Valuations accuracy: keeping records

23 October 2018

Maintaining a comprehensive valuation file is essential in case claims come to court, caution Tom White and Claire Curtis

Surveyors should always adhere to professional guidance, much of which has been developed in response to negligence claims against valuers. While there is a temptation for best practice to lapse given the pressures of a busy workload and tight deadlines, a lack of documentation in a valuation file can leave a surveyor exposed to the risk of a claim that, even if found without merit by a court, can result in wasted time and costs, considerable stress and reputational damage.

By taking a few simple steps and ensuring that these become routine best practice on every valuation, valuers can minimise this risk, or at least help cut a claim short at the earliest opportunity.

Back to basics

The Red Book establishes the mandatory rules and professional standards for valuation practices and processes, and RICS guidance notes provide supplemental direction and assistance along with a clear framework of best practice for surveyors to follow. The court will often review and take into account all such professional guidance when considering an allegation of negligence against a surveyor and assessing whether they acted with reasonable skill and care.

This professional guidance provides the foundations of property valuation, which are second nature to most experienced surveyors. However, even the most diligent are susceptible to commercial pressures and time constraints, which can mean they do not fully record all the steps they take and the reasons they reach particular decisions on a given valuation. In many instances this may not be an issue; however, there can be a risk that a valuation may later be called into question, particularly if markets subsequently decline, borrowers default and financial institutions seek to enforce their security over the properties that have been valued.

If there is a shortfall in the recovery, lenders will often explore whether there was an error in the valuation process and, if there was, look to the valuers and their professional indemnity insurers to make up the difference. Even if the reported value was at or within an acceptable margin of the true market value of the property and thus should not be challenged, claims can be harder to rebut – and in particular to cut short – before trial if the underlying valuation file does not offer robust detail on the process followed by the valuer, the evidence on which they relied and the decisions made on the way to reporting the final figure.

Gaps in the file may be exploited by the claimant’s legal team, and this can present difficulties for the defendant firm. Those difficulties are exacerbated if the firm finds itself in the position of having no witnesses to give first-hand evidence of what it did, which can happen where claims arise long after the valuation was carried out.

Scrutiny

Where a valuation is the subject of a claim, the file will come under close scrutiny by lawyers, independent expert witnesses and the court, who will assess whether the valuation was negligent. Many hours will be spent by parties in litigation analysing every aspect of a valuation and the file – often considerably more than was spent on conducting the valuation itself.

The defendant’s legal team will want to be able to give a rational explanation for every decision made by the valuer, with reference to clear and persuasive evidence, in order to satisfy the court that they exercised their judgement in a reasonable and coherent way on the basis of relevant evidence, rather than having applied a general feel for the market. It should follow that the more analytical the valuation is and the more supporting evidence there is on file, the better the prospect of it standing up to scrutiny in a claim, and the easier it will in turn be to rationalise the valuation and rebut any challenges.

Consequently, it is often important for the key decisions in a valuation exercise to be recorded in the file so as to provide a clear audit trail that succinctly explains how and on what basis the valuer reached their opinion of market value. This is equally as important whether a valuation is prepared by one surveyor or a team. While it may seem contrived and unnecessary to prepare a written record of a decision when there is only one surveyor and no discussion has taken place, it is nonetheless important.

Gaps in the file may be exploited by the claimant’s legal team, and this can present difficulties for the defendant firm

A record of the decision-making process becomes even more pertinent for complex valuations, such as residual valuations with multiple moving parts: these can be the subject of more substantial claims because the residual calculation can have an amplifying effect, even when only small changes are made to the inputs.

Where the property being valued is the subject of a contemporaneous transaction and purchase price evidence is also available to the valuer, it can often be important to record in the file any evidence in addition to this on which the surveyor has relied in reaching their view on market value. The courts recognise that valuers cannot just blindly adopt a purchase price as market value, so the valuation ought to be supported by any other available evidence.

If the property has been undervalued when sold and thus a valuation is higher than the contemporaneous purchase price – often a high-risk approach – a detailed explanation justifying that approach is essential. In the absence of such an explanation, the valuer may find themselves an easy target if a claim is subsequently made.

Every detail counts

Ideally, we would all have time to record every single decision and conversation in beautifully typed notes. However, the practical reality is that this is not always possible owing to the time constraints and commercial pressures of a busy practice. However, even a handwritten bullet-point note or a quick email explaining a surveyor’s thought process, if kept in the file, can be helpful in clarifying and justifying why a decision was taken.

In addition to recording decisions, a valuation file should include evidence of the research undertaken by a surveyor to help form their view on market value. This is particularly important in relation to the collation and analysis of comparable transactions and discussions with local agents. These steps do not always find their way into the file, which can present difficulties if the valuation later has to be defended – particularly if there is a lengthy gap between the valuation being undertaken and a claim being made.

Similarly, it can be important to retain a record of all correspondence, whether internal or external, so it can be reviewed and considered by the legal team should a valuation be challenged. But every professional should bear in mind that, in the event of a claim, all documents relating to the valuation will be seen by the court and both parties’ legal teams. Consequently, you should only put something in writing if you would be happy for it to be read out in court – which means no rude emails.

The prevention principle

In summary, a clear paper trail and a complete valuation file can greatly help the legal team defending an allegation of negligence. It can clarify why particular decisions or steps were taken, which may enable a robust rebuttal of the claim. This can be especially helpful in instances where the original surveyor is no longer available, or is unable to recall events thanks to the passage of time.

The approach with regard to documenting decisions should remain the same no matter what the scale of the valuation is – a complete valuation file should be best practice for every surveyor on every instruction. As Benjamin Franklin said, 'an ounce of prevention is worth a pound of cure'.

Tom White is a partner and Claire Curtis an associate at Clyde & Co LLP

Further information

• Related competencies include: Valuation
• This feature was taken from the RICS Property journal (October/November 2018)
• Related categories include: Risk management