When a commercial property inspector provides a due diligence report (i.e., an inspection report or environmental assessment) as part of their client’s commercial real estate (CRE) transaction, it is for the sole use of the inspector’s client. In this case, the legal concept of “privity of contract” applies. Privity of contract is a common legal principle that prevents any person from enforcing a contract or suing on his/her behalf unless they are a direct party to that contract. Thus, only an inspector’s client would have the right to sue if work was done improperly.
However, in some instances, a third party may also seek to use the report, which is where a reliance letter comes into play. A reliance letter gives a third party the right to rely upon the accuracy of the report that was initially prepared for someone else, which results in increased liability for the inspector. Hence, someone who was once considered a third party is now, for all intents and purposes, a client.
When a Reliance Letter Is Used
A third party can ask an inspector for a reliance letter. The inspector addresses the reliance letter to whoever he is granting the right to rely on the report. Parties who ask for reliance are usually those related to the CRE transaction, such as a lender, buyer, seller, or an insurer.
It is most common for a reliance letter to be requested for an environmental site assessment, especially as part of the Small Business Administration’s environmental policy, which requires one. Often, a reliance letter template is provided by the requesting party.
Although rare, a reliance letter may also be requested for commercial property inspection reports. For example, a member of CCPIA was asked by his client, a prospective buyer, for a reliance letter in order to give the property’s seller access to his inspection report. In another instance, a lender requested a reliance letter from a commercial property inspector for access to a report for an inspection performed for a building’s prospective buyer.
It is possible for a third party to gain access to an inspection report without a reliance letter. However, that third party would not legally be able to use it for their due diligence or for liability protection.
Things to Keep in Mind
Reliance letters may become part of a standard protocol for some commercial property inspection services, and 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.
- 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. Typically, a client will 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.