Court confirms surveyor's margin of error in negligence cases should not generally exceed 15%

Although ultimately finding in favour of the surveyor, Mr Justice Dove rejected attempts by the firm to justify a 20% margin of error in a "difficult and challenging" case involving the valuation of a listed building operated as a care home on a 40 year local authority lease. The facts of the case were particularly unusual as the property also featured several outbuildings, which could not be used for care home purposes.

A property valuation can be negligent if it is outside a "permissible margin for error". Case law currently sets this margin as about 5% for simple residential property valuations, 10% for one-off commercial property valuations and 15% where there are "exceptional features". However, an even higher margin may be argued in "an appropriate case".

In practice, a surveyor facing a professional negligence claim whose valuation comes slightly outside the 15% margin often seeks to argue that the claim is an 'appropriate' case in which an even higher margin should apply, according to professional negligence expert Michael Fletcher of Pinsent Masons, the law firm behind Out-Law.com. This allows them to argue that they are not negligent, to improve their negotiating position in any settlement discussions, he said.

"This is a good judgment for those bringing professional negligence claims, particularly lenders who may seek to pursue surveyors for negligent valuations of security," he said. "It may discourage defendants, and their insurers, from running arguments that the margin is greater than 15%; which, in my experience, is a strategy they invariably follow if they believe the valuation is only marginally more than 15% higher than the correct valuation."

"This may encourage the earlier settlement of claims. It may also give claimants greater confidence commencing claims, because they can have greater certainty over the margin of error that will ultimately be applied by the courts," he said.

Litigation expert Michael Reading of Pinsent Masons added that the judge's comments also reinforced the fact that the law focusses on the result and not the methodology when coming to a finding of negligence.

"The case also serves as a reminder that even if a valuer uses what might be considered the wrong methodology, or the wrong inputs in the correct methodology, to establish its valuation was negligent, the key issue is whether the valuation figure is within the bracket of the reasonable margin of error," he said.

The dispute in this case arose out of the sale of Manor House, a grade II listed building in Lynmouth, Devon, which at the time of the sale was being used as a 17-bed care home. The then owner intended to sell it as a going concern, accompanied by a new 40-year lease from the local council for care home use. Ultimately the business failed, and the purchasers defaulted on the loan.

The lender attempted to recover its losses by pursuing the surveyor, on whose valuation it had relied when lending to the purchasers, for a negligent over-valuation of the property. They surveyor, as well as arguing that its valuation fell within an appropriate margin of error bearing in mind the complexities associated with valuing this particular property also attempted to argue that if it had in fact been negligent any liability was superseded by a later restructuring of the loan by the lender.

Although ultimately not required to decide on the point, Mr Justice Dove said that he would have been minded to dismiss this particular argument by the surveyor. The surveyor had based its argument on a 2002 Court of Appeal decision in a case between Preferred Mortgages and Bradford & Bingley Estate Agencies, but unlike in that case the refinancing did not involve the redemption of the security of the loan, the judge said.

Michael Fletcher said that this was another "tactical argument" often run by professional indemnity insurers in these types of cases.

"Surveyors often try to argue, based on the Preferred Mortgages judgment, that they have no liability because a facility extinguished the previous facility, and that the lender only relied on its valuation when entering the extinguished facility," he said. "In most situations, this argument is artificial - for example, as in this case, where the lender sends out a new facility letter but maintains the same account for its borrower, there is no discharge of the debt and the security for the loan remains the same.

"To all intents and purposes,it is the same facility," he said. "However, just like where a defendant argues for a higher margin for error, this argument creates a risk for the claimant that it could lose at trial. It is therefore often used tactically by defendants to pressure claimants."

"Whilst not binding on this point, this judgment is helpful in confirming the judge's view that, even despite internal accounting adjustments made by the lender, the Preferred Mortgages argument did not apply because there was no redemption of the security for the loan. Again, this will be helpful to claimant lenders in looking to counter one of the fall-back arguments often put forward by defendants in surveying negligence claims," he said.