Contingent fee, target value and a prior valuation
A sole practitioner is approached by the owner of a 4.2-acre industrial site in Ekala. The owner is in a tax dispute with the Inland Revenue Department over the value of the land at 1 April 2021. He asks for a retrospective valuation dated 31 March 2021, 'as close to LKR 900 million as possible,' because his accountant says that figure reduces the tax. The fee offered is LKR 1.5 million plus 8% of any tax saved. The valuer had valued the same site in 2022 for a bank at LKR 640 million. The owner says the 2022 report was 'too conservative' and asks the valuer not to mention it. The valuer's spouse owns a 5% share in a company that leases a small workshop on the site. The valuer has not visited the site since 2022.
1. Identify the ethical threats in the instruction and explain which are present and why.
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Threats. The 8% success fee creates a self-interest threat and an advocacy threat: the valuer becomes financially interested in a high outcome. The request 'as close to LKR 900 million as possible' is an instruction to work backwards from a target, which conflicts with objectivity. The request to suppress the 2022 valuation creates an intimidation and self-interest threat and a honesty issue. The spouse's 5% share in a tenant company creates a familiarity and conflict-of-interest threat. The prior valuation at LKR 640 million is a relevant fact; hiding it would mislead the tax authority and any reviewer. Action. Decline the success fee and the target value. Offer a fixed fee for an independent retrospective valuation. Disclose the spouse's interest and the prior instruction; if the interest is material, decline. Explain that the prior report may be referred to and any difference explained.
2. Set out the conditions under which the valuer could accept the retrospective instruction, and the process that should be followed.
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Acceptance conditions. A retrospective valuation is permissible if the valuer can obtain evidence that existed at 31 March 2021 and can distinguish later information. Conditions: (i) fixed fee, not contingent; (ii) written scope stating the valuation date and purpose; (iii) inspection now plus historical records, title, planning, and dated comparables; (iv) no target value; (v) disclosure of the 2022 valuation and any conflict; (vi) an independent review if the file is contentious. Process. Gather 2020-21 sales, listings, and rental evidence; adjust for time and location; document why the 2021 value differs from 2022. If the evidence supports LKR 640 million, report that, not LKR 900 million. If the client will not accept these conditions, decline. The valuer should also check whether the tax dispute requires a specific statutory basis or expert format.
3. Explain how the prior valuation and the spouse's interest affect independence, and what to do if the client refuses disclosure.
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Independence. The prior valuation is not a disqualification, but it must be disclosed because it is known to the valuer and may be known to the authority. The spouse's 5% share in a tenant is a conflict if the tenant's lease affects value; even if small, disclose and consider whether a reasonable observer would doubt objectivity. If client refuses. Do not accept the instruction. A client who requires suppression of a prior report and a target value is asking the valuer to participate in misleading conduct. Return any retainer, keep a record of the refusal, and consider whether a report to the professional body is required. The valuer should not 'compromise' by omitting only the fee arrangement; the conflict and prior report are material.