Bank pays for overvaluation broker

When obtaining financing for your home or business, real estate appraisal reports often play an important role. Now what if such a report is fatally flawed? Can the bank then recover its losses from the real estate agent?

The appraisal report is usually provided by the party needing the financing. The bank uses that report to assess the conditions under which it wants to provide the financing. If the actual value of the property is much less than the appraisal value, this can be particularly embarrassing for the bank. When selling, the collateral suddenly turns out to be worth much less than originally thought. The arrows are then often pointed at the preparer of the report, the real estate agent.

In a similar case, Rabobank first filed a complaint with the broker's disciplinary tribunal and was vindicated. The broker had made mistakes. But you cannot claim damages at the disciplinary tribunal, so Rabobank (no doubt confidently) took the matter to court. Both at first instance and on appeal, however, Rabobank had to back down. Why did things go wrong now?

On appeal, the court first formulated a general rule: if the broker knows that a bank will use the appraisal report, he has a duty of care to that bank. Breach of that duty of care leads to liability to the bank. So that seemed to go in the right direction for Rabobank. But no general rule without exception: the broker may limit the scope of his duty of care. For example, by including in the report that he does not accept responsibility for use by third parties (in this case, the bank). And that's where things went wrong for Rabobank. The broker had included such a provision in the appraisal report.

Still Rabobank did not leave it at that and went to the Supreme Court. It has yet to rule but the omens are not good. The Attorney-at-law-General, which advises the Supreme Court, agrees with the above explanation. So that seems to be going in the right direction for the broker.

However, if the broker wins, banks in the future will never allow their clients to provide appraisal reports with these kinds of duty-of-care restrictions. The question then is whether brokers will want to drop these kinds of restrictions. Or will they invent something new to limit their liability? That will be interesting.