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Examining the challenges for surveyors in unpredictable financial times

Read our latest article from CMS, the international law firm, on the challenges surveyors face in unpredictable financial times.

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CMS Law has contributed this article as part of Marsh’s Property Insights series, aimed at surveyors, property consultants, and other professionals across the real estate sector.

During the Covid-19 pandemic, mortgage and landlord re-possessions remained relevantly low. This was mainly due to emergency measures introduced by the government to restrict such action (including a moratorium on repossessions between March 2020 and April 2021). However, since these measures have been lifted, there has been a rapidly evolving change in the economic markets as interest rates have surged and markets have experienced volatility. Whilst it appears that the UK is avoiding a deep recession, economic growth is slow (estimated to be at around 0.1%) and inflation and interest rates are high. There are signs that this is beginning to take hold; mortgage arrears and repossessions have risen significantly.

During previous periods of economic uncertainty, surveyors have rightly been concerned this could see a rise in claims for a number of reasons, including alleged overvaluations, defective reports, failure to monitor builds etc.

Increase of defaulting borrowers

The National Statistics report on Mortgage and Landlord Possession Statistics for April to June 2023 demonstrates the current trend in the market for increased possession claims. The report shows that, compared to the same quarter in 2022:

  • The rate of mortgage possession claims increased 15%.
  • Landlord possession claims increased 24%.
  • Increases in possession claims have been recorded in all regions.

The report highlights that the statistics “cover a period of rising interest rates as well as the introduction of the Renters (Reform) Bill to parliament".

The increase in interest rates obviously has a significant effect on the cost of lending which, in turn, increases missed payments by borrowers who are also struggling to meet increased costs of living. Commercial entities are also struggling to meet payments due to the increase in business costs (e.g. increased overheads). Where there is an increase in missed mortgage or rental payments there is, obviously, an increase in possession proceedings.

It is an inevitable part of possession proceedings that lenders and landlords will revisit any advice obtained during the lending or rental process. In an economic downturn, when repossessions are rising and house values tend to fall, there is usually a steep rise in claims by lenders against surveyors for allegedly over valuing properties.

Rise in unconventional lenders

The last few years have seen a rise in non-traditional lending institutions. This could be more straightforward alternative lenders such as bridging and mezzanine lenders to newer arrivals such as peer to peer lending platforms. These lenders provide access to finance for borrowers without the requirement for them to go to the bank, arguably making this form of lending more risky and prone to default by borrowers. This form of lending, where multiple investors may be involved in a particular lending scheme, has led to concerns amongst surveyors and their insurers. There is a concern that surveyors’ valuations and surveys could be relied upon by many investors, with whom the surveyor has had minimal contact, leading to the potential for several claims arising from one valuation report or survey.

Property managers and rental portfolios

Office space vacancies in London have reach purported 20-year highs. Occupants are breaking leases and leaving properties in states of disrepair (calculating it is more cost effective to pay penalties than continue paying rent). Companies are requiring more green and sustainable spaces but have a limited pool to choose from. This is a challenging time for the commercial market.

Office spaces are being used for alternative, potentially less profitable, cultural activities. Tenants are seeking greater flexibility on their leases, with less long-term commitments. All these uncertainties naturally make it harder for surveyors to value the risk.

We anticipate, as per previous times of financial instability, there may be an increase in claims against surveyors and property managers relating to valuations, property maintenance, failure to obtain rental income and maintain occupation.

Inflation and impact on quantity surveyors

It is not just valuation surveyors who can anticipate being on the receiving line of claims. Past periods of economic uncertainty have shown that quantity surveyors can equally expect to face scrutiny.

The cost of materials has increased significantly in recent years and continues to fluctuate. The unpredictability of the costs of materials will undoubtedly cause difficulties in accurately estimating the cost of works. Furthermore, there have also been supply chain issues in the construction industry as a result of many factors (including Covid-19 and market unrest). This has and will cause difficulty in recommending materials and project timelines. Another consideration is the current lack of HGV drivers and construction workers, which is also affecting project timelines. The current economic climate and its knock-on effects invariably cause cost-cutting pressures on projects, increasing risk of a claim for any involved. Coupled with the difficulties faced by quantity surveyors, it appears likely that they may also face an increase in claims against them.

Quantity surveyors’ reports usually contain time limits to them, however, consideration of how quickly the market (and the rate of inflation) can change should be given. It may be prudent to limit the report more than previously, given the current difficulties faced by the sector.  

Meet the authors

Robert Jones

Robert Jones

Partner, CMS Law

  • United Kingdom

Georgie Baxter

Georgie Baxter

Senior Associate, CMS Law

  • United Kingdom