RICS Guidance and Key Developments for Surveyors: #2 Coronavirus, valuations and "material uncertainty"
The recent lockdown has posed a serious challenge to the UK housing market, with the present and future potential impact of COVID-19 on the market inviting comparisons to the post-2008 recession.
Since 26 March 2020, when the government issued an order halting viewing and telling home buyers and sellers to delay moving where possible, the market has seen a recorded drop of 40% in the number of homes listed for sale. £82bn of UK property sales have been put on hold, representing around 400,000 stalled transactions.
Despite this fall in sales volume, house prices have remained relatively stable. Government job protection schemes and the availability of mortgage holidays have resulted in relatively few distressed sellers. Once the market sale volume recovers, between government stimulus packages, record low mortgage rates, and developer's short-term incentives, prices will hopefully remain supported.
Given the importance of valuations on supporting the market, the RICS has issued guidance to its regulated members in relation to the impact of COVID-19. It recognises that difficulties in property inspection may arise from firm's internal procedures, Government restrictions and the unwillingness of occupants to grant access. A summary of the guidance follows below, along with our advice on 2 clauses that surveyors might wish to considering adding to their terms and conditions and their reports, if they are undertaking surveys and valuations under the current restrictions.
Where surveyors make any changes to the way in which instructions are carried out as a result of COVID-19, the RICS states that this must be agreed with the client and recorded in writing, with a detailed file note to support the rationale that underpins the changes. The report must make clear any restrictions on information and/or the ability to inspect the property. Instructions should be declined if a surveyor considers that it is not possible to provide a valuation on a restricted basis.
When conducting a valuation, surveyors may use information prepared by third parties so long as they reasonably believe that the information prepared by the third parties is adequate and reliable. Questions of commercial confidentiality and statutory data protection must also be respected. Underpinning all of this, the RICS states that its members must act in accordance with the requirements of the RICS Red Book Global Standards, the relevant sections of which are VPS 1.3.1(i), VPS 2.1, VPS 3.2(g), and VPS 4.8.
When a member concludes that a material uncertainty declaration is necessary, this must be explicitly stated, and regard must be had to VPGA 10 and VPS 3 within the RICS Red Book Global Standards in the decision-making process. If a member does not make a declaration, they should record their reasons for not doing so. The RICS has helpfully provided a form of words to support a declaration of material uncertainty on their website.
As a further protection, we would recommend that when any valuer is asked to undertake a valuation without having been able to inspect the property, either on a 'drive-by' or 'desk-top' basis, we recommend that they include the following words in their letter of engagement:
"We confirm your instruction to undertake this valuation on a "drive-by"/"desktop" basis, so that we will be valuing the subject property without undertaking any inspection. We agree to provide a drive-by/desktop valuation on the basis that neither the author of the valuation nor this firm will have any liability to either you, or any third party with whom you may share the valuation, in the event that there are any defects or issues with the subject property that are material to the valuation but which we were unable to ascertain due to the lack of an inspection."
We also recommend the following clause which addressed the position where the surveyor is asked to rely on the information provided about the property by a third party:
"In order to assist us in valuing the subject property, we have been provided with [insert list of all items provided from any source] ("the Information") and you have instructed us to prepare the valuation on the assumption that the Information is correct. You hereby acknowledge that we will not be in a position to verify the accuracy of the Information. Neither the author of the valuation nor this firm will have any liability to either you, or any third party with whom you may share the valuation, for any losses or potential losses arising from the valuation being provided in reliance on the Information."
Surveyors who include these terms in their engagement letters and valuation reports should be in a better position to defend any claims that may arise in due course, should the valuation come to be challenged by the client, or any third party.
Whilst the negative impact of COVID-19 has been well documented, it is important to bear in mind there is a light at the end of the tunnel. The significant pent-up demand for houses is likely to be released once the Government lifts the current restrictions, which is likely to be accompanied by a commensurate rise in demand for surveys and valuations. Following the advice in this note will hopefully equip surveyors to weather any storm that might follow this enforced calm.
Click here to read the first article in this series.