Is Your Security Advice Secure?
Lenders frequently ask valuers they instruct about the suitability of the property as security. Most valuers will include a caveat to the effect that the lender needs to consider matters outside the remit or knowledge of the valuer before making a decision on the amount or terms of a loan, but is this sufficient? A recent Supreme Court decision underlines the need for clarity on the limits of the valuer’s role. I examine how the law has progressed and suggest steps that valuers can take to limit their liability.
The 1990s saw a sustained fall in most property values in the UK, accompanied by a huge surge in loan defaults. This was an explosive cocktail when mixed with what proved to be widespread naivety by both lenders and valuers as to the questions that should be asked and the answers that should be provided to better protect their respective interests. The need for more robust and consistent processes for loan security valuation was one of the principal drivers for the evolution of the RICS Book into a set of standards covering most types of valuation undertaken by chartered surveyors. However, the problems emanating from these earlier valuations led to a plethora of negligence claims by lenders against valuers.
Among the most well known of these cases, which has also influenced negligence litigation beyond valuation, is a decision of the House of Lords in 1996, South Australia Asset Management Corporation v York Montague Ltd, commonly referred to as the “SAAMCO” case. This was one of three appeals heard together where the matter in contention was whether a valuer who provided a negligent valuation was liable only for the difference between the negligent figure and the true value or whether they should also be responsible for the lender’s losses attributable to a fall in the property market between the date of the original valuation and the date on which the lender was able to realise the security. The so called “SAAMCO Principle” is based on a distinction made by Lord Hoffman in the judgement between a professional’s duty to provide advice and a duty to provide information.
The distinction was if a valuer is engaged only to provide information, e.g. the value of the security on a given date, they are only liable for the consequences of that advice being wrong. Unless they were engaged to advise the lender on the whole of the loan transaction, they could not be liable for losses that would have been incurred by the lender even if the valuation had been correct.
In two of the appeals under consideration the effect of this approach was to limit the valuer’s liability to the difference between the negligent valuation and what would have been the true value. This has become known as the “SAAMCO cap”. However Lord Hoffman did point out that although this was the effect of applying the limits that had been determined on the valuer’s scope of duty in the cases in question, it was not an absolute cap. Somewhat ironically, the third of the appeals, the SAAMCO case itself, demonstrated this. The lender’s losses, even allowing for the fall in market, were lower than the difference between the negligent value and the true value that should have been provided originally. So although the damages awarded were less than the difference between the “wrong” and “right” values the method of calculation did not involve the application of a cap.
Although the SAAMCO Principle has often been cited as a means of determining the extent of a professional’s liability, it has also been the subject of considerable criticism. The problem is that, in the context of SAAMCO, “information” and “advice” are merely useful aphorisms. Having made this distinction Lord Hoffman did go on to say it was a generalisation of the principle that a person under a duty to take reasonable care to provide information which someone else will use in deciding a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action.
Clarity was brought to the appropriate interpretation of the SAAMCO principle in 2017 in the Supreme Court’s decision in BPE Solicitors v Hughes and Holland (“BPE”). With a pleasing symmetry the decision was given by Lord Sumption, who had appeared as counsel for the valuer in the SAAMCO case twenty years earlier. On the question of the distinction between advice and information, he acknowledged that some confusion had arisen because of the descriptive inadequacy of these labels. On the face of it they are neither distinct nor mutually exclusive. Information given by a professional to their client is usually a specific form of advice, and most advice will involve conveying information. However, he went on to indicate that the nature of the distinction is clear from its place in Lord Hoffmann’s analysis as well as from his language.
Lord Sumption elaborated on the distinction. An “advice” case is one where the professional is under a duty to consider and advise the client on all relevant considerations pertaining to the client's decision whether or not to take a particular course of action. If the professional is negligent in his advice, he will be liable for all the foreseeable consequences of the client acting upon it. By comparison, in an “information” case, a professional adviser contributes a limited part of the material on which their client will rely in deciding whether to enter into a prospective transaction. The process of identifying the other relevant considerations and the overall assessment of the merits of the transaction are exclusively matters for the client or other advisers. It follows that even if the information provided by the professional is known to be critical to the client’s decision to enter into the transaction, the professional is only liable for the financial consequences of their advice being wrong, not for the financial consequences of the claimant entering into the transaction if these are greater.
Most recently the Supreme Court issued concurrent judgements in June 2021 on two cases, Manchester Building Society v Grant Thornton (“MBS”) and Khan v Meadows (“Khan”). The first involved a claim against a firm of accountants, the second a claim by a patient against a medical practitioner. Both cases involved the SAAMCO principle and were heard in succession by the same panel of the Court in order to examine the application of SAAMCO in different fields of activity.
The Court elaborated on the clarification of the SAAMCO principle in BPE. Rather trying to shoe-horn a case into either the information or advice categories, the focus should first be on identifying the purpose to be served by the duty of care assumed by the defendant. It also held that although the type of “counter-factual” analysis used in SAAMCO, i.e. what the claimant’s loss would have been if the original information had been correct, worked in a straightforward case, there would be cases where the construction of the counterfactual world would be far from straightforward. This would create a further source of contention. It preferred an approach where the extent of liability was determined from analysis of scope of the duty of care owed by reference to its purpose. A counter factual analysis could usefully be used as a cross check in many cases but it should not be relied on as the primary means of determining liability.
What does all this mean for valuers? Although the recent Supreme Court decisions have added further guidance to how the SAAMCO principles should be applied, nothing has fundamentally changed in the way in which the courts should approach the assessment of damages. I have seen some commentators suggest that they have meant the end of the SAAMCO cap, but as the later cases have confirmed, this was never the basis on which the three appeals under the SAAMCO umbrella were determined. So the good news is that there has been no sudden increase in valuer’s exposure resulting from these latest cases.
What is important for valuers to take away from these decisions is that it cannot be assumed that the provision of a valuation for a lender can simply be categorised as “information” and that they therefore have no liability for anything other than the consequences of the valuation being wrong. MBS and Kahn have emphasised this is not a useful label to rely on, especially as most lenders want advice on the suitability of the asset as security alongside its value. It is therefore vital to ensure that the precise scope of the valuer’s duty of care and the purpose of the valuation is precisely set out in the terms of engagement and report.
Special care is needed around valuations that involve commenting on a business and its performance. While the performance of a business in occupation is material to the valuation of some types of real property, great care must be taken in ensuring that the information provided does not stray into comment on its overall financial status or credit worthiness, which could influence the lender’s decision on whether to lend and on what terms.
With a fall out from the pandemic likely to result in some significant changes in the market for some type of property we once again have the recipe for an upturn in loan defaults and lenders looking around for ways to recover any shortfalls. It’s time for valuers to make sure that the advice they provide does not open the door for additional liability beyond the accuracy of the current valuation.
