abstract
Successful negligence claims typically result from a failure to
employ appropriate valuation methods, follow recognized appraisal
procedures, or disclose hypothetical conditions. Advancements in
appraisal education and improved appraisal practices, coupled with
mandatory continuing educational requirements, have raised consumer
expectations regarding the level of competency of appraisers. In
assessing claims of negligence, the courts are increasingly taking into
consideration the prevailing standards of the appraisal profession. This
article examines a number of negligence cases in the context of the
professional appraisal standards of the Appraisal Institute of Canada.
**********
This article explores appraisal standards and claims of
professional negligence. Court cases involving negligence claims against
appraisers are examined in the context of the current appraisal
standards of the Appraisal Institute of Canada (AIC). (1) The
comparisons of the negligence claims to the current appraisal standards
are confined to the courts' decisions rather than the actual
appraisals involved in the disputes. It also must be recognized that
appraisal standards have evolved, and under the current appraisal
standards of the AIC, the courts would likely hold an appraiser's
work product to a higher standard than that used in past cases. When
reviewing an appraisal report in contemplation of litigation, the
applicable standards are those that existed when the appraisal under
review was prepared.
Terminology and Concepts
Any discussion of professional appraisal practice and lawsuits
related to professional negligence must begin with an examination of the
terminology and concepts that the courts consider when reviewing a
negligence claim.
Appraisal Practice and Market Value
Appraisal practice is described in the Canadian edition of The
Appraisal of Real Estate as follows:
Appraisal practice covers a broad spectrum of problem-solving tasks
that involve real property and are undertaken for a variety of
functions. The professional standards and negligence claims examined
here, however, relate primarily to market value appraisals intended for
financing. Market value is defined as follows:
The most probable price which a specified interest in real property
is likely to bring under all the following conditions:
1. Consummation of a sale occurs as of a specified date.
2. An open and competitive market exists for the property interest
appraised.
3. The buyer and seller are each acting prudently and
knowledgeably.
4. The price is not affected by undue stimulus.
5. The buyer and seller are typically motivated.
6. Both parties are acting in what they consider their best
interest.
7. Marketing efforts were adequate and a reasonable time was
allowed for exposure in the open market.
8. Payment was made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
9. The price represents the normal consideration for the property
sold, unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale. (3)
Market value is not founded on an "as if" or
"assumptive" premise. An "as if" or
"assumptive" premise implies a contingent and prospective
value, which is inconsistent with establishing market value "as
is" at the effective date of appraisal. In Jabbour v. Bassatne, (4)
a dispute arose as to the as-is market value of raw land. The appeals
court observed that
Appraisers retained to estimate market value (i.e., value in
exchange) have at their disposal the three traditional approaches to
value: (5) the sales comparison approach, the income capitalization
approach, and the cost approach. Of the three approaches, either the
sales comparison approach or income capitalization approach is likely to
be the most applicable in estimating the market value of property.
Typically, these two approaches are the most relevant from a
lender's perspective in establishing the appropriate loan amount
and confirming that the property provides adequate security in the case
of mortgage default.
Reasonable Appraiser Standard
The 2004 edition of the Canadian Uniform Standards of Professional
Appraisal Practice (Standards) issued by the Appraisal Institute of
Canada provides guidance as to the level of performance the public
should expect from its members. Contained in the Foreword of the
Standards is a statement of competency:
As to how members are judged in discharging their professional
obligations, the Appraisal Institute of Canada applies the
"Reasonable Appraiser" standard, (7) which measures the
performance of appraisers against the performance of their peers within
the organization and within the profession. The Standards state that a
Reasonable Appraiser is "one who maintains a level of performance
that would be acceptable to the Professional Practice Peer Group [of the
Appraisal Institute of Canada]." The Standards further state that
"if reasonable appraisers conclude that there is no rational
foundation for an analysis or opinion, then such analysis or opinion
would not be justified." (8)
When an appraiser's performance falls below the standard of
the Reasonable Appraiser, and an economic loss is sustained by a party
entitled to rely upon the appraiser's work product, the damaged
party may bring an action against the appraiser for negligent
misrepresentation. (9) In cases where there is a claim of negligence
against an appraiser, the courts have looked to the prevailing standards
of the profession and the Appraisal Institute of Canada.
