Beachcroft LLP speak out over Scullion v Colleys case
Beachcroft LLP lawyers have warned that insurers could face a new wave of claims from buy-to-let investors looking to recover lost rental income.
The concern follows the recent decision in the valuers' negligence case of Scullion v Colleys.
The case involved the buy-to-let purchase of a residential flat in October 2002. The lender had obtained a valuation from a firm of surveyors, which provided a capital value of £353,000 and a rental value of £2,000 per month. After purchase, the rental receipts were below that figure, and the borrower sold the property in May 2006. He then sued the surveyors, alleging negligence in overvaluing the flat and providing an inaccurate rental figure, and recovered £72,234.
Duncan Greenwood, professional risks partner at Beachcroft LLP, said: "The reasoning behind that successful award could have serious implications for surveyors and their insurers.
"The judge decided that the surveyors owed this borrower a duty, notwithstanding the fact that this was an entirely commercial enterprise and that the mortgage application form contained a disclaimer of liability. That is a surprising, and in my opinion an unjust, extension of current third party liability principles.
"To make matters worse, while the property was actually worth what the borrower paid (resulting in his claim for the property's fall in value being dismissed), the borrower successfully recovered the costs of ownership [i.e. his outgoings on the flat (including mortgage payments and maintenance costs) less his modest rental receipts] for the time that he owned the property, on the basis that the borrower had been relying upon the anticipated rental stream to fund these costs. This was despite the rental figure not being guaranteed and the surveyor not being retained to advise of the overall prudence of the commercial venture.
"Most astonishingly of all, the amount awarded was almost twice the level of the rental 'diminution', the judge having found that the rental valuation was overstated by £900 per month so that logically, at a high point, the loss ought not to have exceeded £38,700 (i.e. £900 per month over his 43 months of ownership.
"With the huge growth in the buy-to-let mortgage market from 1999 to late 2007, this decision (for which leave to appeal has already been obtained) could give rise to huge numbers of claims from not only aggrieved property investment clubs and private investors, but it is also likely to be seized upon by lenders looking to maximise recoveries. This is at a time when the market is already saturated by sub-prime lender claims against the profession."
