Investment Forum - Real Estate

What is the justified margin of error in valuations?

28th July 2021

The subjectivity involved in a valuation process means that there is no single correct approach, but there are ways of assessing the valuation itself

Just as one would be presented with differing opinions when visiting two different lawyers, an element of subjectivity arises whenever professionals must provide their view of the open market value of property – valuations. Periti are the main property valuers in Malta, though estate agents and at times accountants may also be asked to carry out such a task.

Given the essential purpose that valuations serve in matters involving, inter alia, sale and purchase, financing, company valuations, and quantification of damages, it is natural that the valuer, whose valuation becomes an inherent part of the process, bears a certain degree of responsibility. The question is: what is the justifiable margin of error afforded to valuers?

Initially, it must be pointed out that although it is a professional opinion, there are established guidelines which the valuer may follow, such as the ‘Kamra tal-Periti Valuation Standards for Accredited Valuers’ and TEGOVA’s ‘European Valuation Standards.’ While there may be exceptional circumstances which may suggest a departure from such recognised recommendations be justifiable, many a times, doing so could entail commercial or legal repercussions, while conversely sticking to them would be a solid defence should the valuer find him/herself facing any such repercussions.

Where circumstances demand a departure from these standards, either because they do not apply or if an opt-out becomes reasonable due to exceptional circumstances, the valuer should set this out in full both in a formal letter referring to the conditions of engagement and in the Valuation Report itself. 

The subjectivity involved in a valuation process means that there is no single correct approach, but there are ways of assessing the valuation itself by looking at its:

  1. Accuracy: the extent to which the valuation is similar to a subsequent transaction in the open market;
  2. Variation: the extent to which a different valuer would have arrived at the same or similar conclusion on the value; and
  3. Bias: the extent to which valuations are consistently under or above the ultimate sale price.

Courts have been traditionally reluctant to be over-prescriptive to the valuer’s methodology. In fact, in Corisand Investments Ltd vs Druce & Co. (1978), the Australian Federal Court had acknowledged that a valuer might legitimately base a valuation upon comparables alone, without any further calculation, or even upon his/her own experienced instinct and awareness of the market. This begs the question of how one can expect to use his own experience, instinct, or awareness but at the same time hold him/her liable for reaching an outcome distinct to that of others. 

There is no simple answer, but if the valuer follows a ‘proper process’ (and when there are deviations from this, they are justifiable), and uses reasonable diligence in good faith, then regardless of the outcome, he/she should be in the clear, or at least have a solid defence against any claims. Naturally, defining ‘proper process’ is a complex task but, in reality, if for instance by analogy a lawyer works diligently and still loses a case, he would not be liable for damages.

In fact, in Perit Bezzina Alexander et. vs Mizzi Joseph noe (03.10.2003), the First Hall of the Civil Court of Malta embraced this argument and added that a perit who acted diligently should not be held answerable to every imperfection, if he acted in accordance with the norms established in the relative profession. Professionals are not obliged to provide the outcome their clients want, but to do their utmost to produce the outcome wanted.

It is at the point where the professional fails to produce his best abilities to achieve the outcome wanted that he may become liable. This is the basis of the provisions in the Civil Code related to tortious liability. Article 1031 provides that “every person shall be liable for the damage which occurs through his own fault”, and Article 1032 (1) adds that “a person shall be deemed to be in fault if, in his own acts, he does not use the prudence, diligence and attention of a bonus paterfamilias”. 

These are the general principles set out by our Civil Code. Similarly, Article 1033 states that “any person who, with or without intent to injure, voluntarily or through negligence, imprudence, or want of attention, is guilty of any act or omission constituting a breach of the duty imposed by law, shall be liable for any damage resulting therefrom”. 

Naturally, even when a professional does not possess the required skills to carry out any particular work or service, such person shall be liable for damages caused to others through his/her unskilfulness (Article 1038). Consequently, if one does not believe he/she possesses the skills or expertise for any particular brief for which he/she may be engaged, one may be wise to think twice before accepting to take on such responsibility. 

