RICS draft guidance note - Risk, liability and insurance, 3rd edition

Risk, Liability and Insurance - 3rd edition

Appendix B: Residential valuations and building surveys

This appendix is intended to provide guidance to valuers advising in residential mortgage valuation and 'consumer' work (as opposed to commercial lending situations and other commercial valuation situations, addressed in Appendix C). RICS recognises that there is not a hard and fast distinction between 'commercial' and 'residential', and it may be helpful for valuers to read both appendices.

B1 Issues specific to valuations in the residential sector

B1.1 Buy-to-let properties

Valuations of buy-to-let properties carried out for lenders in connection with the mortgage loan process have been a source of many claims against valuers. This includes claims by borrowers who have received a copy of the valuation provided to their mortgage lender, and have then sought to argue that they relied on the valuation.

The current legal position is that a valuer appointed by a lender in a buy-to-let transaction will not owe a duty of care to the borrower. The valuer's only duty is to the lender, unless the valuer is appointed directly by the borrower or expressly permits the borrower to rely on the valuation.

It is important for members who provide valuations for buy-to-let transactions to consider whether their insurance provides cover for valuations for commercial lending. While buy-to-let properties are residential properties, insurers may take the view that the valuation is for the purpose of commercial lending, if the borrower is seeking to purchase a portfolio of properties for the purposes of running them as a commercial venture. If a member is instructed to carry out such a valuation, they should check whether their policy provides cover for such valuations, and if they are under any doubt, raise this point with their insurance broker to ensure they are not left without cover in the event of a claim.

B1.2 Houses in Multiple Occupation (HMO)

The number of HMOs continues to rise and valuations of these properties present unique risks for valuers. In recent years, some professional indemnity insurers have begun to treat HMOs as valuations for commercial lending on the basis that the value of the property, at least in part, relies on its ability to generate income. In light of this, members whose professional indemnity cover is limited solely to valuations for residential lending should consult with their brokers and/or professional indemnity insurers regarding coverage of any claim before agreeing to value an HMO.

B1.3 Securitisation

Securitisation involves banks selling bundles or 'books' of loans to investors. It has been used extensively since the mid-2000s, particularly by banks operating in the sub-prime market. Banks continue to produce packaged products comprised of residential mortgage loans, often referred to as Residential mortgage-backed securities (RMBSs), which are sold on to third party investors.

To facilitate securitisation, lenders often request that valuers permit third parties to rely on their valuations. This presents a clear risk for valuers who may then face claims by parties who were not clients of the valuer. The issues and risks presented by third party reliance are discussed in section 4; in summary valuers should not permit third party reliance.

The typical form and structure of securitised loans is set out in some detail in Appendix C. Where packages of loans, whether commercial or residential, are sold repeatedly, these transactions will usually also entail repeated assignments of the right to sue the valuer who provided the original valuation. There are three practical points coming out of this:

  1. Some professional indemnity insurance policies provide cover for a restricted number of assignments (the RICS Minimum Terms requires cover for two). Members should check what their policies provide.
  2. Members should consider including in their engagement contracts an express prohibition on the assignment of their contract without their consent. See paragraphs 4.9 and 4.10 and the sample wording included under section C2.
  3. Where possible, members should include any terms and conditions limiting or excluding liability in the valuation report itself, to ensure that any third party that comes to rely on the report is aware of the limits or exclusions.

B2 Nature of building surveyors' liabilities

This part explains the key principles that apply to claims against members relating to residential building surveys and what action members should be taking to limit their risks in this regard.

B2.1 The standard of care

In cases where a claimant alleges that a surveyor failed to identify a specific defect at a property, the claimant has to show - by using expert evidence - that no reasonably competent surveyor would have failed to identify and report on that defect.

The type of report the surveyor is instructed to produce will affect the extent of the inspection required. For mortgage valuations and inspections, a brief and reasonable visual inspection, which enables the surveyor to provide a valuation and general guide as to the property's condition, is sufficient. By contrast, a surveyor carrying out a building survey is expected to inspect all visible parts of the property, although not unexposed parts. The surveyor is not expected to test the services at a property as part of a building survey.

For HomeBuyer Reports, the surveyor is required to exercise the same standard of care that would apply to a building survey, within the agreed confines of the inspection.

Building surveyors should ensure that clients are aware of the different types of survey available, and consider the type of property (in particular whether it is unusual on the grounds of age, value, type of construction etc) and RICS guidance when recommending the appropriate level of survey. Members should recommend a full building survey where necessary, and record that they have done so.

