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A firm of surveyors which carried out valuations that overstated the value of three properties found itself defending an action for negligence recently.
The surveyors had issued valuations on which a mortgage lender had relied when approving loans. The High Court found that the three valuations were excessive by 21 per cent, 11 per cent and 13.5 per cent respectively. As a result, when the properties were repossessed, the lender suffered losses. It argued that its losses were inflated as a result of negligent valuations and that the surveyors should compensate it to the extent that the losses were caused by the overvaluations.
There are a number of decided cases where the facts were similar, and it is accepted that valuation is not a precise science. Accordingly, a valuation may be incorrect without there being negligence on the part of the valuer.
The Court concluded that the first valuation was negligent, there being a number of similar properties which could serve as comparators to establish the ‘right’ valuation. The lender could claim damages. In this case, the Court regarded the permissible error to be in the region of 5 per cent.
The second valuation was also held to be negligent, despite the ‘distinctive’ nature of the property.
In the third case, the Court concluded that the valuation was negligent, but the financial position of the borrower prior to the purchase was such that a ‘prudent lender’ would not have made such a large advance (95 per cent loan- to-value). In that case, the valuers were found liable for only 50 per cent of the lender’s losses.
The ‘allowable’ margin of error in such cases depends on several factors, most importantly the number of comparable properties there are which support the valuation, the financial circumstances of the buyer and the inherent riskiness of the loan.