VALUATION: LEGAL RESPONSIBILITIES VALUATORS AND ATTORNEYS-AT-LAW LLOYD BARNETT LEGAL STATUS OF VALUERS 1. A valuer or appraiser is one whose business it is to inspect and report on the actual or prospective value, quality or profitability of property, which may include land, houses, machinery, shares, art, jewellery or any other property. As regards real property, under The Real Estate (Dealers and Developers) Act, the practice of real estate business is defined as including the appraisal for remuneration of land. Where an attorney-at-law furnishes such services in connection with real estate business within the scope of his profession he is not regarded as engaging in real estate business within the meaning of the Act. As a result both real estate dealers zegistered under the Act and practising attorneys-at-law may in the course of their business carry out real estate valuations. An appraiser may not only estimate the price or value of property but also the legal incidents attached to it and its quality. LEGAL IONSHIPS OF VALUER: 2. The valuer’s retainer or engagement normally creates a contractual relationship with his client. But the relationship also assumes a greater dimension of professional person and client. In some cases the identification of the contracting parties may cause some difficulty. Thus a financial institution may require its nominated valuer to provide the appraisement so that it may decide whether to grant a loan and the applicant for the loan may be required to pay the valuer’s fee but the contract may be betweenthe financial institution and the valuer. Where the professional person and client relationship comes into existence the documents created by the valuer to carry out the assignment may belong to him and not to the employer. Leicester County Council v Michael Faraday & Partners Ltd. [1941] 2 All E.R. 483. 3. A Valuer may also be appointed as arbitrator where the parties in dispute agree to refer the matter in dispute for determination by the valuer. He will not have this status however unless it is clear that there is a dispute which he is required to resolve. Normally, this will be indicated by the submission of rival contentions, or giving of conflicting evidence. Otherwise he may be acting merely as an expert and not as an arbitrator. Sutcliffe v Thackrath [1974] A.C. 727; Arenson v Casson Beckman Rutly & Co. [1977] A.c. 405. Where the valuer acts as an arbitrator his decision will be subject to review by the Supreme Court as in the case of other arbitrators. SPECIAL VALUATIONS 4, Valuations may be required for special statutory purposes. Thus under the assessment provisions of the Rent Restriction Act valuations by professional valuers is a common feature. In revenue matters such as the Land Valuation Act and in compulsory acquisition of property by mining licencees or for development purposes by the Government such valuations become highly relevant. 5. Attorneys are often appointed as executors by clients. As in the case of other personal representatives, it is important to utilise the services of qualified and reputable valuers before dealing with estate or trust property. Under the Trustee Act, a 2trustee lending money on the security of any property on which he can properly lend is not chargeable with breach of trust by reason only of the proportion of the loan to the property if the loan was made on the basis of advice contained in a report or the value of the property made by a person reasonably believed to be an able practical surveyor or valuer and employed independently of any owner of the property, and if the loan does not exceed two-thirds of the value stated in the report. See 5.8. If the personal representative is exercising an express or statutory power of appropriation he should also employ a qualified valuer particularly where he is personally interested. The appropriation of a mortgage at par or a value without such expert opinion may amount to a breach of trust if the property is in bad condition or worth less than that value. FRAUDULENT VALUATIONS 6. A valuer who furnishes a valuation which he knows to be false or recklessly as to whether it is true or false with the intention that it should be relied on is liable for the tort of deceit at the action of the person suffering loss as a result. Derry v Peak (1889) 14 App. Cas. 337. In this case it does not matter whether the valuer is acting as arbitrator or in professional relationship to a client once the person affected could reasonably be anticipated as likely to act upon the valuation. In such cases the addition of a disclaimer of liability clause to the valuation report will not avail to