Saturday, 23 July 2011

Scullion v Bank of Scotland PLC [2011] EWCA Civ 693: a wunch of bankers

You want to buy a house.  You go to the bank for a mortgage.  The bank wants to make sure there’s enough equity in the property to lend you the money.  The bank gets a surveyor to have a shufti.   Surveyor says, yes, it’s worth the money.  You borrow and buy.  Turns out the surveyor missed something big.  You’ve overpaid.  The surveyor admits he’s breached his duty to the bank, and is happy to pay the bank compensation.  But the bank doesn’t care, it’s not suffered a loss.  It’s made a profit, indeed, as you’re paying way more in interest than would otherwise have been due.  And rising property prices will mean no negative equity.  Can you sue the surveyor?

It’s well established that you can; Smith v Eric Bush.  The court knows most housebuyers will rely on the surveyor’s report when making an offer, and surveyors know this.  For non-mansions, anyway.

But there’s a recent case that switches that.  Mr Scullion was a former builder who wanted to invest some money into a buy-to-let.  At a seminar he met a couple of rum fellows, one behind a property development company, the other a property finder.  They said they could get him a million quids’ worth of property for the small honorarium of £25k; the remainder would be covered by mortgages, which would in turn be covered by rents.

So he started in a small way.  Colleys, a surveying division of Bank of Scotland, gave a report to the development company valuing one flat at £353k with a rental value of £2,000 per month.  The company passed the details on to Mr Scullion, and Mr Scullion signed an agreement with the company, with some unusual, barely legible small print, with a view to buying the flat.  He decided to go for it.  Even better; he got a bargain.  The purchase price was under £300k.

Except it wasn’t such a bargain.  The whole thing was a small appendix to a larger mortgage fraud.  The upshot of it all was that Mr Scullion had a flat that he was only able to rent for a year, for £1,000 per month, and in the end sold it for £270k.  Needless to say, both figures well under that advised as being market value by Colleys.

Mr Scullion ended up suing Colleys and at first instance won around £70k, representing the lost rental income.  Colleys appealed.  Rather churlishly, given the iffiness of its valuation.  Even more churlishly, Colleys won.  Much to the disquiet of the Court of Appeal.

How could Colleys have won?  According to the Court of Appeal, because it was a buy to let.  Not a house purchase.  Therefore the Smith v Eric Bush rule couldn’t apply.  A buyer to let is a bit more sophisticated than a house purchaser and would be expected to get their own individual valuation.  And it was a commercial transaction.  One of many a business might undertake.  Not the personal dwelling of a desperate purchaser.  Over half of buyers to let have more than one let property; the Court held it was hardly a near certainty that a buyer to let would rely on a lender’s survey.  If Mr Scullion could afford to pay £25k in commission, why not spend the extra grand or so on his own survey?

So Mr Scullion lost.  With a powerful, if regretful, judgment from Neuberger LJ to boot.  I yield to no-one in my admiration of the Lord Justice, but I cannot help but think he got this one wrong.  The evidence that buyers to let don’t get their own valuations looks fairly slender.  With the Smith decision surveyors know they’re often on the purchaser’s hook and must factor that into their fees.  And Colleys got the valuation spectacularly wrong.  Given that they mentioned rental value, Colleys must have known SOMEone may be buying to let; and with a capital value of £350k their rental value was well over any likely mortgage figure.  All these factors play in favour of Mr Scullion.  There’s not much that plays in favour of Colleys.  They valued badly and got away with it.

It may yet go to the Supreme; even though it was a 3-0 decision, expressions of regret are often a signal to take it further.  Is there sufficient public interest in such a case?  Perhaps – if the buy to let market collapses further people would be interested in seeing whether they can sue anyone.  That would cause difficulties for surveyors, which might be another reason why the decision went the way it did…

1 comment:

  1. i thought george & another v countrywide already addressed the issue of surveyors liabilities with 'buy to lets'?