In commercial real estate acquisitions, developments and fundings, purchasers and funders often rely on technical information about the property prepared by professional consultants. Technical due diligence reports on the suitability of the property for further development, environmental assessments, building / fire safety surveys and the like all play an important role in acquisition and funding decisions.
Those reports are often prepared for the seller or developer. Without a direct contract between the consultant and the purchaser or funder seeking to rely on the report, there may be limited recourse for them if a report is later found to be inaccurate or negligently prepared. Reliance letters are commonly used to address that contractual gap.
What is a reliance letter?
Reliance letters are documents issued by a consultant (e.g. architect, surveyor or environmental specialist) giving a named third party (e.g. purchaser or bank) the right to rely on a report prepared for another party. The letter extends responsibility for a particular piece of work to that identified beneficiary.
Their purpose is simple: they provide that direct route of recourse against the consultant if the advice in the report is later shown to be negligent.
Why are reliance letters important?
Reliance letters provide valuable protection. For example, a purchaser may rely on an environmental report commissioned by the seller. If contamination issues subsequently emerged and the report was negligently prepared, without the reliance letter the purchaser could face significant remediation costs while having no direct contractual claim against the consultant. However, if the purchaser had a reliance letter from the consultant, that extends the consultant’s responsibility to the purchaser. The purchaser could then raise a direct contractual claim against the consultant.
What is the difference between reliance letters and collateral warranties?
Reliance letters and collateral warranties both provide protection for third parties, but in different ways:
- A collateral warranty creates a direct contractual relationship under which the consultant warrants compliance with its obligations under the underlying appointment or building contract.
- A reliance letter is generally narrower, focusing on a specific report or piece of professional advice rather than broader ongoing obligations.
In practice, reliance letters are often quicker and more cost-effective to obtain. As the aim is reliance on an existing report, they provide a practical alternative to a full collateral warranty.
What are the key considerations when getting a reliance letter?
- What is being relied upon? Many reliance letters relate to a specific report and do not extend to draft documents, verbal advice or subsequent updates. It is therefore important to ensure that the report is clearly identified (often attached to the reliance letter) and is relevant to the transaction.
- Is there a limit on the consultant’s liability? Liability provisions merit close attention. Consultants often seek to limit their exposure through liability caps, net contribution clauses, exclusions of certain losses or shortened limitation periods. Whilst reasonable from a consultant's perspective, the recipient should consider whether the proposed protections reflect the level of risk associated with the transaction.
- Does the consultant have insurance? A reliance letter is only as valuable as the consultant's ability to meet a successful claim. Recipients should consider the availability of the consultant’s professional indemnity insurance, level of cover and any exclusions.
- Can the recipient assign the letter? Assignation rights are important. To ensure a full reliance pack for future sales or financings, the recipient should consider whether the benefit of the reliance letter could be transferred to future owners or lenders. The ability to assign the letter can increase the value of the protection. The letter will sometimes grant the recipient the right to request further letters in the future, typically subject to a reasonable fee.
- Should the letter extend to other uses? A purchaser may need to rely on the report for its own future development plans, for example as part of a planning application. If development is proposed, the purchaser should therefore ensure that the letter includes a copyright licence.
- Is the letter suitable for the transaction? Whilst reliance letters are a common aspect of real estate transactions, their terms should be consistent with the transaction. With market focus on building safety, environmental performance and sustainability, we are seeing reports on fire safety, contamination, energy performance and wider ESG considerations becoming increasingly important. Given the significance of these reports, it is important that the reliance letter terms are consistent with the transaction.
Balancing the parties' interests
Purchasers and lenders will typically seek broad rights of reliance and meaningful remedies if something goes wrong. Consultants, on the other hand, generally want to ensure that their exposure remains proportionate and aligned with the purpose for which the report was originally prepared.
As a result, negotiations of the reliance letter terms often focus on the scope of reliance, liability caps, insurance obligations, assignation rights and the identity of the beneficiary. While reliance letters are often viewed as relatively straightforward documents, these points can have a significant impact on the allocation of risk. Sellers also have an interest in the process. Providing purchasers with direct rights against key consultants can reduce concerns about potential gaps in protection.
However, obtaining reliance letters can take time and cost, particularly where multiple consultants are involved. They should be considered and actioned early in the transaction timetable.
Key take aways
Reliance letters are a well-established feature of real estate transactions, providing purchasers and lenders with direct recourse against consultants whose reports underpins key commercial decisions.
Although they are often regarded as a routine deliverable, the detail matters. The scope of reliance, liability limitations, insurance arrangements and assignation rights can all affect the value of the protection being obtained. Careful review of those provisions can help avoid unexpected gaps in recourse. There are however timing and cost implications, so early engagement is prudent.
As technical due diligence has an increasingly important role in real estate transactions, reliance letters are likely to remain a useful and valuable tool for managing risk.
