Negligence & Valuation

Negligence & Property Valuation: Methodology & Margin of Error Theory.

A brief summary of the case law that has evolved around determining negligence in valuation practice. This article attempts to summarise case law surrounding margin of error theory.

The general standard for precise conclusions” . 2 The It has been widely recognised professional negligence is best unpredictability of the that there is permissible range described by assessing what the property market can often for values, and it follows that if a professional actually did and result in imprecise valuation value lies outside of this range, comparing this with what a conclusions, and an this is a strong indicator that the reasonably competent member of allowance made for this when valuer has been negligent. the profession would have done determining the threshold for Meagher JA stated that the in their shoes. When a valuer’s professional permissible margin of error is determining whether a valuer negligence. Brown, Matysiak 10% in most cases, but can be has exercised reasonable skill and Shepherd further extended to 15% in exceptional and care, the extent to which the expand on this concept, circumstances.5 This range will valuation departs from the ‘true noting that valuers tend to generally be applied to expert value’ of the property is the best interpret information evidence. However, whilst the starting point. However, as it has been famously noted by many, valuation is best viewed as an art, not a science. Whilst the value of the property is the first plae to begin, this is not a conclusive indication of negligence, and the valuation methodology and ways in which the valuer arrived at his conclusion must also be examined. “Valuation is an art, not a science” As Goddard LJ stated, ‘valuation is very much a matter of opinion … we are all liable to make mistakes, and a valuer is certainly not to be found guilty of negligence merely because his valuation turns out to be wrong’.1 Watkins J expounded on this and differently, resulting in differing opinions of value that are based on the same evidence.3 Watkins J concludes that “two able and experienced men, each confronted with the same task, might come to different conclusions without anyone being justified in saying that either of them has lacked competence and reasonable care, still less integrity, in doing his work. ”4 Margin of Error Theory & Test The ‘margin of error’ theory started as an approximate indication of what could be expected from a reasonably competent valuer and has margin of error provides a guide, Meagher JA went on to state that “it is not a statement of some principle that no valuation within the bracket can, as a matter of law, be negligent. ”6 Although as Bellew J stated, “when the valuation is so far removed from the true value of the property … (it can be) satisfied that the (valuer) was negligent in preparing it and providing it”7, indicating that an egregiously wrong assessment may sometimes be enough to establish negligence with little further investigation. It must be noted that this test cannot be considered a sole determinant of negligence, but rather that it calls into question the skill and care of the valuer. noted that “valuation … is a task subsequently evolved into an which rarely, if ever, admits of informal test for negligence.

Valuation Methodologies & Negligence According to Hyam, “the use of comparable sales evidence is the most widely accepted method of determining the market value of land” and it has been described as “the conventional valuation technique” and “the most direct method”8. Hyam states that when applying most methods of valuation, market transactions must be used and correctly analysed9. This means that whilst the valuer may adopt the appropriate valuation approach, it is not enough only to use the correct method, but it must also be applied correctly. However, this will change on a case-by-case basis and Croft J noted that the Courts are yet to adopt a “prescriptive position with respect to valuation methodology” and that “care should be taken to ensure that no single process of reasoning is elevated into a statement of principle”10. Furthermore, “the valuer’s task is then, within the context of the facts and circumstances relating to the relevant property, to apply the most appropriate method of valuation according to his or her expertise and experience.”11 Hyam states that “values must be calculated in the light of circumstances which existed on the material date” and that whilst the Courts can take subsequent events into account, the “tendency … is to admit evidence of any events prior to the date of trial which throw any real light on the issues.”12 Whilst these principles have not been fully enshrined in the common law, there is some general judicial guidance regarding good valuation practice. Barker J has stated that where there is paucity of comparable sales evidence, it is reasonable to note relevant older sales dating back 12 months, however, in a rising market, these are not “susceptible to reliable adjustments” and therefore “should not be used for comparative purposes”13. This observation is currently especially relevant, and points to a challenge faced by valuers in a rising property market. To ensure the validity of a valuation conclusion, Harrison AsJ agreed that it is considered good valuation practice to adopt a secondary valuation methodology to check the conclusions reached by the primary approach, however he conceded that where only one method is available and it is not possible to perform a c cross check, this will suffie14 . It is important to note that these principles may not be applicable to every property, and that valuers should use their own discretion when determining values and the methods that they use to arrive at their conclusions.

Key Takeaways Where valuers have exercised reasonable skill and care, it is unlikely that a claim of negligence will arise. The yardstick of a valuer’s negligence is best viewed as how a reasonably competent member of the profession would approach the same valuation task and whether the actual approach taken is within the legally prescribed margin of error. However, valuers must keep in mind that the boundaries for negligence will vary from valuation to valuation, and that negligence claims may arise around both incorrect assessments of value and incorrect selection and application of methodologies.

*This article is not intended to constitute any legal advice, but rather provide a brief summary of the principles relating to negligence and valuation. We recommend that any readers seek their own independent legal advice instead of placing reliance on this article.*

References 1.Baxter v FW Gapp & Co Ltd [1938] 4 All ER 457, 459. 2.Singer & Friedlander Ltd v John D Wood & Co [1977] 2 EGLR 85, 86. 3.G Brown, G Matysiak & M Shepherd ‘Valuation Uncertainty and the Mallinson Report’ in Cutting Edge Conference (Bristol: Royal Institution of Chartered Surveyors, 1996). 4.Singer & Friedlander Ltd v John D Wood & Co [1977] 2 EGLR 69. 5.Adwell Holdings Pty Ltd v Smith [2003] NSWCA 103, 23. 6.Ibid. 7.Casteran v Rural Valuations Pty Limited and O’Dea [2015] NSWSC 1337, 21. 8.Alan A. Hyam, The law affecting valuation of land in Australia (The Federation Press, Fourth edition. ed, 2009). 9.Ibid. 10.Challenger Property Asset Management Pty Ltd v Stonnington City Council & Anor [2011] VVSC 184. 11.Ibid. 12.Hyam, Alan A., The law affecting valuation of land in Australia (The Federation Press, Fourth edition. ed, 2009. 13.Australian Executor Trustees Limited v Propell National Valuers (WA) Pty Ltd [2011] FCA 522. 14.Provident Capital Limited v John Virtue Pty Ltd (No 2) [2012] NSWSC 319, 140.