New RICS guidance for valuers - Another step in the right direction for valuers
RICS has produced a Guidance Note for the valuation of residential leasehold properties for secured lending purposes, aimed at providing valuers with a best practice guide when undertaking valuations in what has been a turbulent sector over the last 5 years.
RICS states "it has been estimated that one-fifth of the total housing stock in England comprises leasehold properties with short and medium term leases" and there are a number of key issues that professionals need to keep in mind when dealing with them.
By providing guidance on the key matters that affect value in residential leaseholds, RICS seeks to assist valuers in navigating the minefield that can be leasehold valuations in order to minimise the risk of both errors and claims. A failure to understand key provisions or onerous lease clauses could materially affect value and increases a valuer's claims exposure.
Matters affecting value
The Guidance Note makes it clear that lenders' expectations of instructed valuers do not go further than the Red Book Global Standards. However, a valuer is expected to have considered all matters that might affect value when preparing a valuation. RICS also advises that valuers should avoid placing responsibility on conveyancers for information available in the public domain as this often holds up transactions in an already backed-up market.
The Guidance Note sets out the matters that affect value including (but not limited to): (i) diminishing lease terms; (ii) restrictive covenants; (iii) planning agreements; (iv) health & safety regulations; and (v) ground rents.
This includes valuers being aware and having knowledge of the relevant legislation when conducting valuations, such as the Leasehold Reform Act 1967 which provides certain tenants of houses with longer leases the right to buy the freehold interest of their home; and the Leasehold Reform, Housing and Urban Development Act 1993 (as amended) which provides tenants of flats with long leases with a mechanism by which they can collectively buy the freehold of their building or obtain a lease extension on their individual flat (if certain conditions are met).
Other regulatory requirements, under Landlord and Tenant legislation, obligate freeholders to comply with various regulations in respect of common parts of a building containing leasehold properties, as well as the building itself. Valuers are expected to have a working knowledge of these as failing to comply could lead to the property becoming unsuitable for occupation and therefore affect the value. This can be seen in the Homes (Fitness for Human Habitation) Act 2018 (the Act), amending the Landlord and Tenant Act 1985. Under the Act, a building can be rendered uninhabitable if it suffers defects such as mould and damp or excess cold, leaving it unreasonable for occupation in that condition.
A key part to the inspection is ensuring adequate preparation beforehand. The RICS Guidance Note could not be clearer in stipulating that it is a valuer's responsibility to identify and make enquires of the property owner/leaseholder prior to carrying out the inspection and preparing the valuation. This includes considering any other properties in the building and undertaking research and making further enquiries based on what is identified. It also sets out information that the RICS advises the valuer should obtain as early as possible in the valuation process and to ensure that these findings are recorded properly.
As with any valuation, the valuer's notes are critical in risk avoidance. Notes act as evidence to the reasoning behind the valuer's opinions and communicate all relevant information to the client. They also can provide an invaluable tool for rebutting any claim of negligence, by demonstrating the level of investigation and the care and attention taken by the valuer when preparing the report.
Where there is no information available on the issues identified, valuers are able to make assumptions. These assumptions must be clearly set out in the report and, if possible, agreed beforehand with the client.
Whilst valuers are not expected to be legal experts, there is an expectation of knowledge of the type of lease term that may impact on value. They should also be able to identify where there are obvious physical defects within the building, for example affecting the external wall systems, and supporting evidence should be provided wherever possible. Any suggestion of an issue or non-compliance in the building that may have an impact on the value of the property and thus its suitability for secured lending purposes must be clearly recorded.
Diminishing lease terms
One key area of deficiency identified by RICS is awareness surrounding the true 'depreciating nature' of leasehold tenure. The Guidance Note concisely states "Leasehold properties in general are depreciating assets for both leaseholder and lenders", for the simple reason that, as the unexpired term reduces, so the value of the leasehold interest declines. RICS advises valuers properly to consider the effect of the length of the remaining lease term on the value of the leasehold.
RICS sets out some of the assumptions on which valuers may rely in the absence of specific lender guidance. However, it refers valuers to the other guidance notes it has published, such as the current edition of its Guidance Note entitled Leasehold Reform in England and Wales and explains that valuers should be aware of leasehold reform issues, even if that knowledge falls outside of their remit for secured lending purposes.
RICS also advises valuers to exercise caution when relying on information provided and using any assumptions without having first exhausted all publicly available lines of enquiries. Also remember, if you are dealing with a shared ownership property, assumptions regarding leasehold properties may not apply.
Whilst it is not for the valuer to advise on the restrictive covenant itself, they should still be aware of their potential impact on the value of the property, particularly if the terms are extremely onerous. The example provided by RICS is an alienation clause that prohibits subletting. This could adversely affect market value for buy-to-let investors, who will in effect be prohibited for using the property for their intended purpose.
The issues to which we refer above are only examples of those set out in the Guidance Note and all valuers should study its contents with care. Any failing to meet its requirements and recommendations may not only amount to a regulatory issue but may also be seized upon by any claimant in the event of a claim.
The overall message from the RICS in the Guidance Note is that it strives for valuers to take more responsibility for valuations, identifying as much as possible about the lease and the property prior to inspection, in order to assist their clients in making informed decisions about the property. Awareness is key. Understanding crucial issues affecting leasehold interests such as diminishing terms and how they can impact on value are fundamental in carrying out valuations and for risk avoidance.
- Ensure you have fully documented your investigations and any issues in your site notes
- Document all assumptions or ensure they are set out clearly in your terms and conditions and letter of engagement
- Consider the impact of cladding, and external wall systems and always refer to RICS guidance on valuation of properties in multi-storey multi-occupancy residential buildings with cladding
- Check any information provided on the property and surrounding areas against what is already available in the public domain
- Make sure you have considered all applicable legislation and regulation
If you would like to understand more about this topic, please contact Alex Anderson (who contributed to the production of the Guidance Note) or Kat Cusack for further information.