RICS draft guidance note - Risk, liability and insurance, 3rd edition

Risk, Liability and Insurance - 3rd edition

Appendix A: Valuations

Members' attention is drawn to the extensive guidance in RICS Valuation - Global Standards (Red Book Global Standards) on engaging with clients and writing valuation reports. Members' attention is drawn specifically to the following:

  • VPS 1: Terms of engagement (scope of work)
  • VPS 3: Valuation reports

All RICS members are required to comply with Red Book Global Standards when undertaking valuations. RICS advises members to resist any requests from clients to diverge from Red Book Global Standards requirements. There is further guidance on this issue for residential valuers in Appendix B.

Members who undertake valuations to which the requirements of Red Book Global Standards apply must join RICS Valuer Registration (VR).

A1 The court's approach to professionals' liabilities

A1.1 The standard of care of a valuer: the 'bracket'

The courts expect valuers to achieve the standard of skill and care expected from a reasonable body of the valuer's peers. Whether a claim against a valuer is brought for breach of contract or in tort, the question the courts ask is whether the valuation given was one that no reasonable valuer in the actual valuer's position could have given. The courts invite expert evidence from other, independent valuers ('expert witnesses') to assist their decision-making in each case.

In reaching a decision on this issue, the courts recognise there is subjectivity in valuation: two valuers may reach different valuations of the same property at the same time without either of them being negligent. The usual question the courts ask is what are the maximum and minimum valuations that could be given by a reasonable valuer in the defendant valuer's position. To be found negligent, the defendant's valuation must generally have fallen outside that range, or 'bracket', of hypothetical reasonable valuations.

As well as deciding what the 'bracket' is for a particular valuation, and whether the valuer's valuation falls within the bracket, the courts may sometimes also consider whether there were any specific errors made by the valuer in the course of the valuation. If there were, that could increase the chances of the valuation being held to be outside the bracket. This means that a valuer cannot focus purely on the end figure; the process followed by the valuer and the text of a valuation report are also important. For example, while it is not automatically negligent for the valuer to have adopted an alternative methodology to the norm, when good robust evidence to support a conventional methodology is available, the case of Barclay Bank Plc v Christie Owen & Davies Ltd (t/a Christie & Co) [2016] EWHC 2351 found the only acceptable reasons for not using the conventional methods are:

a) if there is evidence that other methodologies are used in the market or

b) if there is better available evidence that might support a more robust valuation on some other basis.

A1.2 Damages

The SAAMCO Cap: the most important principle in the law of damages as it presently applies to property valuers is the SAAMCO Cap (the name comes from the House of Lords decision South Australia Asset Management Corp v York Montague Ltd [1996] 3 All ER 365, in which the method for calculating damages in claims against valuers was established). This usually restricts the damages for which a property valuer can be held liable to the difference between the valuer's valuation figure and the figure the court decides was the actual value of the property at the date of the valuation.

For example, if a valuer values a property at £140,000 but the court decides the valuation was negligent and the actual value was £100,000, the maximum damages for which the valuer can be liable is £40,000 (plus interest), even if the client's losses are higher than that amount. Importantly, this means that valuers are not generally liable for additional losses suffered by their clients by market depreciation in the property between the date of the valuation and the date of the claim. It should be noted that the application of the SAAMCO Cap provides no scope for any damages awarded against the defendant to be reduced to reflect any contributory negligence on the part of the claimant.

It is important to note that the SAAMCO Cap is based on the principle that providing a valuation is only, in legal terms, providing 'information'. The cap does not apply if a valuer goes beyond the provision of information and advises a client whether to proceed with a transaction. The case of BPE v Hughes-Holland [2017] UKSC 21 indicates that, where a valuer provides only part of the material on which a claimant relies when deciding how to proceed, that will be treated as giving information. Only in cases where the valuer advises the claimant on the whole transaction and how the claimant should proceed will the valuer be treated as giving advice. Valuers should therefore be careful to ensure that they do not cross this line.