protect the valuer from liability for the fraud. S. Pearson & Son Ltd. v Dublin Corp. [1907] A.C. 351; Commercial Banking Co. of Sydney Ltd. v R. H. Brown & Co. [1972] 2 LL. Rep. 360.PROFESSIONAL STANDARD AND DUTY OF CAI 7. A person who holds himself out as & valuer or appraiser represents himself as possessing the knowledge and skill which a veasonably competent member of the profession possestes: He must therefore use that skill, care and diligence which are reasonably expected of professional valuers OF appraisers. If local or specialist knowledge or data is necessary, he should have the skill to recognize this and employ care in procuring it. If he is not familiar with the neighbourhood of the property he must acquire the poe iwacerial or consult competent Pessoa" with that knowledge. Singer v Friedlorder Ltd. v John D- Wood (1977) 23 B.G- 212 (125). ‘Thus, in Jenkins v Betham (1655) 15 C.B. 108, it was held that a valuer of ecclesiastical property mst acquire general knowledge of the law relating to dilapidators 9% between outgoing and incoming incumbent and the distinction between that and incoming and outgoing tenancies. Harmer V Cornelius (1858) 5 C.B.N.S. 236+ @. In valuing real estate it will often be necessary to take into account the nature of applicable restrictive covenants, the history of their modification, easements and existing leases oF {mcumbrances and their terms and conditions. Tn situations of fluctuating prices or unstable economics, he must take into account whether the market is about to fall or collapse, OF whether there has been a wave of speculation affecting prices in the short term. Corisand Investments Ltd. v Druce & Co. (1978) 248 E.G. 315 (321, 407). Tt may be negligent merely to follow a standard rule of thumb if the circumstances demand special consideration. values nay be affected by proposed changes oF developments in the locality, pending litigation or proposed changes in the law. Where the client has peculiar responsibilities oF special needs known to the valuer these must be taken into account. ‘Thus in advising trustees who are considering investing on the security of property the two-thirds criterion in the Trustees Act cannot be blindly 4followed. The special circumstances of the property may have to be taken into account and a lower threshold advised as safe for the investment. Shaw v Cotes {1909] 1 Ch. 389; Re Solomon [1912] 1 Ch. 261. 9. It is no defence to say that a mistake was a mere error of judgment, 1f inadequate professional care and skill are used. The liability is not based on whether the valuation is more or less than the market price but whether the error has been caused by negligence. But if the margin of error is great this will provide prima facie evidence of negligence. Baxter v F. W. Gapp & Co. Ltd. [1939] 2 All E.R. 762. ILLUSTRATIONS OF BREACH OF DUTY 10. In Baxter v F. W. Gapp & Co. Ltd. [1939] 2 All E.R. 752, an estate agent was sued for negligence in making a valuation of property for the purpose of an advance by way of mortgage. He had inspected the property but did not make local inquiries as to the value of that property or similar property in that locality, where he had not previously practised. The valuation was £1,800. The property had been bought by the mortgagor for £600. The highest price at which it had changed hands in recent times was £850. Certain additions and alterations were being made at the time of the valuation. The estate agent advised an advance of £1,200 upon the first mortgage, subject to £200 being retained pending completion of the work. He subsequently advised an advance of £150 on the second mortgage. The valuation was given to the plaintiff’s contractors. The Plaintiff sued the estate agent and the court held that his valuation was excessive and had been made without the due care which an expert ought to bring to his task and the measure of damages was the whole loss sustained by the plaintiff who had advanced money on mortgage of the property, including the expenses of the abortive sales, insurance premiums, builder's account for 5the upkeep of the property, mortgagee’s expenses and disbursement, the agent’s commission on the ultimate sale of the property, in addition to the principal advanced and the interest lost. See also Lowenburg, Harris & Co. v Wolley (1895) 25 S.C.R.I. 11. In Kenney v Hall, Pain & Foster (1976) 239 B.C. 355, 429 the valuation of a vendor’s house was given prior to a formal contract between vendor and purchaser. The vendor committed himself to purchasing other property and suffered financial loss when his own house was sold for only one-third of the valuation. The court held the