It follows from the above that a purchaser needs to be satisfied as to the physical condition of the property before exchanging contracts; and should be advised on the possible need to have a survey done. There are two main possibilities to look at:
(a) The purchaser may choose to rely on a valuation done by her mortgagee.
Before deciding to lend, a building society is under a statutory duty6 to have
‘a written report on the value of the land and any factors likely materially to affect its value made by a person who is competent to value.’
Similarly, in practice, any institutional lender is likely to have a professional valuation done before committing itself.
Such a valuation is commissioned by the lender; though paid for by the borrower. Nevertheless, it has been established by the courts that such a professional, at least in the case of the average house purchase, is expected to
6 Building Societies Act 1986, s 13.
realise that the borrower may well rely on the valuation report; and therefore owes a duty of care not only to the instructing lender but also to the borrower who does in fact rely on the report. In practice, most institutional lenders do make a copy of the report available to the borrower; though their literature is generally framed to discourage reliance on it! A number of points are worth noting:
(i) The duty will normally exist even where the borrower has been advised to have her own independent survey done. But the duty is not normally owed to anyone other than the lender and that particular mortgage applicant. Thus if the latter makes the report available to a subsequent purchaser there will be no duty; and the person handing it on should make it clear that she too does not accept any responsibility for its accuracy.
(ii) If the valuer is a staff employee of the lender, the lender too may be vicariously liable for the negligence of the valuer,
(iii) Any attempt to limit or exclude the liability of the valuer or her employer will be subject to the test of reasonableness under s 2 of the Unfair Contract Terms Act 1977; and, at least in the case of the average, modest house purchase, is likely to be held ineffective for that reason.7 (iv) However, the courts have made a distinction between a valuation for mortgage purposes and a structural survey.8 A less detailed investigation of the property, so it is said, is required in the former case. The duty of the mortgage valuer has been put as follows:9
‘The valuer, in my opinion, must be a professional person, typically a chartered surveyor in general practice, who, by training and experience and exercising reasonable skill and care, will recognise defects and be able to assess value. The valuer will value the house after taking into consideration major defects which are, or ought to be obvious to him, in the course of a visual inspection of so much of the exterior and interior of the house as may be accessible to him without undue difficulty.’
The point is that a valuation is an appraisal based on a limited investigation; but it is an appraisal by a supposedly competent surveyor who should recognise the significance of what is visible.
7 See, generally, Smith v Eric S Bush [1989] 2 All ER 514. Contrast McCullagh v Lane, Fox &
Partners (1995) Times, 22 December, and Lexis transcript, in which the vendor’s estate agent who had innocently misrepresented the area of the (expensive) property was held to have excluded any assumption of responsibility to the plaintiff purchaser by a disclaimer in the particulars; and the disclaimer held to be fair and reasonable within the 1977 Act.
8 See M Harwood, ‘A Structural Survey of Negligent Reports’ (1987) 50 MLR 588.
9 Smith v Eric S Bush (note 7 above), per Lord Templeman, p525.
In Beaton v Nationwide Building Society10 the valuer carelessly (so held) concluded that relatively extensive, repointed step-cracking in the exterior brickwork and further, unrepaired cracking, pointed only to structural movement in the past which was many years old, and not to any continuing movement.11
(b) A purchaser may decide to have her own, independent survey done, whether or not she is also paying for her mortgagee’s valuation.
Clearly, this is advisable where the property is in any way out of the ordinary, by reason of price, history, location, age, etc.
In such a case the purchaser will have a contract directly with the chosen surveyor. The surveyor will owe a contractual duty of care and face potential liability for professional negligence.12 The following points should be noted:
(i) Even a structural survey does not guarantee the state of the property.
There may be hidden defects (most seriously, for example, in the foundations) which even a competent structural survey would not be expected to discover.
(ii) The surveyor will only be liable for doing negligently what she has contracted to do. And only within these limits will the Unfair Contract Terms Act 1977 apply to any attempt to exclude or limit liability.
Most building societies urge their loan applicants to have, as an addition to their own valuation, either a homebuyer’s (or similarly named) report or a
‘full’ structural survey. In either case, it is important for the purchaser to read the terms of engagement (which will generally be in standard form) to discover exactly what the surveyor is agreeing to investigate.
The homebuyer’s report is normally done for an additional fee by the lender’s valuer at the same time as the mortgage valuation. Its scope is likely to be particularly limited. The conditions attached to the one offered by one building society, typically, includes the following:
‘The surveyor will inspect as much of the surface areas as is practicable, and will lift loose floorboards and trap doors where accessible, but will be under no obligation to raise fixed floorboards or to inspect those areas of the property that are covered, unexposed or are not readily accessible. Inspection will therefore exclude both the roof space, if there is no or no reasonably accessible roof hatch, and the outer surfaces of the roof if they cannot be readily seen…except where the contrary is stated parts of the structure and of the woodwork which are covered, unexposed or inaccessible, will not be inspected.’
10 (1991) (Lexis transcript).
11 On the margin of error allowed to valuers see HW Wilkinson, ‘Valuing within the Bracket’ (1995) 145 NLJ 1267.
12 Note Supply of Goods and Services Act 1982, ss 12–16.
In addition, this report excludes the testing of services and defects of no structural significance or of a minor nature. It will point out any further investigation which may be called for; but will not provide such further investigation without a further fee.
Such a homebuyer’s report may give reassurance. It is doubtful whether it gives any greater protection than reliance on the lender’s valuation.13 The cost and extent of investigation of a full structural survey will depend on negotiation between the surveyor and the person instructing the survey (though in practice a standard form contract will be offered). Even such a survey does not guarantee the state of the property in every respect. There may still, for example, be inaccessible parts of the structure.