A1.3 The purpose of the valuation

A valuation report and engagement letter must state the purpose for which a member has provided a valuation (Red Book Global Standards VPS 1, paragraph 3.1). RICS recommends that, where possible, members should be more specific than saying only that a valuation is provided, for example, 'for secured lending purposes'. Although a member may not have full visibility of what a client hopes or intends to use the valuation for, they should record what they consent to it being used for. They should consider including wording along the following lines (again, secured lending is used as an example):

'Where you have explained to us that the valuation is required for your use in a particular secured lending transaction, we consent to its use solely for that purpose. Where you have not instructed us as to the purpose for which the valuation is required, we consent to its use only in a single secured lending decision.'

A2 Liability Caps

Red Book Global Standards requires valuers to include a statement in their terms of engagement and within the valuation report, setting out any limitations on liability that have been agreed. VPS3, paragraph 1.2 of Red Book Global Standards provides guidance where, due to the client's standard reporting form or format, it is not possible to provide this statement within the valuation report.

There are some circumstances in which the use of a liability cap is limited or prevented by law. For example, valuation reports prepared for inclusion within prospectuses under the FCA Listing Rules may not exclude liability to parties other than the addressee of the report (see UK VPGA 2 of RICS Valuation - Global Standards 2017: UK national supplement). Specialist legal advice may be required in such situations. See above and Appendix B1 in relation to 'consumers'.

A3 Third party reliance on valuations

This guidance note contains some additional, more specific guidance about third party reliance in the residential and commercial contexts in Appendix B and Appendix C respectively. One of the points made in the residential context is that RICS recognises there is a practice of permitting valuations of residential properties provided to lenders to be disclosed to the borrower/purchaser. In certain circumstances, this may extend the duty of care to that borrower/purchaser.

Other than where the practice identified in B3.1 is adopted by agreement between firms and their lender clients, valuers should not permit third party reliance and terms and conditions should exclude third party reliance, with any exceptions made clear, taking into account the points highlighted below and in section 5.

Permitting third parties to rely on a valuation has the effect of permitting them to be treated as the member's client. There are the following specific risks in this practice in relation to valuations:

  • Permitting reliance by third parties who are in a different position from the client (such as the property owner, where the client was the lender) may expose members to claims of a different type.
  • Members should be particularly careful if they are asked to give consent to third party reliance at a date later than the effective date of their valuation. Valuers will improve their position in that situation if they tell both the client and the third party, in writing, that they have not re-valued the property, and the valuation may already be out of date, because the effective date of the valuation has not changed. If any changes have been made to the report these should be clearly communicated in writing to the third party as well as the client.
  • Some of the third parties with whom valuations are shared might be based in different jurisdictions, and may try to bring claims before the courts of those jurisdictions, with very different laws from the laws that govern the relationship between members and their clients. It is also possible that such claims may not be covered by the member's PII, if they are brought in jurisdictions that do not fall within the geographical limits of the PII policy.
  • Permitting disclosure in the regulated investment context may entail regulatory risk (i.e. exposure to the risk of regulatory investigations) as well as more conventional liability risk.
  • Members' contractual terms of engagement (including the terms set out in this guidance, such as the liability cap) may not be binding on the third parties. In addition, some of the legal defences members might be able to raise if faced with a claim from a client may be more difficult to raise in response to a claim from a third party.
  • Members should think carefully about whether they had communications with the client at the time of submitting the valuation that affect the way in which the valuation should be used. It may be necessary for those communications to be passed to the third party so that the valuation report is placed in the proper context. If so, members should try to influence the way in which the valuation report is passed to the third party, to ensure where possible the valuation report is passed on only together with those other communications.
  • Members' PII may impose specific conditions concerning third party reliance on valuations, and may exclude indemnity in relation to certain third party claims - see paragraph 4.10.

If members do agree to permit third party reliance, they should be as specific as possible about who the permitted third parties are - permitting an entire 'class' of third parties to rely on the valuation will add greater risk. Appendix C8 comments on what members should do if asked to issue a fee invoice to a third party.

