The importance of exercising care and skill in valuing residential properties for lenders was emphasised in a recent court case.

In Paratus AMC Ltd & RMAC 2005 NS1 PLC v Countrywide Surveyors Ltd (2011) the claimants alleged that Countrywide Surveyors had overvalued a two bedroom flat at £185,000 after the borrower defaulted and the lenders subsequently sold the property for just £123,500.

While the claimants lost in the case, it reemphasises the importance of surveyors taking all factors into account when reaching a residential valuation.

In his judgement, His Honour Judge Keyser Q.C., rejected the idea that a residential surveyor would be negligent if a valuation fell outside an acceptable range by an arbitrary set margin, but instead concluded that the valuation exercise was a matter of the exercise of judgement involving the assessment of numerous factors.  He said that the law is simply that the valuer owes a duty to exercise the care and skill of a reasonably competent valuer.  In each particular case it is a question to be decided on the facts whether or not he has discharged that duty.  In the Paratus case, he concluded that that the acceptable margin of error was in the order of 8{0a6a65c996ed4169444354e707b897cdb00dbefc1d0429e8febb9bf11027ba53} and that the valuation of the Property, though too high, was not negligently high.

“This case was a mixed blessing from the point of view of surveyors,” says James Burgoyne, Director, Brunel Professional Risks. “The case rejected a purely arbitrary approach to margins of error which is generally good news for the profession.  It also gave support to arguments of contributory negligence where the lender was in breach of its own lending criteria. However a counter argument by the surveyors that the lender had suffered no substantial loss prior to the property being transferred to a Special Purpose Vehicle as part of a securitisation programme was rejected, which removed a possible defence for surveyors in similar cases.”

“This case shows just how accurate surveyors must be in valuing residential property.  In times of property price volatility there is only a small margin for error. Surveyors must ensure that they have effective risk management procedures in place to ensure the accuracy of their valuations and that their processes and procedures are properly documented if they are to defend themselves against any claims of negligent valuations.”