What is a valuer required to do when providing a Property Pro Valuation?

Transcription

1 What is a valuer required to do when providing a Property Pro Valuation? Easy Money Handouts Pty Limited (Easy Money) was a low doc lender. On 17 January 2008, Easy Money ordered a valuation report from Competent Valuers Pty Limited (Competent). The valuation to be provided was of a standard residential property and was to be a short form PropertyPro format. Competent issued the task to a subcontractor on its panel of subcontractors, Joe Wright (Wright). Wright assessed the value of the property at $460,000 and whilst Wright signed the valuation report, it was issued on the letterhead of Competent without any reference to Wright being a subcontractor. The valuation report contained the usual disclaimers. The lending guidelines for Easy Money were quite lax but, in essence, Easy Money would rely on the following three documents before determining to advance loan funds to a borrower: A signed loan application; A statutory declaration sworn by the proposed borrower to the effect that he/she could service the loan without substantial hardship; and A valuation of the property. Easy Money advanced loan funds to a borrower based, in part, upon the valuation provided by Competent/Wright. The loan amount was $414,000, calculated at a 90% LVR. The purpose of the loan was to refinance an existing loan over the property for the amount of $351,000. In addition, the borrower wanted some 'play money' for unspecified investment purposes. The borrower defaulted without making any repayments under the loan after which Easy Money obtained possession of the property and sold it mortgagee in possession in February 2009 for $325,000. After deducting MIP sale costs, Easy Money says that it suffered a shortfall in excess of $125,000. Easy Money obtained a retrospective valuation of the property in which the expert valuer provided an assessment of $370,000 being applicable as at 18 January Easy Money sues Competent on the basis that: Competent owed Easy Money a duty of care in the provision of the valuation; Page 1 of 6

2 Competent made representations in the valuation which were misleading and/or deceptive and therefore in breach of the Competition and Consumer Law; and As a consequence of the breach of duty of care and misleading and deceptive conduct, Easy Money suffered the loss. During the investigation of the defence of the claim, Competent obtained its own expert retrospective opinion from a valuer who said that the property in fact had a value of $420,000 as at the date of valuation, but he was not prepared to go any higher than that. Based on the expert opinion obtained during its investigations, Competent and its insurer forms the view that it probably has to admit that the valuation was too high and therefore in breach/contravention. In other words, Wright was wrong but Competent did not accept the assessment of $370,000 as stated by Easy Money's expert. However, Competent feels that it has a number of potential defences available to it which might assist to reduce any liability it has to Easy Money. In this respect, Competent notes the following: In the application for finance, the borrower represented that he had an annual income of $125,000 per annum however tax returns produced on subpoena indicate that his income at the time was in fact in the order of $35,000 per annum. The effect of the global financial crisis on the area in which the property was located was felt from the latter part of 2008, after the initial valuation was performed, such that the MIP sale appears to have occurred in a GFC affected climate. Wright was the valuer who provided the professional opinion as contained in the valuation report Competent did no more than issue the report on its letterhead and did not itself inspect the property, review sales or provide an expression of opinion but for the fact the report was on Competent's letterhead. The purpose of the loan was for a refinance would the loan have proceeded if Wright had assessed the value of the property at $420,000 in accordance with the expert opinion obtained by Competent? Questions 1. How does Wright's position as a sub-contractor of Competent impact upon Competent's liability? What insurance issues might arise? Page 2 of 6

3 2. Assume that the true value of the property is $420,000. Is this a different transaction or notransaction case based upon what we know about Easy Money's lending practice? 3. Assume that the true value of the property is $370,000. Is this a different transaction or notransaction case based upon what we know about Easy Money's lending practice? 4. Assume the evidence at trial was that there was a fall in the market of 20% between the date of valuation and the date of MIP sale, will Competent be able to reduce its liability? If so, by how much? Notes for Answers This workshop brings together the key issues that regularly arise in relation to claims concerning valuations done using property pro. The fact situation is largely based on one of the 8 valuations that were the subject of the Hodder Rook case. A case note on that decision is provided with the materials. The most important issue relates to expert evidence. It is commonly the case that a claimant usually a mortgage insurer in this line of work will obtain a retrospective valuation at significantly lower than the subject valuation. In this case, the retro is $370,000 against a valuation of $460,000. It is commonly the case that such a retro is hindsight affected, often done by a valuer that was not valuing in that postcode at the relevant time, or can t help themselves but deliver on what the client wants, which is a low figure so that they can pursue a claim. A key message from the RMM is that such retro expert evidence has to stop. Valuers commissioned to give expert opinions, should make sure that they are aware of all the facts, as well as the inherent limitations in valuing a residential property retrospectively. If you were valuing in that postcode at the relevant time, then you can express an opinion with some confidence. If your genuine view is that the valuer got it wrong, then you can say so, just explain why. Expert valuers too easily jump to conclusions. That does not help you or your client. Rest assured your views will be vigorously tested by the defence team and if you have not been fair and balanced in your views, expect a day or two being pummelled in the witness box. Culturally, lazy criticism of other valuers is not helpful to the profession. Be ethical. Treat an expert review the way you would like your colleague to treat you put yourself in their shoes and consider whether or not their expression of opinion was outside the normal standard of care expected of a valuer, particularly when the fee charged only permits about one hour s time preparing the valuation report. In this case though, the expert opinion obtained by the defence team, came up 10% short of the valuation - $420,000 vs $460,000. This is compared to the plaintiff s expert at $370,000. This sort of Page 3 of 6

