Appraiser Duty of Care – Lessons Reinforced: Royal Bank of Canada v. Westech Appraisal Services Ltd.
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The Supreme Court of British Columbia decision in Royal Bank of Canada v. Westech Appraisal Services Ltd. 2018 BCSC 473 (Westech Appraisal) delivered on March 23, 2018 provides an excellent case study on the scope of an appraiser’s duty of care in appraisal assignments and some lessons on how appraisers can insulate themselves from negligence claims.
In 2007, the Royal Bank of Canada (RBC) asked Westech Appraisal Services Ltd. (Westech) for an appraisal of an improved residential acreage. The appraisal was sought because the owners were seeking to borrow $1,000,000 against a line of credit to finance a business venture. A credit union already held a first mortgage with an outstanding balance of $1,450,000.
The Westech final estimate of value expressed a value range of $2,500,000 to $3,000,000 for first mortgage lending security purposes. This was consistent with Westech’s statement of intended use, but was at odds with the underlying purpose of the appraisal and was not in alignment with the cover letter sent with the appraisal.
RBC advanced a loan of $700,000 on a line of credit secured by a second mortgage. The business venture failed and the borrowers defaulted in 2009. The property was sold by court order on April 8, 2013 for $1,350,000. The proceeds were insufficient to cover the outstanding balance of the first mortgage. RBC received nothing from the sale of the property and there was no repayment of the loan. RBC looked to Westech.
RBC sued for negligence alleging that Westech had not met the standard of care required of a professional real estate appraiser. The appraisal was said to contain false, inaccurate or misleading information and that it grossly overvalued the property. The defendants countered asserting that RBC’s reliance was unreasonable because the appraisal had not been used for its intended purpose – conventional first mortgage financing – and that RBC was negligent in assessing the borrower’s credit risk.
The court identified three issues:
- Was RBC’s reliance on the appraisal reasonable?
- Did the appraisal meet the standard of care of a professional appraiser?
- Was RBC contributorily negligent?
The court found that RBC’s reliance was reasonable, but that Westech was not proven to be negligent. Therefore, it was not necessary to consider if RBC was contributorily negligent. The court then provided lengthy reasons for its decision.
The court observed that it is not controversial that appraisers owe a duty of care to their clients.[i] That duty is identical to the duty owed by all professionals. Under the law of negligence, if a person is in circumstances that give rise to a duty of care owed to another person, liability depends on the standard of care the law requires in those circumstances. For professionals, the standard of care is the exercise of a reasonable degree of care, knowledge and skill.
In Westech Appraisal, the allegation that the appraisal contained false, misleading and inaccurate statements was the basis for a claim in negligent misstatement. The court referred to Queen v. Cognos Inc., [1993] 1 S.C.R. 87 at 110 for the elements of negligent misstatement:
- a duty of care based on a “special relationship”;
- an untrue, inaccurate or misleading statement;
- the representor acting negligently in making the statement;
- the representee reasonably relying on the statement; and
- the representee suffering damages as a result of the reliance.[ii]
The question of “special relationship” depended upon whether Westech should have foreseen that RBC would rely upon the appraisal. Westech pointed to the statement in the appraisal that the intended use was for conventional first mortgage financing security. The court rejected this defence because: 1) the evidence established that there had been no express communication between RBC and Westech about the purpose of the appraisal and 2) the cover letter to the appraisal stated in part “… The purpose of this Appraisal Assignment is to determine value for first mortgage and/or lending security purpose …” The court stated that “the cover letter creates, at the very least, uncertainty as to any limitation on use.”[iii]
Westech Appraisal reinforces that it was incumbent upon appraisers to clearly communicate to clients any and all limitations on the use of an appraisal. Appraisers have to expect that any doubt about the sufficiency of the communication establishing the terms of the retainer will be resolved in favour of the client.
Once the court decided that RBC’s reliance on the appraisal for second mortgage lending purposes was reasonable, the court turned to examine if the appraisal had been prepared with the requisite standard of care.
The court quoted from previous case law to the effect that the minimum standard for appraisers is reasonable conduct “… having regard to the standards prevailing in the profession and the imprecision inherent in the methods by which the value of the property is determined …”[iv]
The court also noted previous courts acknowledging that the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) provides rules by which appraisers should be governed in developing opinions of value.[v]
The standard of care is not supposed to be perfection or correctness. The court does not look to see if the appraiser’s opinion was ‘right.’ Instead, has the appraiser “… acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession …”?[vi]
To determine if the Westech appraiser met the standard of care, the court undertook a two-step analysis: 1) did the defendant act contrary to CUSPAP and 2) did he fail to meet the standard of care of a reasonable appraiser in developing the opinion of value.
The court’s analysis was undertaken with reference to the following:[vii]
- did the defendant consider sufficient relevant information to provide a basis for opinion and were the analyses, opinions and conclusions in the appraisal appropriate and reasonable;
- valuation is a matter of opinion and opinions can reasonably differ;
- the question is not whether the value is overstated but has the appraiser acted reasonably in light of professional standards;
- verification of the appraisal is not found in the market price at which property later sells; and
- gross overvaluation not adequately explained may establish negligence, but small overvaluation without explanation or a large overvaluation adequately explained will not give rise to liability.
The court accepted the evidence of the expert called on behalf of Westech that the appraisal complied with CUSPAP and concluded that, while the appraisal was on the high side, the reasons for arriving at the opinion were adequately explained.[viii] The court criticized the expert called by RBC on the basis that the expert had simply formed his own opinion of what would have been the correct value on the valuation date when the essential question was whether the appraiser followed professional guidelines.[ix]
A detailed review of the evidence, including the expert opinion evidence is beyond the scope of this article. Suffice it to say that, in a 230-paragraph decision, the court thoroughly reviewed the appraisal report, the basis upon which it was argued the appraisers were or were not negligent and drew upon an extensive review of existing case law to make its decision.
A significant aspect of this case is the court’s endorsement of CUSPAP through its reliance on that document. This citing of CUSPAP as the source of standards for appraisers points to the critical need for care in developing, publishing and amending CUSPAP.
The case also reaffirms the importance of clear communication with clients regarding the intended use of appraisals. There should be an express communication on the intended use and it will serve appraisers well to confirm the intended use in writing before an appraisal is tendered to the client.
There are some good practice points on the use of form appraisals for residential valuation. It was the expansion on the form template that, in large part, was the reason the court decided the appraisal was prepared in accordance with the requisite standard of care.
Finally, the test is not whether, with the benefit of hindsight, the appraiser was ‘right,’ but instead, were professional standards met and sufficient information provided to support opinions of value.
End notes
[i] Westech Appraisal, para. 146
[ii] Ibid., para. 149
[iii] Ibid., para. 153-158
[iv] Ibid., para. 164, quoting from VSH Management Inc. v. Neufeld, 2002 BCSC 755, at para. 87
[v] Ibid., para. 165
[vi] Ibid., para. 166, quoting from Zubaida v. Hargreaves, [1995] 1 E.G.L.R. 127 at 128 (C.A.)
[vii] Ibid., para. 172
[viii] Ibid., para. 177
[ix] Ibid., para. 196-197
This article is provided for the purposes of generating discussion and to make practitioners aware of certain challenges presented in the law. It is not to be taken as legal advice. Any questions relating to the applicability of cases referred to in the article in particular circumstances should be put to qualified legal and appraisal practitioners.