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Brexit Clauses: Lenders Beware

Valuers have a duty to follow market trends and they will adapt their views on value depending on market conditions.
The outcome of the EU referendum has put valuers in an unenviable position. Not least because the RICS Red Book (as part of the implementation of professional standards in specific contexts) requires a valuer to identify a situation where a reduced level of certainty should be attached to their valuation (RICS Valuation Practice Guidance Applications 9 (VPGA 9 - Valuations in markets susceptible to change: certainty and uncertainty)).

Following the UK's vote to leave, the general effect on the property market is unclear, but some volatility can be expected. This will make a valuer's role in determining a fair price for a property more difficult in the absence of transactional data post-dating the referendum.

Brexit clause

The RICS guidelines suggest a potential need to caveat post Brexit valuations. A number of valuers acting for mortgage lenders have sought to insert a clause into their valuation reports, stating that they have less confidence than usual in the probability of their valuation being in line with the actual sale/transaction price.

The proposed inclusion of this clause, however, demonstrates a lack of understanding of underwriting processes and reliance on such reports for/by lenders. As a result, a number of lenders and their panel managers have insisted on the removal of any such caveats from standard mortgage valuation reports received/finalised post 23 June 2016.

The general theme, at least in the medium term, being advanced by the valuation profession, is that valuation advice will be subject to a greater degree of uncertainty than normal. It is suggested, therefore, that all valuation reports submitted post 23 June cannot (albeit this is not stated explicitly) be relied upon by lenders in the usual manner.

Our view is that the Brexit vote should not allow valuers an opportunity to absolve themselves from responsibility by suggesting that the property market is too volatile to accurately evaluate. To do so would see lenders accepting risk that normally attaches to third party professional valuers engaged by lenders. This is not a sustainable position for the lending market. 

Emphasis on conservative value; not caveat

The fallout of the economic financial collapse in 2008 did not permit valuers to discharge themselves from responsibility for coming to a firm view on value. It would therefore seem extreme if valuers were now able to self-categorise any Brexit impact on the property market as being so 'exceptional' so as to permit an (effective) exclusion of liability or a widening of the range of permitted tolerance to apply.

If market turbulence is a concern, then we consider that valuers should not be permitted to insert an express 'uncertainty clause' in valuation reports. Instead, lenders should still be entitled to expect that valuers, as paid professional advisors, should provide an accurate valuation. Albeit, if there are concerns about the market, then any valuation should be at an appropriately conservative level in order to reflect the professional valuer's views on any notional uncertainty.  This must be instead of attempting to artificially permit an increased margin of error, or attempting to ensure that lenders accept valuations subject to a market uncertainty caveat.

Additionally, the margin of error concept is well known to the valuation profession and firmly established in case law. The case of K/S Lincoln and Others v CB Richard Ellis Hotels Ltd [2010] aligns the type of property, rather than market conditions, with an appropriate margin of error at the time of the valuation. Lenders should not be seen to be 'accepting' of a margin of error greater than the widely accepted 5% (10% in highly unusual circumstances) on the basis of uncertain market forecasts, as affirmed and commonly applied by this case.

Property valuation will always contain an element of the unknown, although the degree of any uncertainty may vary depending on market circumstances at the valuation date. Accordingly, a non-caveated, conservative valuation approach is more appropriate. 

This will enable the lending community to continue to support the sector and in turn, allow the lending market to function properly, despite the challenges currently facing the property market. 

Should any of your panel valuation firms propose that valuation reports received post referendum to be treated differently to those prepared Pre-Brexit, please contact us and we can advise you on a suitable response.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions 

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