An appraiser's liability to a third party

It is the terror of many an appraiser: being liable for a mistake made. Moreover, it can feel awkward if the person suing the appraiser for damages is a third party, such as a bank or investor. After all, that was not the client and the appraiser often did not intend to obligate himself to anything with respect to that third party. An additional problem is that any applicable general conditions (usually) only apply in the relationship between appraiser and client. Therefore, with respect to third parties, it is often not possible to rely on limitations of liability contained therein in general terms and conditions. In this blog I will discuss what an appraiser can nevertheless do to limit his liability risk towards third parties.

When does liability arise?

When an appraiser accepts an assignment, he assumes certain obligations to his client. In performing his work, the appraiser must exercise towards his client the care that may be expected of a reasonably competent and reasonably acting professional. However, the appraiser is not free to neglect the interests of a third party. It may even be the case that the appraiser acts unlawfully with respect to a third party while properly executing the agreement with the client.

Appraisal reports are typically used not only by clients, but more importantly by other parties. Consider the use of a valuation report by a lender. Appraisers must consider that potential use by a third party based on their duty of care. In answering the question of whether an appraiser is liable for damages incurred as a result of the use of an appraisal report by a third party, one of the key factors will be the reliance that the third party in question was entitled to derive from the appraisal report.

The Arnhem-Leeuwarden Court of Appeal recently ruled on a situation in which an appraiser had performed an appraisal on behalf of the buyer of a property. The buyer had provided the appraisal report to the bank in order to obtain a mortgage loan. After obtaining the loan, at some point the buyer no longer met his obligations to the bank. The bank therefore proceeded to foreclose. It subsequently turned out that the property's foreclosure proceeds were significantly lower than the appraiser had appraised, and the bank held the appraiser liable.

In the court proceedings, the appraiser argued, among other things, that he was not liable because the value he appraised differed by less than 10% from the value established by an expert hired by the court. The appraiser believed that, by definition, this made him not liable. He believed that a bandwidth of 25% always applies to appraisals. According to the court, this argument did not hold water. According to the court of appeal, there is no general percentage within which range an appraised value must be in relation to an appraisal performed by another appraiser. One argument for this is that certain appraisals may be expected to be more accurate than others. In other words, the question of whether an appraisal was performed correctly cannot be answered in its generality. It always depends on the circumstances of the case.

How to avoid liability?

In most situations where appraisers are sued for damages by third parties, the third party alleges that the valuation of the (foreclosure) proceeds was too low. For example, lenders often rely on an appraisal report commissioned by the mortgagor. The moment the mortgagor fails to meet his obligations and an auction is held, the previously overvalued value comes to light. This plays out especially in times of falling real estate prices.

To prevent third parties from successfully taking the position that they were entitled to derive a high degree of confidence from an appraisal report, appraisal reports include disclaimers such as:

            This appraisal report is intended to be used solely by the client for the purposes described in the purpose of the appraisal. No responsibility is accepted by me in case of use by third parties, unless with my written permission. Consequently, the undersigned accepts no responsibility towards others than the client with respect to the contents of this report and only when used for the purpose for which it has been prepared.

If such a provision is included, liability is less likely to arise. After all, the third party will have to state and, if necessary, prove what he was entitled to expect from the appraisal report despite this notice. The warning in the disclaimer makes a third party less likely to take the position that he was entitled to rely on the appraisal and that the appraiser acted unlawfully. Especially if the third party is a professional, such as a bank. After all, such disclaimer should encourage third parties to conduct their own further investigation.

If valuation reports include a disclaimer, it should be unambiguous and sufficiently specific. A provision such as, "No rights can be derived from this brochure" is not clear and therefore often insufficient. When using a disclaimer, it is therefore important to pay close attention to the wording, as this can prevent a lot of trouble.

PS this article is intended for teaching and entertainment purposes and does expressly not constitute legal advice. Use of the aforementioned information is entirely at your own risk and the author shall not be liable for any damages resulting from such use.