Buy-to-let boom comes back to haunt the industry

There have been 25 High Court cases brought by lenders against RICS valuers in the last year, with several thousand more cases pending. Firms are in serious danger of collapse because of the threat, said one lawyer.

All the litigants are alleging professional negligence and claiming compensation. Most of the cases are to do with alleged overvaluing on off-plan and new buy-to-let city centre apartments.

The litigants are mortgage lenders who had to repossess the properties and sell them at a loss.

David Dalby, director of the RICS Residential Professional Group, said: “A large number of potential claims are being notified to our members, unsupported by evidence of negligence, but where the lender has taken possession and has suffered a loss.

“Evidence to date indicates that the majority of such losses are directly attributable to falls in the residential markets and not to negligent valuation advice, and that many of these losses are the result of inappropriate lending due to poor underwriting practices amongst some lenders. Where such poor lending decisions have been made, it is hardly surprising that the incidence of default is higher than for loans where prudent lending, based on proper affordability checks, has been undertaken.”

The figure of 25 High Court cases compares with just one in the previous five years, but echoes the recession of the early Nineties, when there was a rush to sue valuers.

Some of the latest claims have involved new apartments in Manchester and Leeds, and developments which were mothballed.

The rise in litigation follows various lenders’ decisions to stop lending on off-plan and new-build city flats, in view of difficulties in achieving accurate valuations, and several related cases of mortgage fraud.

Estate agents have also accused lenders of being too quick to use the auction route as a method of disposing of repossessions, where prices have been rock-bottom.

Lawyer Alexandra Anderson, a partner at Reynolds Porter Chamberlain, said that on top of the 25 cases lodged at the High Court, there were well over 2,000 others in the pipeline.

She said: “Losses of British and Irish banks on loans in the UK property market run to billions of pounds. This has put a lot of pressure on banks and investors to pursue any option open to them to recover their losses, including launching a negligence claim against the surveyor who valued the collateral for the loan.

“There can sometimes be a ready assumption that when property prices fall because of a drop in the market, the surveyor who valued the property is to blame. But even if the valuation was inaccurate, that doesn’t necessarily mean that there was negligence.”

She added that the mere threat of legal action can put a surveyor out of business because the firm must inform its professional indemnity insurer of the claim, and face higher premiums, regardless of the outcome of the case. She said that in some cases, individual firms had received several threats of litigation.