estate agent liable for the excessive valuation. Applying modern principles of negligence adumbrated in Hedley Byrne, Commonwealth courts have held estate agents liable for negligent statements to purchasers on which reliance has been placed when purchasing from vendors. Estate agents have been held liable for negligent statements as to the area of land to be sold, the permitted use of land, the income expected from the land, and the facilities of the property such as sewerage or sound-proofing. Richardson v Morris, Smith Real Estate Ltd. [1977] 1 N.Z-L.R. 152; Kormarnski v Marion (1979) 100 D.L.R. (3rd. ed.) 817 Bango v Holt (1971) 21 D.L.R. (3rd. ed.) 66; Hawk v Dixon (1975) 64 D.L.R. (3d) 201; Dodds and Dodds v Millman (1964) 45 D.L.R. (24) 472; Olsen v Pairer (1978) 91 D.L.R. (3d) 123; (1980) 111 D.L.R. (34) 512; Barrett v T.R. West Ltd. (1970) N.I.L.R. 789; Roberts v Montex Development Corpn. (1979) 100 D.L.R. (3rd. ed.) 660. 12, In the New Zealand tase of Allied Finance and Investments Ltd. v Haddow & Co. [1983] N.Z.L.R. 22 solicitors acting for a borrower were held liable to a third party lender because they have acted negligently in issuing a certificate to the lender which gave the impression that his loan was properly secured when this was not so. The N.Z. Court of Appeal held that they had given the certificate believing it to be in the best interests of their client but also knowing that the third party would rely on it for his protection. This latter aspect is important because an attorney-at-law is 6normally entitled to expect that the other party will look to his own legal representative for advice and protection. In the Canadian case of Tracey v Atkins (1979) 105 D.L.R. (3rd. ed.) 632 a solicitor retained by a purchaser was found liable for failing to advise a vendor that an agreement granting him the first mortgage had been varied to give him only the second mortgage. See also Clarence Construction Ltd. v Lavallee (1980) 111 D.L.R. 582. 13, Real estate agents in their anxiety to earn a commission often make statements which are designed to induce a particular transaction. Care should be exercised in respect of such statements because, if the Court finds that it was intended or could reasonably be expected that the statement would be relied on, the agent may be held liable if it turns out to be inaccurate. However, if it is clear that the matter is outside the real estate agent's professional competence he may be held not to be liable. In the Australian case of Presser v Caldwell Estates Pty. Ltd. [1971] 2.N.S.W.L.R. 471 the agent told the purchaser that the land had been ‘in-filled’ and the Court held he was not liable as statements about the geological structure of the subsoil fell outside the skill and function normally expected of an estate agent. An agent may also escape liability if the court concludes that his in-accurate statement was mere trade puffing as in the Canadian case of Shields v Broderick (1984) 3 D.L.R. (4th ed.) 96 where the agent told the purchaser he need not worry about selling his own house; it would sell very easily. LIABILITY TO THIRD PARTIES 14, The valuer's liability to his client is in the first place contractual. The court will imply that the retainer imports the same standard of care that the law of tort demands. Since the real estate agent or attorney is engaged in carrying on a professional practice the tortious liability for negligent misstatement is easily extended to negligence in relation to valuations. See 5Mutual Life and Citizens Assurance Co. Ltd. v Evatt [1971] A.C. 793; Hedley Byrne & Co. Ltd. v Heller and Partners Ltd. (1964) A.C. 465. Accordingly, a valuer who makes a report knowing that a third person will be shown it and may rely on it owes a duty of care to that person. Cann v Wilson (1888) 39 Ch.D. 39 overruled by Le Lievre v Gould [1893] 1 Q.B. 491 but expressly approved by the House of Lords in the Hedly Byrne Case. Whereas an exemption clause will not avail in the case of a fraudulent valuation, a valuer may be able to exclude or limit liability by a restriction or disclaimer. It is also possible that wheré he acts as arbitrator he can be liable for negligence. Arenson v Carson Beckman Rupley & Co. [1977] A.C. 405 (431-2); sed quaere. IMMUNITY OF MUTUAL VALUERS 15. It is now clearly established that a valuer is not insulated from legal liability because the valuation is undertaken in the interest of contracting or even contending parties unless, he is truly appointed as arbitrator. In Sutcliffe v Thackrah [1974] A.C. 727, Lord Reid at p. 736 said: “But whatever be the grounds of public policy which have given rise to this immunity