Legal profession

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The money pit: getting the assets right the first time

Mark O’Hara reports on the rise of professional negligence claims against legal advisers in divorce and civil partnership dissolution matters.

About the author Mark O’Hara FRICS has been a practising chartered surveyor in Bristol and the surrounding area for the past 30 years. He is the managing director of Osborne Irish Associates in Clifton, Bristol and, in addition to his foundation work as a surveyor, also acts as an expert witness for both civil and family litigation.

I am a chartered surveyor and have been for 30 years. I am being called upon more and more in relation to potential professional negligence claims against firms that failed, when instructed initially in divorce proceedings or civil partnership dissolution, to provide an accurate assessment of non-matrimonial property portfolio assets. When the evidence to prove property value is inadequate, the results can be devastating for the clients; however, they are also likely to be damaging for their legal representatives in the years ahead, when someone else has the thankless task of scrutinising the work undertaken to arrive at the figures relied upon.

Since the mid- to late 1990s, the acquisition of buy-to-let properties has grown strongly, and it is predicted to continue to do so for some time. Many couples took advantage of the fact that finance was easily available, and invested large portions of their assets in buy-to-let property portfolios.

When the relationships break down, the portfolios form, in most cases, a substantial asset to be assessed and divided. The shocking fact is that this most valuable asset is not always given appropriate consideration. It is only when the parties cannot agree to resolve their financial claims that they must seek the assistance of financial remedy proceedings. The courts will have regard, in particular, to the matters set out in Matrimonial Causes Act 1973 section 25(2)(a):

… the income, earning capacity, property and other ÿnancial resources which each of the parties to the marriage has or is likely to have in the foreseeable future, including in the case of earning capacity any increase in that capacity which it would in the opinion of the court be reasonable to expect a party to the marriage to take steps to acquire…

Perhaps the casual approach to property portfolios follows on from the courts’ apparent desire to uncomplicate the assessment of assets by experts and allow property to be thrown in a melting pot for the parties to simply agree. As legal advisers, you should not fall into this potential trap. How your client’s assets are valued should be given appropriate consideration.

Potential pit: example scenario

Consider a case where a client sought legal advice and representation for her divorce proceedings with her former husband.

The couple had a portfolio of 15 investment properties of which eight were to be retained by her former husband. To assess the value of the properties, her former husband instructed a local estate agent to provide drive-by valuations. These were then relied upon by the client to assess the value of capital assets for the dissolution of the marriage. However, upon the financial settlement awarded by the court, the district judge excluded the issue of capital gains tax (CGT) in his considerations due to lack of evidence. Estate agent valuations are unreliable for CGT.

The question arose as to whether the client’s legal advisers were negligent in not exercising due diligence when obtaining values for the properties. I hope that the following will give useful instructions to ensure that clients are advised properly.

Pit avoidance: estate agent valuation versus valuation report

A professionally prepared valuation report is intended only to give a brief inspection of the property and a market valuation. Its scope is restricted by the fact that the report is based on a limited inspection and several standard assumptions. The valuation involves a brief inspection (usually less than 20 minutes in length) and should not be confused with a survey. Internal inspection is not necessary, and the valuation can be undertaken by a drive-by and area research as long as this is done by a qualified valuer.

Valuations are required in situations where a definitive value is needed. A valuation carried out by an estate agent is purely an opinion (ie, an estimate of price). An ‘opinion’ means that there is no requirement in law for it to be accurate.

Only chartered surveyors are qualified and required to give an unbiased, objective and accurate valuation of a home’s true worth. For this reason, only valuations from a chartered surveyor are acceptable for mortgage and insurance valuation purposes. A client is also offered protection from an incorrect valuation if provided by a chartered surveyor, who will be insured against claims for an error in the valuation. An estate agent will not have insurance, and if their valuation is incorrect the client would have little or no recourse.

