When a commercial property inspector provides his/her report to the client, that report is for the client’s sole use. The legal concept of “privity of contract” applies here. Privity of contract is a legal principle that prevents any person from enforcing a contract unless they are a party to that contract. Thus, only the inspector’s client can sue for breach of contract or negligent performance.
However, in some instances, a third party may want to see the report. Such requests raise two issues. First, depending on the wording of the contract, the inspector must generally obtain the client’s permission to share the report with a third party. Second, if a third party wants to rely on the report, this exposes the inspector to an increased risk of liability.
If the inspector is going to provide the report to a third party at no charge, CCPIA believes the inspector should first require that the third party sign a report access agreement. This document informs the third party that they are relying on the inspector’s report at their own risk and requires them to release the inspector from liability. It also informs the third party of the limited scope of the inspection that was performed, and includes other provisions that provide the inspector with significant legal protection.
If the third party wants to be able to rely on the report just as the client does, the inspector is exposed to more risk and should therefore charge a fee and require the third party to sign a reliance letter. A reliance letter gives the third party the right to rely upon the accuracy of the report that the inspector initially prepared for the original client to the same extent the original client was entitled to rely on that report. Hence, someone who was once considered a third party becomes, for all intents and purposes, an additional client.
Third parties who may ask for access to a report usually have some interest in the real estate transaction, such as a lender, buyer, seller, or an insurer. It is also common for such third parties to want to be able to rely on any environmental site assessment, especially if the transaction involves a Small Business Administration (SBA) loan. If you provide an environmental site assessment or similar report to a third party, it is vital that your reliance letter specify what standards you followed, and that those standards include limitations, exceptions, and exclusions. Most disputes arise because the person or entity relying on the report did not understand the limited scope of the inspection and subsequent report.
Things to Keep in Mind with Reliance Letters
Reliance letters may become part of the standard protocol for some commercial property inspection companies, but for others, it will be a rare occurrence. The following are important things to keep in mind:
- Work with your legal counsel to set the terms and conditions of a reliance letter that, at a minimum, maintains all of the protections outlined in your original contract.
- Don’t automatically agree to use a reliance letter template that a third party provides to you. It may not contain all the protections that the CCPIA reliance letter contains, and it may include other provisions that greatly increase your liability.
- Check with your insurance company to make sure that a reliance letter does not create any uninsurable liabilities. For example, an SBA’s reliance letter requires liability insurance coverage of $1 million.
- Always use CCPIA’s Commercial Property Inspection Agreement, which precludes a third party’s ability to rely on your report unless you grant that party usage rights.
Commercial property inspectors may wish to put procedures in place for situations that require a reliance letter. Some inspectors choose to charge a fee that accounts for the time invested with their legal counsel and insurance agent, plus the potential increase in liability. A client will usually let the inspector know before the inspection if a reliance letter is needed. Finally, keep in mind that reliance letters can be valuable tools in getting your client through a CRE deal successfully.