4 scenario makes it difficult to defend the valuation as competent, but a clear message from Hodder Rook is that courts should be slow to conclude that such variations in opinion make the valuation negligent. A court needs to identify shortcomings in the approach taken by the valuer. A plaintiff needs to show more than the valuation was too high or outside an acceptable bracket. You need to show errors in the process. The unfortunate reality in most cases though, is that against this expert evidence scenario, your insurers are reluctant to put a lot of money at risk running a trial, essentially punting on which expert the court is going to favour. This is why expert conferences before trial also known as hot tubbing - is becoming more common, although such conferences between valuers have a habit of making experts further apart than when they started! Another option is considering referral of valuation issues to a single expert for determination, in much the same way rental determinations are conducted. Whether or not that is appropriate usually depends on the circumstances of each case, but the API is looking at Alternative Dispute Resolution frameworks with key clients, that can resolve this issue of disparate expert evidence, which causes a great deal of aggravation and cost for clients, valuers and their insurers. Dealing with the questions in the workshop, our views are as follows: 1 Wright s position as sub-contractor. As a general rule, liability follows the letterhead. In this case, Competent subcontracted the job to Wright, but did not say this on the valuation. As such, the client was not aware that a sub-contractor performed the valuation, so it will be extremely difficult for Competent to say that it is not liable for the comments made in the valuation, because the work was done by a sub-contractor. Had Competent delegated the job to Wright, for Wright to do on his own letterhead, the situation would be different. That is rarely done in the industry though. What will happen though, is Competent will seek to pass on its liability to Wright. This is what the lawyers call a claim for contribution. It is likely that Competent will join Wright to the proceeding and Wright should have his own insurance to cover that. If Wright does not have his own insurance, then he should have had a prior arrangement with Competent that he was covered under Competent s policy. If he did not do this, he will have an uninsured liability. The simple message is that all sub-contractors should have their own insurance, or a very clear written agreement with their principal, that they are covered under the principal s professional indemnity insurance. Page 4 of 6

5 2 Different transaction or no transaction case? The fundamental principle concerning assessment of damages, is to put the plaintiff in the position they would have been in, had they not received a negligent valuation. Key to this is the principle that if a plaintiff was going to suffer loss anyway what lawyers call inevitable loss then a negligent defendant is not responsible, because he cannot be said to be the cause of that loss. This analysis is entirely hypothetical. It involves the court assessing what would have happened and doing its best to do justice to the parties. In valuation cases, this means two key things. The first is that verdicts can vary enormously, depending on what view the court takes about the expert valuation evidence and what would have happened. The second is that this commonly comes down to an issue as to whether or not the lender would have still lent money to the borrower and on what terms. If the lender/mortgage insurer establishes that they would not have entered into this transaction, their loss is measured by the difference between the loss they suffered and would not have suffered. If the lender can also establish that they would have made more money on another transaction, they can be awarded that difference as well. However, if the court finds that the lender would have still advanced money to the borrower; or that the mortgage insurer would still have insured the loan, the court needs to make a conclusion as to the terms of that loan. In this case, the borrower only needed $351,000 to refinance the loan, so if the court concludes that the true value of the property was $420,000, then $378,000 would have been advanced at a 90% LVR. This would have covered the refinance and also given the dodgy/distressed borrower some play money. As such, the loss would be measured by the difference between what was advanced - $414,000 against the amount that would have been advanced - $378,000 a loss of $36,000. That is significantly lower than the $125,000 claimed, which would roughly be the amount awarded should the court find that the lender would not have lent any money at all ie a no transaction case. Please note that you only get to calculate damages, if the court finds that the valuation was negligent. In this case, that would mean the court, or defence lawyers, have conceded that the valuation was negligent. That will require some clear evidence as to something the valuer has done wrong more than just an expression of opinion on value and more than just being outside the "bracket" of expert opinion. 3 Assume true value is $370,000 - is this a transaction or no transaction case? At a true value of $370,000 ie what the court accepts as the value of the property at the time of the valuation then 90% of $370,000 is $333,000. As this is less than the amount required to refinance Page 5 of 6

6 ($351,000) then a court is likely to conclude that this is a no transaction case. In the Victorian case of Quinerts, the trial judge accepted evidence that the borrower would have found more money to refinance from his own resources, but the court of appeal essentially concluded that this took the analysis of what would have happened too far. This shows how critical expert evidence is, both as to competence of the valuer that did the initial valuation, but also as to what the true value of the property was a the time of the valuation. 4 Assume fall in value of 20%. Whether or not a negligent valuer is liable for losses caused by a fall in market value, remains a legal issue about which lawyers differ. As a matter of principle, the prevailing view is that a valuer is not. The only High Court case to deal with the issue directly Kenny & Good did find a valuer liable for a fall in value, but that was because the valuer warranted that the property would hold its value for the life of the loan. Absent such a reckless statement, the better view is that clients should wear the risk of falls in market value, because they are inevitable and not the valuer s responsibility. In this case, the defence argument would be that you simply take out the 20% fall in value from the loss calculated. So if the true value is held to be $370,000, then the defence will say that $74,000 of the client s loss is caused by market movement which is outside the valuer s control. On a no transaction case, the loss is approximately $125,000, so success with this argument would reduce the liability to about $51,000. Obviously clients argue that they would not have entered into this transaction but for the negligent valuation, so they get their entire loss. Whilst that simple argument is attractive to clients (and also to their lawyers), it is not a correct statement of the law, but could be the outcome depending on the facts of the case. The more important issue for valuers is that they and their insurers cannot afford to be liable for falls in market value when they have been negligent. You are not paid enough to be taking on that risk. Bear in mind, that your colleagues and courts can find errors quite easily. For a $250 valuation, liability of $100,000 plus is easily achieved, to which you add legals. The risk/ reward ratio is very tight, such that market downturns threaten the financial viability of the industry that obviously operates on very tight margins. Again, the API is looking at altering the risk/reward ratio, by engaging with clients to review terms to ensure the long term viability of the profession. Page 6 of 6