased the property only a few months previously for £390,000.

The solicitors failed to report this discovery to the lender.

The remortgage completed in February 2006. The borrower defaulted and the lender suffered a loss. 

A claim was subsequently brought against the solicitors on the grounds that the solicitors had failed to report to the lender its discovery that the property had been purchased only a few months previously for substantially less than the surveyors’ valuation of £725,000.
The problem for the lender was that in the mortgage application itself the borrower had clearly stated that he had bought the property in October 2005 at a purchase price of £450,000.  In other words, the lender was on notice that the property had been overvalued by its surveyors.

The solicitors defended the claim on the seemingly watertight basis that the lender was already on notice but the defence was rejected by the High Court. The Court’s view was that the solicitors were under a duty to report to the lender all information gathered about the purchase history and value of the property to the lender which might have an effect on the lending decision.  The solicitors had failed to do this and were therefore liable.
The solicitors appealed to the Court of Appeal and the Court of Appeal found in their favour.  The Court of Appeal ruled that because the lender was already in possession of information that suggested that the valuation of the property was excessive, the solicitors’ failure to report was not the cause of the lender’s loss.  Put simply, the borrower had stated in his application that the purchase price in October 2005 was £450,000 and the lender was therefore already on notice that its surveyors’ valuation was wildly inaccurate.

Although in this case common sense prevailed and the claim against the solicitors failed, the case is a useful reminder that conveyancers acting for lenders must be careful to report all non-confidential information which might have an effect on the lender’s decision to lend. A trip to the Court of Appeal is an excursion that most firms could do without.