Landlord wins buy-to-let case against surveyor

Published 25th Oct 2010

A buy-to-let landlord has won a long-running legal case against a surveyor judged to have overestimated the rental income on a new-build flat, paving the way for future challenges from other aggrieved investors.

Emmett Scullion, a self-employed builder from Portsmouth, bought an apartment in Cobham, Surrey, to augment his pension. The property was valued at its asking price of £352,950 in a valuation by local surveying firm Colleys, now part of Lloyds Bank. The survey said the flat could be let for £2,000 a month.

Scullion bought the apartment in 2002, based on the figures given in the valuation, but found he could let it only at about 50% of the surveyor's estimate. He sold the property in 2006 at a loss, a full year before the downturn in the housing market.

He subsequently took legal action against Colleys, claiming the surveyor owed him a duty of care, and was awarded £72,000 this month. The damages cover his loss of rental income and the transaction costs of purchasing and then selling the flat.

Legal experts say this could encourage other buyers to take similar action.

"This is really significant because so many investors bought buy-to-let properties when the market was booming. Surveyors and their insurers will be concerned that the judgment could lead to many other claims by disgruntled landlords that their lenders' surveyors overestimated the potential rental returns," says Alexandra Anderson of London law firm Reynolds Porter Chamberlain.

"A lot of non-professional landlords entered the buy-to-let market before the credit crunch. Many of them will have relied on the survey ordered by the [lending] bank. If the survey overvalued the rental income the property should achieve, they could have a similar claim," she says.

There have been other successful legal actions by purchasers against surveyors, but these have been confined to structural issues which were allegedly missed during surveys, and discovered only after the properties were bought.

Mortgage lenders have sharply cut the number of buy-to-let mortgages available since 2007: there are now about 250 compared with more than 3,000 four years ago and most require deposits of at least 25%. Most lenders also insist that a valuation of a property's rent is at least 125% of the landlord's mortgage payments; before 2007 the guideline was 110%.

"Valuations are never 100% accurate. We look at comparable properties in a locality let out in the period of time just before the valuation. It's not a science but it's usually correct even in today's market where there are fewer transactions than in the past," says James Kinsella, a spokesman for Colleys.

He says the firm cannot comment on the specifics of the Scullion case but says surveying guidelines within the company have not changed since the verdict.

The court held that Colleys placed too much reliance on the sale price of the flat, breaching industry guidelines set by the Royal Institution of Chartered Surveyors (Rics).

"Although the market has changed drastically in recent years the same fundamentals apply when determining a capital value or rental value of a property. These are the condition of the property, its location, nearby facilities and so on," says David Dalby, head of the residential faculty of the Rics.

"A surveyor should also look at comparables. There's plenty of public information about capital values but there are far fewer details available on rental values. There's no lettings database that's the equivalent of the Land Registry, for example," he says.

At the height of the property boom, 10s of thousands of buy-to-let units, typically two-bedroom two-bathroom homes in city and town centres, were sold at peak prices.

The phenomenon spawned firms like Inside Track, set up in 2000 offering weekend "information seminars" to amateur property investors at up to £2,500 per person, plus thousands more to join a property club run by a sister company, Instant Access. The companies relied on gearing – customers were urged to buy one or two properties, then remortgage them to fund the purchase of additional flats and houses.

The Inside Track business model imploded when prices started falling in 2007, leaving a glut of unsold buy-to-let flats in city centres such as Leeds, Manchester and Liverpool. The firm went into administration in 2008.

Since that time, disputes over surveyors' valuations of buy-to-let properties across the country have usually centred on undervaluing, rather than overvaluing.

When the credit crunch began the Nationwide Building Society wrote to surveyors assessing new build properties – then the favoured purchase for buy-to-let landlords – asking them to remove the "premium" charged for new homes, saying they should be valued in the same way as second-hand homes.

In September 2008 Rics changed its rules on valuations of new build homes and asked its members to quantify incentives offered by developers to entice purchasers, like "free" furniture, offers to pay stamp duty and other discounts. As a result of these measures, many believe surveyors now routinely value homes of all kinds too harshly.

"I have never come across a surveyor attributing a higher rental to a property than is actually achievable. In 95% of cases they have undervalued a property by 20% to 40%," says Marc von Grundherr, a director of Benham and Reeves Residential Lettings.

"Being cynical, this is a policy banks are able to follow. They say on the one hand 'we are open for business and fully lending' but on the other hand say the rental achievable is low and won't service the debt, so they will have to loan less. It's another way to reduce the loan-to-value," he says.

Today's harsh regime on valuations, and the sharp fall in the number of buy-to-let purchases, means few buyers since 2007 are likely to bring claims for overvaluation.

But the same cannot be said for thousands of amateur landlords who bought in the heady days of 2000 to 2006: the courts could be in for a busy time.

Source: ' The Observer '

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