Valuation Conflict of Interest Case Studies

My firm provides regular revaluations of a ground rent portfolio to the freeholder, to include vacant possession valuations. The long leaseholder is seeking finance secured against the properties and we have been approached by the bank to provide valuations for loan security purposes. Are we able to accept the instruction from the bank?

If you have an ongoing contract with the freeholder, this instruction would involve acting for two different clients on the same property at the same time. That would constitute a party conflict, which would require the informed consent of all parties, before the new instruction could be accepted.

If you do not have an ongoing contract with the freeholder, this request to value a property or asset previously valued for another client of the firm raises a potential threat to independence and objectivity. Your primary duty is to your existing client, the freeholder. However, under some circumstances, the fact that you have good knowledge of the property and can therefore do the work more quickly than a rival firm could be advantageous to both your existing client (the freeholder), the lender and therefore the leaseholder. Bear in mind that even if you consider there is no conflict, under Red Book Global Standards VPGA 2 you would also need to disclose your other involvement with the property to the prospective lender.

It is possible that there could be confidential information that you are party to because of your firm’s relationship with the freeholder. You would need to consider whether you could fulfil your duty to the lender without disclosing this information. If the information is critical to the value then a conflict cannot be avoided and the instruction from the lender should be declined.

You should think carefully about whether the interest you are valuing for the lender would affect the interests of the existing freeholder client, or vice versa, because this might threaten your objectivity or appear to do so. A concern that the new valuation might adversely affect an existing client could be a party conflict. For example, if the ground rent is aligned to the market value of the long leasehold interest, this could give rise to a reasonable concern from the lender client that your existing relationship could have affected your assessment of market value.

If based on the circumstances of this case you consider that there is a potential conflict of interest you must be satisfied before proceeding that:

a) it is in the interests of both parties that you undertake the work

b) that any risk of a conflict arising can be avoided by putting in place an effective information barrier and

c) that you can seek informed consent to act without disclosing any confidential information.

If you are satisfied that these conditions are met, you should first seek the consent of your existing client, the freeholder, and then disclose your involvement to the lender as per VPGA 2. If an information barrier is necessary, this will also need to be agreed by both parties. Unless these conditions are met the instruction from the lender should be declined.

My firm is approached by a bank proposing to lend on a property to undertake a valuation. Their client (the borrower) is seeking to acquire the property that has been openly marketed within an extremely tight timescale. My firm valued the property a few years earlier so we have a good knowledge of the property, which will assist us in providing a valuation for loan security purposes in the necessary timescale. However, my firm is already acting as the broker for the vendor in the sale. Are we able to accept the instruction from the bank?

In this scenario, there is an obvious conflict of interest. The firm is committed to acting in the vendor’s interest to achieve the highest price for their property. The lender’s interest is in a valuation that provides them with information to make a secured lending decision. The firm may also owe a duty of care to the borrower, which is a party whose interests should be considered. Given all of these competing interests there is a clear risk to objectivity.

In all but the most exceptional circumstances the firm should not accept these instructions. Factors to consider in deciding whether there are exceptional circumstances might include:

• whether this is a very unusual asset that very few firms could value in any reasonable timescale and proceeding is therefore in the best interests of your existing vendor client and the potential lender client
• whether a valuation or a broker’s opinion of pricing had been provided to the vendor
• whether the size and scale of the firm makes it possible for a robust and effective information barrier to be put in place
• whether the lender is specifying the additional criteria for independence for a valuation for secured lending set out in paragraph 3.3 of VPGA 2, which you may not be able to meet and that should be drawn to the lender’s attention
• the purpose for which you valued the property earlier, the timing of that valuation and whether there is any conflict arising with the instructing party in that valuation.

Any decision to proceed with the instruction should not be made by the valuer alone but after careful consultation with the firm’s compliance and/or legal department.

My firm is approached by a freeholder to undertake a valuation for accounts purposes. We provided a valuation of the same property for loan security purposes on behalf of a bank six months ago in respect of a loan facility granted to the freeholder. The bank is happy for us to provide an accounts valuation to the freeholder (their client). Are we able to accept the instruction from the freeholder?

Red Book Global Standards sets out that there is a potential threat to objectivity where the firm is valuing a property previously valued for another client. In this situation, the interests of the parties do not obviously conflict – the bank required an independent valuation upon which to make a lending decision, and the freeholder needs an independent valuation to provide information for their accounts.

In this example, both the first client’s (the bank’s) and the second client’s (the freeholder’s) interests are aligned and each is not only aware of the firm’s involvement but is willing for them to proceed. On this basis there would not be a party conflict of interest. However, the firm needs to be aware that their duty of confidentiality to the bank means that the earlier valuation should not be referenced in the valuation provided for the freeholder’s accounts.

The firm should also be satisfied that it does not hold any confidential information from its existing client that would need to be disclosed in order to fulfil its duty to the freeholder.

There could be a perceived conflict in this case if the previous valuation is seen as placing pressure on the firm to provide the same value for the second valuation. The firm should consider whether sufficient time has passed to ensure this perception is not a real risk and whether it can put safeguards in place, for example oversight of the second valuation by a valuer who was not party to the previous valuation.

The firm should also be aware of the fact that if the lender seeks a revaluation, a potential conflict of interest may have been created by undertaking a valuation for the freeholder (borrower) in the intervening period since the last valuation for loan security purposes.

My firm is approached to value a property for a lender. One of our senior valuers is married to a director of the borrower company. Are we able to accept the instruction?

There is a clear own interest conflict of interest in this scenario. The duty of the firm to act in the interests of the lender conflicts with the interests of an individual in the firm who is involved, whether directly or indirectly as a senior member of the valuation department, in the proposed valuation.

Therefore the firm would need to consider whether the effect of the conflict can be mitigated through an information barrier, so that it is possible and in the best interests of the prospective client to proceed with informed consent.

An information barrier would need to involve a physical and electronic separation of the senior valuer with the personal connection from the people undertaking the valuation, and all information held by the firm about that valuation. The firm would have to be confident that this would be effective, taking into account, for example, the possibility of overheard conversations in shared office spaces, and the ability to ensure complete segregation of information within the company’s IT systems.

Only if the firm can be confident of an effective information barrier can it go on to consider whether seeking informed consent to proceed with the instruction would be in the interests of the prospective lender client.