The number of homes repossessed by mortgage lenders increased steadily in 2019, with an increase of 17% in the final quarter compared to the previous year. One of the key drivers for this is thought to be affordability, with an increasing number of households facing a strain on their finances. Fast forward a few months and large sectors of the economy are on pause as a result of the Covid-19 pandemic and many businesses and people are facing severe financial hardship.
To try and counter the economic impact of the pandemic and the lockdown in place, the government has introduced measures such as mortgage holidays and a job retention scheme. However, it is unclear what the longer term effects of the Covid-19 pandemic will be on the UK economy and property market. There is also uncertainty around how lenders will respond if there is an increase in borrowers who default on their mortgages when the government’s support measures and the lockdown come to an end.
Some commentators, like Savills, are predicting a short-term fall in property prices of 5 to 10%, followed by a quick recovery. However, if we do face a marked increase in repossessions in 2020 and beyond, coupled with a substantial and a sustained fall in property values (in 2008 it was 16%), lenders will be less likely to recover their loans and costs in full when a property is repossessed and sold. If an error or omission was made by their professional advisers, those lenders may then seek to recover any shortfall by making a claim against them.
Some protective steps for those carrying out surveys now
In the current situation, surveyors and valuers would be wise to follow the Covid-19 guidance issued by RICS. Where properties cannot be fully accessed for inspection, or where access to data on comparables is restricted during the lockdown, surveyors and valuers should make that clear in their report, and consider whether amendments should be made to their terms of engagement. Surveyors and valuers should also consider whether to make a material uncertainty declaration when reporting and make sure that they record the rationale behind their decision (either way) for future reference. Such records can make it easier to defend any future claim.
Claims against valuers and surveyors: hurdles for lenders
Even if there is an increase in claims, property valuers and surveyors should not despair. Such claims can often be successfully defended and lenders must overcome a number of hurdles before they can succeed with any claim. Some important questions to consider are:
1. Do the alleged breaches of duty fall outside the scope of the surveyor’s duty of care?
2. In the case of an alleged overvaluation, what percentage margin of error is appropriate and does the alleged true value of the property at the time exceed that margin?
3. Would the transaction still have proceeded, either on the same terms or by way of a loan for a smaller amount, despite the alleged breach of duty?
4. Is it worth seeking to ‘cap’ the loss to not more than the difference between the alleged overvaluation and the true value of the property at the time of the loan?
5. Has there been any contributory negligence, or a failure to mitigate by the lender?
6. Did anyone else who advised the lender cause or contribute to the loss?
It remains unclear right now if a new wave of lender claims will come and it is to be hoped that the economy and property market can bounce back relatively quickly. However, if we do see an increase in claims, surveyors and valuers should not lose heart because such claims can potentially be successfully defended. It is also worth remembering that even where an error has been made and a lender has a valid claim, there may still be arguments which can be deployed which can substantially reduce any claim payment made.
A more detailed version of this article, discussing the issues which can arise in connection with the questions listed, is available on request.