UK: Valuers – Round Two?

Last Updated: 9 December 2010
Article by Tom White

The UK is now out of recession and the new Government is promising stability and growth, but does that mean that surveyors and valuers and their professional indemnity insurers can breathe a sigh of relief?

It is well known that in the last recession in the early 1990s surveyors and valuers were a major target for professional negligence claims. The fact that surveyors and valuers have to maintain a minimum level of professional indemnity insurance cover means that they are often viewed as softer targets with deep pockets. The collapse in the property market, both residential and commercial, exposed a variety of transgressions. It appears that the same pattern is emerging this time around.

Surveyors and their insurers are already seeing an increase in the volume of claims. In the last recession there was a time-lag before a dramatic increase in the volume of claims was seen, so the trend may continue to rise.

With the exception of mortgage fraud, we are not seeing a change in the nature of claims made against surveyors and valuers as compared with the boom times. All of the usual suspects continue to crop up: allegedly defective valuations, rent review disputes, service charge disputes, defective notices, defects missed in structural surveys etc. In our experience the vast majority of claims against surveyors arise out of valuation work. After that, by volume at least, come claims in relation to property management, advisory services and building inspections. The surveying profession covers a huge range of specialisms, but more often than not claims arise out of the same small practice groups.

There are a number of ways in which a downturn can be the cause of increased claims against surveyors going forward.

For example:

  1. Where firms have had to make redundancies this may lead to fewer people monitoring compliance with risk management procedures, staff being redeployed to sectors outside their field of expertise, staff "hoarding" work and not working as a team, all of which increases the risk of claims.
  2. There is an increased likelihood of firms taking on inappropriate instructions, or instructions from inappropriate clients.

Perhaps more significantly, however, there are also ways in which a downturn can exacerbate problems which were the result of other events:

(a) The fact that the recession was preceded by a period of sustained heightened activity (as was the last recession) means that there are more transactions which might have given rise to problems and a greater chance of professionals being over-stretched and having slipped up.

(b) The downturn in the property market and the increasing numbers of home owners in difficulties may reveal problems which otherwise would have been hidden by rising values.

(c) A drop in the profitability of clients' businesses may mean that they have a commercial incentive to start examining past transactions for any irregularities, and the lack of ongoing activity will mean they have time to do so. For example, we are aware of banks reviewing entire loan portfolios in the hope of identifying a possible claim.

(d) Third parties, such as a new board of directors or an administrator or liquidator, may become involved in a client's management and may seek to question the services previously provided by the client's advisers.

(e) The fall in the property market can increase the severity of claims. For example, the quantum of a claim relating to a failure to respond to a landlord's rent review notice may not be capped by the following rent review in the same way as it could be in a rising market (when the argument would be that the rent would go up at the next review anyway, irrespective of whether the property is over-rented as a result of the failure to respond to the notice); or the lack of suitable sub-tenants or assignees may make mitigation of loss more difficult or less effective.

(f) Clients will recognise that times are just as tough (if not tougher) for surveyors and valuers as they are for the client. This may mean that clients will seek to exert additional commercial pressure in the context of a professional negligence claim: the threat of losing a client's business becomes all the more meaningful in a stagnant market.

Insofar as claims relate to historic events, to a significant extent the die is already cast. However, there are steps that can be taken to manage potential claims. Carrying out reviews of sample files in areas which have been identified as possible risks will not only help improve a firm's risk management procedures going forward but may also help preserve crucial evidence if a claim is made. Careful thought should be given to whether to sue a client for unpaid fees, in view of the chance of this provoking the client into making a claim.

It is important that firms continue to maintain high standards in managing risk. If anything, risk management and compliance procedures should be tightened up. Care should be taken when redeploying employees to different parts of the business.

The law, this time around, is also more in the surveyor's favour. SAAMCO has established that the surveyor's liability is limited to the extent of his negligent over-valuation; the Nationwide litigation against various solicitors in the late 1990s has laid the groundwork for contributory negligence claims against lenders; the recent decision of K/S Lincoln v CBRE has confirmed that provided the valuation is within a reasonable bracket, it is not negligent, irrespective of the potential errors within it. We also now have new arguments on syndication and securitisation issues. The future is not all gloomy for valuers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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