(iii) Even where a purchaser successfully establishes a claim for professional negligence, it should be remembered that damages awarded may not cover the total loss. The measure of damages in such cases, whether against the mortgagee’s valuer or an independently-commissioned surveyor, is in general the difference between the price paid for the house and the market price in its actual condition at the date of breach (ie taking into account the undiscovered defects). In particular, if the necessary repairs are carried out and cost more than this difference, the extra will not, it seems, be recoverable.14 Further, the amount recoverable for resulting distress and inconvenience may be severely limited.15
3.5 INSURANCE
A client should be advised to read any insurance policy that she takes out with great care. Policies vary a great deal in what damage and events they do and do not cover.
13 And may simply reflect a move by institutional lenders to shift the cost implications of cases such as Smith v Eric S Bush directly onto the borrower.
14 See Watts v Morrow [1991] 4 All ER 937; suggesting (at p950) that to allow the full cost of repairs would be to ‘put the plaintiff in the position of recovering damages for breach of warranty that the condition of the house was correctly described by the surveyor and, in the ordinary case, as here, no such warranty has been given’. This is hard to understand. The essential obligation of a surveyor is precisely to give a correct description of the property in so far as a competent survey can do so; and the plaintiff is not claiming for defects which a competent survey would not have discovered. For the assessment of damages where a lender lends in reliance on a negligent valuation, see South Australia Asset Management Corporation v York Montague Ltd (1996) Times, 24 June, HL reversing CA sub nom Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 WLR 607). Compare Downs v Chappell (3 April 1996, unreported; see (1996) 140 Sol Jo 501).
15 Watts v Morrow (note 14 above). See, generally, LS Gaz, 20 March 1991, p18 (S Migdal and A Holmes); NLJ, 8 May 1992, p632 (E Macdonald); Sol Jo, 2 October 1992, p962 (C Boxer).
The usual house policy will not normally provide cover against events which have occurred and defects already existing before the policy was taken out. In other words insurance will not normally mitigate the effect of the caveat emptor rule; or relieve the purchaser of the need to be satisfied as to the physical condition of the property before exchanging contracts.
3.5.1 Insurance between contract and completion
Under an open contract (where risk passes to the purchaser on exchange) the vendor does not need to maintain her insurance after contract; though in practice it is not likely to be cancelled. If she does not cancel it and the purchaser also insures, there is likely to be the problem of double insurance mentioned below.
3.5.2 The Standard Conditions
Although the risk remains with the vendor, Standard Condition 5.1.3. expressly excludes any obligation on her to insure. Unless Standard Condition 5.1.1. has been amended and the incidence of risk passed to the purchaser, the vendor should be advised of the need to keep her insurance in force until completion. If the property is damaged or destroyed between contract and completion, the vendor will be liable and get either a reduced purchase price or (if the purchaser or vendor herself exercises a Standard Condition 5.1.2. right to rescind) no money at all. Clearly the vendor needs to be insured against this risk of loss.
A purchaser, upon exchange of contracts, has an insurable interest in the property and is entitled to insure. If, however, she does, this may give rise to a double insurance situation. One leading policy provides:
‘If at the time of any loss, destruction, damage or liability arising under this policy there is any other insurance covering the loss, destruction, damage or liability or any part of it, the Insurer will not pay more than its rateable proportion.’
If the purchaser does insure and the vendor’s policy contains such a clause, the vendor will not be fully compensated for any loss. The price paid by the purchaser will be reduced by the amount of the loss; and the vendor will only receive part of the balance from her insurance company.16
The purchaser faces little risk whether or not the property is insured during this period. She still holds the purchase price (less deposit paid); and can retain enough of this to compensate for the damage to the property. She will only have a
16 The purchaser will not receive anything since, having paid a reduced price, she will not have suffered any loss.
problem if she rescinds and, for whatever reason, there is difficulty in recovering the deposit from the vendor; or if the value of the damage to the property and any other recoverable, incidental costs (such as alternative accommodation pending reinstatement) recoverable under Standard Condition 5.1.1. together exceed the balance of the purchase price.17
It follows from the above that the best procedure may be for a special condition to be added to the contract:
(a) obliging the vendor to keep the property insured to its full value until completion; and to produce on exchange the receipt for the current premium covering the period between contract and completion; and (b) obliging the purchaser not to insure the property before completion.
In addition the purchaser’s solicitor should require a copy of the vendor’s policy to be supplied to the purchaser before exchange. The purchaser needs to be satisfied that the policy does cover the property adequately in the period between contract and completion. To give a simple example, most policies provide no or reduced cover if the property is vacant or unfurnished for longer than a specified period. This may be important if the vendor is planning to vacate before completion.18 Similarly, the vendor should herself be advised by her solicitor to examine the terms of her policy carefully at the time of sale to check whether cover will be affected in any way.
In practice it seems that institutional lenders commonly insure the property from exchange as a matter of course. If the above approach is adopted, they should be instructed not to insure on behalf of the purchaser until completion. The lenders do not need to insure in their own interest before completion as they will not hand over the loan until then. And they can protect their position by requiring solicitors acting for them to check that the above provisions have been made.
If the purchaser is let into occupation before completion she is under a duty to insure (Standard Condition 5.2.2(g)). This reflects the passing of the risk to the purchaser in this situation. In this situation, the sort of clause suggested above could be used in the contract with the obligations of the vendor and purchaser being transposed.
17 And this is a risk faced by a purchaser whenever she lawfully rescinds for any breach by the vendor—for example, failure to prove title. It is not confined to rescission on the happening of an insurable event.
18 See, further, M Harwood, Sol Jo, 1 May 1992, p408; 6 November 1992, p1110.