So far it has been established that lack of diligence in the exercise of one’s profession may leave one susceptible to liability; but how is this lack of diligence determined? Such examination is left in the hands of the Court and its subjective analysis of the facts of the case at hand. Nevertheless, in Il-Pulizija vs Perit Louis Portelli B.E. & A., A. & C.E (04.02.1961) the Court of Criminal Appeal (Inferior) provided that a professional shall not be held responsible if the negligence shown was not “grossolana” – gross negligence. Therefore, if one is to adopt the ordinary prudence and diligence required of him/her by law, one should not face the repercussions of a negative outcome. 

Furthermore, in Victor Savona pro et noe vs Dr Peter Asphar et. (23.06.1952), the Court of Appeal (Superior Jurisdiction) provided that a professional may not be held accountable for every mistake committed or every time he/she did not guess the outcome correctly. Unpredicted outcomes may present themselves despite of prudent behaviour. These judgements, though more than sixty years old, set the general principles for more judgements to follow. 

In a recent case in the names of Valle del Miele Limited vs Aloisio Raphael et noe (09.07.2020), the Court of Appeal (Superior Jurisdiction) reiterated arguments like the ones made back in the 1952 and 1961 judgements. It also delved into a crucial factor which must exist for there to be tortious liability – the causal nexus between the negligent and imprudent behaviour of the professional and the damages suffered. Even though the judgement pronounced related to the work of auditors, by analogy the same may apply to any other professional, including valuers. 

Naturally, some tasks may be more difficult than others to carry out, which lead to higher chances of adverse outcomes. The ‘margin of error’ which is permitted depends on the court’s perception of the difficulty of the valuation task, depending on factors such as the type of property, the availability of suitable comparables, and the difficulty of market conditions at the time. In around 75% of English cases the bracket or margin of error that is considered as justifiable in valuation accuracy is between 10-15% either side of the ‘true value’.

These percentages are in no way unanimous across different jurisdictions, or even across different courts. There are not enough published Maltese judgements on this topic that one would be able to determine the average margin of error afforded within our jurisdiction. 

Based on what we have seen, valuers should adopt practical ways in order to minimise the risk, including:

  1. The purpose of the valuation should be expressed preferably in writing as to make the instructions clear;
  2. Beware of instructions to undertake urgent work;
  3. Do not undertake specialised undertakings unless experienced and competent in that specialisation;
  4. Clearly defining the basis of valuation, purpose of report, and the effective date of valuation;
  5. Inspection to be carried out by an experienced and competent person;
  6. The opinion of the valuer should be based on verified and confirmed facts;
  7. Proof-reading of report and all calculations;
  8. Maintain independence to produce results as objective as possible.

In essence, the law does not require perfection out of valuers, or any other professional for that matter, and thankfully so as that would render the execution of any profession impossible. However, to avoid liability it requires them to act with the prudence, diligence, and skill that is expected standard in that industry. As it was said in Singer & Friedlander Ltd vs John D. Wood and Co. (1977), “valuation is an art, not a science. Pinpoint accuracy is not, therefore, expected”.

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marlon

Marlon is a lawyer and partner at DF Advocates. He has a decade of experience in civil and commercial matters and has represented a broad spectrum of both local and international clients within the business sector. Marlon’s expertise is in real estate, hospitality, industrial and transport law.

jurgen

Jurgen is a lawyer and junior associate at DF Advocates. After reading for a Bachelor of Laws (Honours) Degree in 2019, he graduated as a lawyer with a Master in Advocacy in 2020 and was admitted to the bar in 2021. He practices in civil and commercial litigation, with a particular emphasis on real estate, industrial and employment law.


DISCLAIMER: The content of this article does not necessarily reflect or represent the views and opinions of The Malta Chamber of Commerce, Enterprise and Industry. 


What is the justified margin of error in valuations?