Surveyors: are your marine valuations putting you at risk?

More often than not Surveyors undertaking standard Pre-Purchase Condition Surveys are requested, almost sometimes as an afterthought, to advise as to value, particularly if the vessel is of an unusual type (and thus not capable of being readily valued by reference to sister-ships currently on the market).

There is sometimes a tendency for Surveyors to regard the valuation element of the instruction as being of lesser significance, and all too often involving an informed stab in the dark or a simple calculation involving estimating the costs of any recommended works and/or replacements of gear, adding a bit more off to represent the inconvenience and slight unpredictability of the work, and deducting the total from the brokers asking price.

Valuation procedures are normally a little bit more structured if a marine mortgage or other lending is involved, but even so, unless you enjoy the good fortune of being on good terms with the local office of significant National Brokerage chains and someone is prepared to let you have access to the actual sale prices received for comparable vessels (as opposed to the asking prices which may be far more) there is regrettably little reliable evidence upon which valuation can be objectively based.

This did not cause much of a problem when the market was relatively stable and the second-hand value of vessels reasonably predictable from one year to another.  Times have changed, and whilst there may still be particular geographical areas or marques where that remains the case, brokers report ever increasing variation between prices sought and ultimately, reflecting the fact that the Sellers and Buyer’s respective economic circumstances appear to be ever increasingly the principal factor in determining the ultimate price accepted, reflecting the adage that in the present market any boat is only worth  what a buyer is prepared to pay and the seller accept.

Accordingly, with the prevailing economic climate still putting real pressure on values and with so many Surveyors still reliant upon Selling Brokers to put their names forward for work, many Surveyors, lacking vital sales price intelligence, and often under pressure from Commission fed Brokers to support asking prices, unwittingly over-value vessels

This is a problem which has been affecting property surveyors for some years, and in a rash of significant Court decisions, Judges have awarded substantial damages to disappointed property owners and Mortgage Lenders where it has turned out that the valuation was hopelessly unrealistic, resulting in the Buyer or Lender selling it at a loss. Precisely the same law applies in the case of valuation of boats, whether commercial or pleasure craft, and further insofar as that valuation is bound to be then adopted as the basis for the vessels insured value, a further consequence of over valuation is that any Insurers, faced with a serious claim, are legally entitled to limit their pay-out to a fraction of the claim if on the basis that the craft is over insured.  Getting it wrong can thus have profound consequences.

The Courts have also been swift to apply increasingly exacting obligations to Commercial Surveyors practicing in small specialist areas of work.  Indeed, in the recent 2010 decision “K/S Lincoln –v- CB Richard Ellis Hotels” the Judge indicated that a margin of error of plus or minus 5% in relation to a standard residential property would be acceptable, rising to 10% for one off transactions, but if there was an exceptional feature then a margin of error of 15% or higher may be appropriate.

By inference, valuations given which ultimately fall outside that range of accuracy may be considered to be so inaccurate as to enable a Court to find negligence, with consequence financial liability.  The margins are nothing like as large as anyone would comfortably contemplate in the present market.

All seems rather worrying but essentially there are a few simple rules which, if observed, should sensibly minimise the risks.

Any sensible competent Surveyor is already using standard terms and conditions and a retainer letter clearly setting out in readily understandable terms, any limitations or restrictions on the scope of the Survey.  There is no reason why a simple clause cannot be inserted indicating that any valuation figure given is an honest estimate, based upon informed judgment, but at the same time acknowledging that market values will both fluctuate in time, and from transaction to transaction, and that consequently that whilst best endeavours to have been used to provide an accurate figure, the client has to accept that the valuation given is an indication only.

Furthermore, and to avoid any prospect of Surveyors suddenly finding themselves subject to claims by Lenders or Insurers, a clause should further be inserted that any valuation given is provided solely for the benefit of the Buyer, and not their Lenders, Insurers or  indeed any other third party.

It would also be prudent to check your Professional Indemnity Policy to ascertain whether this specifically covers valuation work and if so, whether the policy contains restrictions or stipulations.  If it does, then ignoring them could leave you holding the can personally so again take note of Insurer’s requirements and put them into effect.

Finally, exercise judgment and if in doubt adopt a conservative valuation, as ultimately your job is to protect the Buyer, not the Seller or his Brokers in the present market.

What happens if you get it wrong?

As ever, there is a rash of conflicting decisions as to how the Court should approach compensation in cases where a valuation has proved wrong.  Generally speaking, damages awarded would be the difference between the price recommended by the Surveyor based on a negligent assessment and the true value of the vessel had the Surveyor completed the assignment professionally (loss of value).

More recent cases however have suggested that a claim for mental distress will also be given if the object of the service (in this case the valuation) “is to provide pleasure, relaxation or peace of mind”.  I suspect that would certainly apply to a normal yacht purchase transaction, in which case it is reasonable to anticipate a claim both for loss of value but also mental suffering and distress.

In summation therefore, ask yourself if you really know enough to offer a real informed opinion on value.  If not, consider whether you can legitimately decline to provide a valuation, suggesting that that is something that may be best left to a Broker.  If the client insists you offer an opinion then respond accordingly but always remember “profit is the reward for undertaking risk” and charge accordingly if you decide to take on that risk.

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