of persons acting in a judicial capacity, I do not think that they have anything like the same force when applied to professional men when they are not fulfilling a judicial function. The point can perhaps be most clearly illustrated by considering the case of a skilled man engaged to value some property or object. The circumstances may vary very much. The owner may wish to sell or insure the property and want to know its market value. No one doubts that in that case the valuer may be sued for negligence if his negligent valuation has caused loss to the owner. Or the owner may have reason to believe that a particular person A would buy the property from him and would accept a valuation py a skilled man. Or he may have agreed with A to sell at a price to be fixed by a skilled valuer, or by this particular valuer. And he may or may not have told the valuer about this when engaging him. There is modern authority to the effect that if the valuer knows that his valuation will affect or bind another person besides his client, the owner, then he can claim an arbitrator's immunity. But why should that be?"16. The question which arose is whether an architect who had been engaged by a building owner under the R.I.B.A. form of contract and had caused his client damage by negligently issuing interior certificate for substantially more than the amount due enjoyed the same immunity from suit as a Judge or arbitrator. The House of Lords unanimously held that he did not enjoy immunity from suit for negligent certification. 17. In Arenson v Casson Becknor Rutley & Co. [1977] Q.C. 405; [1975] 3 W.L.R. 815, it had been agreed that on the termination of the plaintiff’s employment with the company he would sell his shares to the controlling shareholder at their ‘fair value’, viz. “the value as determined by the auditors whose valuation acting as experts and not as arbitrators shall be final and binding on all parties". On the termination of the plaintiff’s employment the auditors valued the shares it £4,916 and the plaintiff transferred them at that price. A few month’s later the company went public on the basis of a report by the auditors which showed the shares to be worth six times the value previously assessed. The House of Lords held that the immunity of judges and arbitrators should not be extended to a “mutual valuer" who was not exercising any judicial function. Lord Simon said: “There is a primary and anterior consideration of public policy, which should be the starting point. This is that, where there is a duty to act with care with regard to another person and there is a breach of such duty causing damage to the other person, public policy in general demands that such damage should be made good to the party to whom the duty is owed by the person owiag the duty. There may be a supervening and secondary public policy which demands, nevertheless, immunity from suit in the particular circumstances (see Lord Morris of Borth-y-Gest in Sutcliffe v Thackrah [1974] A.C. 727, 752). But that the former public policy is primary can be seem from the jealousy with which the law allows any derogation from it.*THE MEASURE OF DAMAGES 18. Generally, the damages awarded for negligent valuations are such as fairly compensates the injured party for the loss suffered as a result of the valuer’s failure to discharge his duty to exercise care and professional skill. Thus if a valuer employed to inspect and value property negligently disregards defects with the result that the property is overvalued the damages recoverable against the valuer is the difference between the price actually paid and the price he would have paid if the valuer had not been negligent. Parry v Sidney Phillips & Son [1982] 1 W.L.R. 1297 (1302); Simple Simon Catering Ltd. v Binstock Miller © Co. (1973) E.C. 527. In assessing damages interest on that difference will be awarded to adjust for inflation. In the case of a sales agreement the damages will not be calculated on the basis of the costs of effecting repairs to the defects the valuer failed to detect or report. where it is reasonably foreseeable that the defect will result in discomfort and inconvenience to the purchaser he will also recover damages for these factors for the period in which the defects could reasonably be rectified. 