A decision last week by the High Court in relation to valuation of commercial premises has highlighted the need for valuers to take into account future developments in the property market.
The case found that a valuer failed to adequately warn of the possible effect of a rival retail development in his valuation, and was liable for the difference between the price paid and the diminished value of the property with the benefit of hindsight.
Phillips Fox senior associate Darren Pratt said the case was important for valuers, and clarified the legal position in relation to future events.
“The message for valuers is to either accept a limited brief on the current state of the market, or if valuers are going to make reference to future events, they need to fully factor them into their valuation,” he said.
“To minimise the risks of claims being brought against valuers in such circumstances, valuers should make clear whether or not they are taking into account future events.
“If the valuation is one of market value at the date of the valuation and does not take into account future events, then this should be agreed with the client at the outset and made clear in the report.
“If a valuation incorporates the likely effect of known or foreseeable events, then it should properly document what those events are and properly assess the likely effect of those events.”
Mr Pratt said last week’s High Court decision also indicated the danger of valuers providing ‘brief reports’, since the duty and liability of a valuer was the same regardless of whether or not their report was brief or comprehensive.
In the case, Queensland valuer HTW Valuers was advising on the retail rental market, including demand for tenancies and availability of tenants.
HTW advised that current rental levels were maintainable and a contract was entered into to purchase the shopping centre.
A rival shopping centre, which was under construction at the time of purchase, opened less than a year later.
Rental values collapsed and the purchasers were unable to sell the arcade.
The court held that the valuer should have taken into account the competition of the future development and awarded damages amounting to the difference between the price paid and the value it reached due to the effect of the new shopping centre.
The court specified that events which need to be taken into account must be reasonably foreseeable, such as expected competition, as was the circumstance in relation to the rival shopping centre.