When you may be in the pit already: valuation negligence

The law puts valuation negligence into two types:

Mistake, carelessness or incompetence, where a valuer has made a mistake, such as failing to list either the correct number of bedrooms, location or age of the property; and/or
the valuation produced is outside an accepted margin for error.

The margin for error has been developed over time in case law. This was clarified recently by the comments of J Coulson in (1) K/S Lincoln (3)K/S Chesterÿeld (5) K/S Quayside (8) K/S Wellingborough v CB Richard Ellis Hotels Limited (No 2) [2010] EWHC 1156 (TCC).

For ‘standard’ residential property, the margin of error could be as low as +/-5%.
For a valuation of a one-off property the margin of error will usually be +/-10%.
If there are exceptional features of the property, the margin of error could be +/-15% or even higher in an appropriate case.
Market conditions can raise these margins.

Stay on solid ground: selection of an expert and report requirements

There may be a request by the client to keep costs to a minimum and also a desire, on the part of the legal adviser, to ensure that costs are proportionate if later they are to be assessed by the court. However, cutting expense in relation to expert advice on value of assets is a false economy.

There is no doubt that an estate agent will be happy to provide a valuation for a reduced fee (or no fee at all) if this leads to instructions. Instructing a qualified surveyor will incur a higher fee and may seem an expensive proposition, but when taken as a percentage of the property to be valued is usually inconsequential.

At the very least - to ward off potential professional negligence - a legal adviser should give suÿcient consideration to the type of valuer to instruct to provide the report required and to advise their client accordingly. Simply to reduce expenditure by relying on an unqualified valuer to calculate the client’s assets would be gambling that the court would consider this reasonable.

Therefore, to provide the appropriate legal advice and protect yourself from any future negligence claim, the only way to ensure that you have a valuation suitable for a division of assets in proceedings or for CGT purposes is to obtain a formal valuation. This can only be conducted by a qualified valuer who has undertaken prescribed education and training in this field.

The Royal Institution of Chartered Surveyors (RICS) provides the criteria to become a land and property valuer. Relevant degree subjects include real estate management; property development and valuation; building surveying; and quantity surveying and commercial management. A formal professional valuation will take into account several relevant property features such as the following:

location/aspect;
building structure and condition;
any building/structural faults;
features of the home; and
caveats or encumbrances on the property.

A firm foundation: types of valuations to consider

Most valuations are set on the date the report is prepared and are a current reflection of the property’s value. However, a valuation is not always that set on the present day.

In certain circumstances, it is necessary to provide a retrospective valuation. This would be particularly relevant if the assets were disposed of previously. There is a different procedure to follow to arrive at an historical valuation, which involves access to databases with historical market value data and research market conditions at a specified date.

There is usually also a requirement to physically inspect the property (very often from the street only as access may no longer be available). A retrospective valuation would take the following into account:

The year that the property was assessed.
Whether the valuations are deemed accurate for that year.
Information from a number of sources in order to reach a historically correct valuation.
In all cases, unless otherwise instructed, to assume that no major changes were made to the properties since the valuation date.

Unintended consequence: a rise in expert witness instructions for surveyors

As an expert witness, I am an obvious beneficiary in litigation. I am relied upon by parties to give advice on what is the standard to apply when valuing land and property. I would have no hesitation to support a professional negligence claim if:

There is no evidence to indicate that the legal adviser gave consideration, as would be the minimum standard, to the type of valuer to instruct to provide valuation figures; and
A legal adviser relied upon the valuations provided by an estate agent or unqualified valuer to calculate the assets for their client, particularly where there may be CGT implications.

The simple fact is that, with due care and consideration, you can easily avoid negligent/unreliable valuations. There are thousands of chartered surveyors to choose from to instruct for valuation purposes. As a basic guideline, it is best to choose a surveyor local to the area of the properties as they will have the best personal knowledge to apply; ensure that there is no conflict of interest; confirm to the valuer the appropriate date to use for the valuation; and agree to the expert with the other side before sending instructions.

To find your local surveyor simply search the RICS website. Visit: www.rics.org/uk

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