Members should also recommend that the prospective purchaser obtain any relevant warranties or professional consultant's certificate where it is appropriate to do so, for example when dealing with a new build, or a recently extended/refurbished property (particularly if the works were significant in scale or structural significance). This could ultimately protect both the purchaser and the member.

A surveyor will be at risk of a finding of negligence if they fail to identify defects that would have been observable, had the inspection of the property been in accordance with the standards identified above or if, having identified a potential concern, the surveyor does not carry out further investigations or advise that further investigations ought to be undertaken.

To ensure that the extent of the inspection is clear, the engagement letter and report to the client should clearly record any limits to the inspection, including any areas of the property that will not be inspected and any issues that will not be dealt with in the report. The report should also include appropriate disclaimers in relation to hidden defects and recommend that any potential risks are investigated further by a specialist.

B2.2 Damages

For claims arising from the failure to identify and report on specific defects at a property, the measure of loss is the diminution in the property's value caused by the defect. In other words, the value of the claim will be the difference between the value of the property as described in the surveyor's report (without accounting for the defect) and the value of the property in its actual condition (subject to the defect), as at the date of the report.

Claimants will often seek to recover the cost of remedial works needed to repair or remove the defect (known as rectification costs). Those costs are rarely awarded and will only be considered by a court in cases where diminution in value would be an inappropriate measure of loss.

B2.3 Limitation

Limitation periods for negligence claims on building surveys are the same as for valuation claims: see section 2.7. In brief, the limitation period for advancing a claim in contract against a surveyor is six years from the date of the surveyor's report, and for claims in tort, the period is six years from the date when the claimant first suffered a loss. For claims brought by the owner of a residential property, this will usually be the date on which the property was purchased.

The period for a negligence claim can be extended if there was a delay in the claimant spotting the defect and finding out about their claim: they will have three years from the date when they found out or should have found out. This extended period is subject to a 'long stop' period of 15 years from the date of the negligent act regardless of when the claimant found out about their claim. This will usually mean 15 years from the date of the survey report.

Given the 'long stop' date of 15 years, members should retain their files for 15 years after carrying out a survey, to ensure that they have the records necessary to respond to a claim. Any updated advice provided in connection with an earlier survey should also be retained for 15 years from the date of that advice as a new limitation period will apply to each new piece of advice provided to a client.

B2.4 Third party reliance

The issue of third party reliance and the risks to valuers is discussed in section 4. 

RICS recognises that there is a practice of permitting valuations of residential properties provided to lenders to be disclosed to the borrower/purchaser, and that sometimes this is done on a basis which permits the borrower to rely on the valuation, i.e. extending the duty of care to that borrower. Members should ensure, wherever they can, that if they do permit borrowers to see their lender valuation reports, they make it clear to the borrower (whether in the report itself, or a letter to the borrower, or both) whether the borrower is entitled to rely on it or not.

The same third party reliance issues affect surveyors when providing surveys of residential properties to lenders. Member should ensure the engagement letter and report clearly records that the survey is provided for the use of the addressee only and that no third party may rely upon it.

B3 Liability caps

When providing valuations and surveys of residential properties, members will often be dealing with clients who are 'consumers' (i.e. those not acting in a business, trade or professional capacity). Buy-to-let investors may be regarded as consumers in this context.

The use of terms in consumer contracts that exclude or cap liability is controlled strictly by law. All contractual terms in consumer contracts must meet a test of fairness. Contractual terms that exclude or restrict liability where one of the contracting parties deals as a consumer or on the other's written standard terms of business must be fair and reasonable, having regard to all the circumstances known to the parties, or within their contemplation, at the time the contract was made. The party seeking to rely on a particular term has to be able to prove that it is reasonable.

Contract terms that have not been individually negotiated - for example terms that have been drafted in advance and that a consumer has not been able to influence - will be deemed unfair if they cause a significant imbalance in the parties' contractual rights and obligations, to the detriment of the consumer. If deemed unfair, the terms will cease to bind a consumer.

Members should not attempting to limit liability by reference to a multiple of the fees for a residential survey or valuation, particularly where the fee for the job is modest. Such clauses are likely to fail the test for reasonableness and fairness, particularly in a consumer context. Limits by reference to the value of the property, or agreeing a reasonable share of responsibility for the cost of repairs in any survey claim, are more likely to be regarded as fair and reasonable, but again this will depend on the level agreed. Further, any clause would have to be drawn specifically to the client's attention, not buried in small print, and even then it would always be subject to a reasonableness and fairness test.