RICS recommends that where members do permit third party reliance, this is done only in a way that ensures:

  • the third party understands and acknowledges (if it is the case) that the firm has not conducted a fresh valuation and the effective date has not changed simply by the act of permitting third party reliance and
  • the third party is bound by the terms and conditions of the firm's contract with its client (including the liability cap)
  • the purpose for which the valuation has been provided has not altered simply by permitting third party reliance.

In considering whether to permit third party reliance, it is important for members to bear in mind the scope of their PII. This is particularly important if members permit reliance for the purposes of the securitisation of loans, loan syndication, stock exchange listing and other investment memoranda. Depending on their structure, those processes may entail transfer of loans, and assignment to the buyer of the loans of the ability to bring negligence claims against the original valuer. If a firm has only the 'two assignments' cover of the Minimum Terms, that may not be enough. Members should therefore review their individual insurance arrangements to verify whether they are suitable for their practice.

If a valuation fee is being paid by a third party, it is important that members consider whether their client requires a third party to be entitled to rely on the report. If not, the engagement letter and valuation report should make that clear, because otherwise, the third party may seek to argue that they are entitled to rely on the report by reason of having paid the fee.

A4 Terms of engagement

The focal document in the contract between the valuer and the client is known as the 'letter of engagement'. Recording the terms of contract in an engagement letter is required by RICS Valuation - Global Standards (Red Book Global Standards). Red Book Global Standards PS2 section 7.1 states:

'It is fundamental that by the time any written valuation is concluded, but prior to the issue of the report, all the matters material to the report have been fully brought to the client's attention and appropriately documented'.

Even where a firm does have standard terms and conditions, there are at least three key terms that should be considered by the firm from a risk perspective in the context of every instruction, as set out below. These terms should be regarded as related, and therefore considered alongside one another in the context of each instruction.

  1. The fee: Red Book Global Standards also requires that the engagement letter specify the basis on which the valuation fee will be calculated. Fees are also addressed later in this section.
  2. The scope of the work: the requirements for a valuation engagement letter in scoping each instruction are set out in full in Red Book Global Standards.
  3. The liability cap: liability caps are discussed in section 3.

The firm should consider the scope of work that it is intended will be provided for the fee, and then ensure the client's expectations in that regard are the same as the firm's. See generally the scope of work in section 5.6, by way of specific examples:

  • Will the valuer need to call on other specialist input (for example, from quantity surveyors) from within the firm?
  • What is the nature of the inspection to be conducted?
  • Will the valuation include any measuring services?
  • See Appendix C8 if asked to issue a fee invoice to a third party.

The scoping process is also a good opportunity for the valuer to state those areas of specialist work the valuer is not going to deliver in this instruction. The valuer may believe the client knows that these specialist works are being provided by other specialists, but it is preferable to state this in express terms. For example, if the valuer is not going to carry out the following services, the valuer should consider saying so in terms:

  • Inquire into the accuracy of passing rental figures provided to the valuer.
  • Examine the structural soundness of the property.
  • Inquire into the accuracy of planning information provided to the valuer.
  • Inspect the property in person (i.e. the valuer is to carry out a desk-top valuation only).
  • Measure the property.
  • Comment on condition.
  • Comment on the strength of a tenant's covenant in valuing a property that has been let.
  • Read leases or other legal documents other than where the valuer has expressly undertaken to do so.

Members' attention in this regard is also drawn to VPS1 Terms of engagement (scope of work) of Red Book Global Standards.

A5 Third party reliance

Valuers should include a clause in their engagement letters that prevents third party reliance. This can be included in a firm's standard terms and conditions. For completeness, this clause should be replicated in a prominent position in the body of the valuation report as well. Stating the position clearly, and in all documents to which the third party might refer, is the best policy, for example making clear via a number of express statements within the report that the purpose of a report is to enable a bank to consider the loan application only. The clause can be along the following lines:

'Our valuation is provided for your benefit alone and solely for the purposes of the instruction to which it relates. Our valuation may not, without our written consent, be used or relied upon by any third party, even if that third party pays all or part of our fees, or is permitted to see a copy of our valuation report. If we do provide written consent to a third party relying on our valuation, any such third party is deemed to have accepted the terms of our engagement.'