19. A most interesting question arises where a party suffers loss having entered into a transaction on reliance on a negligent valuation but part of the loss suffered has been occasioned by falls in the property market. For example: A valuer is employed by a building society to value the dwelling house the borrower is offering as security and the valuer negligently overvalues the property. The Society makes a loan om the basis of the valuer’s valuation and recommendation. The borrower defaults. The land is put up for sale by the Society but only fetches half of the mortgage debt, partly because of the overvaluation by the valuer and partly because of a drop in the property market. Can the society recover the total loss against the valuer or only that percentage as is attributable to the excessive valuation? 1020. This question has been considered in a number of Commonwealth courts. Most recently, the English Court of Appeal considered this problem in six consolidated appeals in Banque Braxelles Lambert S.A. v Bagle Star Insurance Co. Ltd. [1995] 2 W.L.R. 607. In five of the cases the defendant was a valuer and in the sixth a solicitor. Each had been found guilty of negligence. In all the cases the lender would not have lent at all if the valuation had been properly done. Such cases have come to be called "no transaction" cases as opposed to “successful transaction" cases where a smaller sum would have been lent. Sir Thomas Bingham, M.R. illustrated the problem by the following hypothetical case: Vv, negligently advises the property as worth £1.M. and the lender whose policy is to lend 80 per cent of the valuation on mortgage advances £800,000.00. The market value at the date of the valuation was £500,000 but by the time of the sale under the mortgage the market price had fallen to £300,000.00. On one approach the lender will recover £300,000.00 (i.e. £800,000 - £500,000) but on the other approach he will recover only £300,000 (i.e. £800,000 - £500,000). 21. The Master of the Rolls said cases in which the plaintiff is a buyer must be distinguished from cases in which he is a lender. In the former case where the buyer would have purchased in any event the difference between the valuation and the true value could normally give the correct compensation. In the loan cases, the lender cannot sell the security unless the borrower defaults. In a no-transaction case, the lender will lose the difference between the sum advanced and the value et the date of the forced sale. Since the valuer’s negligence caused the lender to enter the transaction, or to lend the extra amount and the lender cannot escape, the negligence is the effective cause of the whole loss. Accordingly, the Court of Appeal held that the plaintiff mortgagees were entitled to recover damages which included the losses resulting from th e market fall. qa22.. It is always difficult to decide whether a negligent act is the effective cause of a subsequent loss or merely provided the occassion for the loss which is effectively caused by an intervening event. Causation in the final analysis is decided on a ‘pragmatic and commonsensical approach’ and not on strict logic or metaphysics. In cases of negligent valuation it appears that the courts may be inclined to hold that falls in property values are not unforeseeable. In the no-transaction cases it is clear that if the valuation had not been negligent the loans could not have been made and the loss would not have occurred and it is therefore only a question of degree rather than causation. In some cases, too, there may be a link between the overvaluation and the risk as, for example, where it also overestimates the revenue which the property can earn and causes the borrower to undertake a greater commitment to repay principal and interest. 23. The Canadian approach has been to exclude the loss attributable to the fall in the market but the Australian and New Zealand courts have favoured the opposite approach. Lowenburg Harris & Co. v Walley (1895) 25 S.C.R. 51; March v E. & M. H. Stramare Ply. Ltd. (1991) 171 C.L.R. 506. In McElroy Milne v Commercial Electronics Ltd. [1993] 1 N.Z.L.R. 39 the N.Z. Court of Appeal held that damages against solicitors could include the element of loss resulting from a falling market, Cooke, J., stating that there was an evident link between the negligence and the Plaintiff's inability to market the property. Leave to appeal to the House of Lords was given in the Banque Braxelles Case. The law ttled. on this nice issue must be regarded as still un: Swingcastle Ltd. v Alastair Gibson (a Firm) [1991] 2 A.C. 223; [1991] 2 W.E.R. 1091. 24. In respect of persons who are trustees, as in the case of attorneys who are appointed trustees under a will, the measure of damages appears to be limited in any event by section 9 of the Trustee Act which provides that where an improper investment would 12have been proper for a smaller sum than is actually invested a Trustee will only be liable to make good the sum advanced in excess of the smaller sum. 13