When appraisers promote a particular expertise or specialty within
the profession, they are held to an even higher standard by the courts:
In addition, there is the possibility that a court could find that
certain circumstances call for a standard of care that is higher than
the usual professional standard. In this type of circumstance, standard
appraisal practice is in itself negligent, as suggested by the court in
Kripps v. Touche Ross & Co., where the court held that "while
professional standards would normally be a persuasive guide as to what
constitutes reasonable care, those standards cannot be taken to supplant
or to replace the degree of care called for by law." (12)
Negligence
The term "negligence" is defined in Black's Law
Dictionary as follows:
The term "actionable negligence" is defined in
Black's Law Dictionary as
In VSH Management Inc. v. Neufeld, the court stated that the
determination of whether an appraiser has acted negligently
Negligent Misrepresentation
When an appraiser is retained to prepare an appraisal, that
individual is expected to develop and express an opinion. If that
appraisal is negligently prepared and causes an economic loss, the
appraiser may face a claim for negligent misrepresentation. The
negligence claim can arise both from what the appraiser did and did not
do.
The elements necessary to sustain a claim for negligent
misrepresentation were set out by the Supreme Court of Canada in Queen
v. Cognos:
1. There must be a duty of care based on a 'special
relationship' between the representor and the representee;
2. The representation in question must be untrue, inaccurate, or
misleading;
3. The representor must have acted negligently in making said
representation;
4. The representee must have relied, in a reasonable manner, on
said negligent misrepresentation; and
5. The reliance must have been detrimental to the representee in
the sense that damages resulted. (17)
The existence of a "special relationship" between the
representor and the representee is a threshold requirement of a claim
for negligent misrepresentation. The court in Cognos noted that
circumstances other than contractual relationships might give rise to a
special relationship and duty of care:
Valuation Opinions
Variability. Appraisers may differ in their opinions of market
value, resulting in entirely different value conclusions for the same
property as of the same date. The courts recognize, however, that this
does not necessarily mean that any of the opinions are negligent. (19)
The courts have also ruled that overvaluation does not in itself show
negligence. (20)
The variability in opinions of value is to some extent a function
of property type. Single-family tract housing in an urban setting is the
least likely to be in dispute, while unique properties--such as
churches, bowling alleys, movie theaters, hospitals, and speculative
land with an uncertain end use--are likely to show the greatest
divergence. During periods of market inactivity or instability, opinions
of value are also likely to show more variability. As an opinion of
value is only valid at a point in time, many appraisal reports contain
an exculpatory clause such as the following:
In the future, there may be less variability in valuation opinions
due to standardized appraisal approaches and practices, enhanced
practical and educational requirements, use of computers and program
software, increased availability of macroeconomic and microeconomic
information, and access to real estate databases through the internet.
Scope of Work. In assessing the reliability of an opinion of value,
careful attention must be paid to the scope of work section of the
appraisal report, which outlines the amount and type of information
researched and analysis applied. Scope of work includes, but is not
limited to, the extent of the
* inspection;
* research into physical and economic factors that could affect the
property;
* data research, verification, and inspection of comparables; and
* analysis applied. (22)
The scope of work applied must be sufficient to result in
opinions/conclusions that are credible in the context of the intended
use of the appraisal. The appraiser has the burden of proof to support
the scope of work decision and the level of information included in a
report. Statements forming the scope of work must be factual and
tailored to the specific appraisal assignment. In VSH Management, the
appraiser's report contained a statement indicating that the report
was based on investigations that included "discussions with owners,
managers and agents and others knowledgeable with this type of property
or this sector of the market as well as municipal officials." (23)
In finding this statement false and misleading, the court noted that
An appraiser must not acquiesce to a client's demands to
undertake appraisal work that would circumvent the Standards and lead to
an inaccurate, meaningless, misleading and/or fraudulent appraisal. A
client's request must be reasonable and serve a legitimate purpose.
The Standards require an appraiser to disclose the intended use and
purpose of an appraisal in the report. The Standards define
"intended use" as "the use or uses of an appraiser's
reported appraisal, consulting, or review assignment opinions and
conclusions, as identified by the appraiser based on communications with
the client at the time of the assignment." A statement of intended
use is "necessary for the appraiser and the client to determine the
appropriate scope of work to be undertaken, and the level of information
to be included in the report." A statement of purpose is necessary
because "liability to the client depends on the appraiser's
understanding of the client's purpose in ordering the
appraisal." (25)
Use. An appraisal report should also include a clause that controls
the distribution of the report and the extent to which the report can be
relied upon. The content of the clause could be similar to the
following:
An appraisal that fails to impose any restrictions on the use of
the report and fails to identify the intended user(s) could result in
exposure to liability from anyone that has relied upon the appraisal
report and sustained a financial loss due to the appraiser's
negligence. A poorly drafted clause may allow an unintended third party
to successfully sustain a claim for negligence against the appraiser. In
Royal Bank of Canada v. Burgoyne, on the questions of the use of a
report and who might be expected to rely on it, the court commented as
follows:
Assumptions and Limiting Conditions. Typically, the appraiser does
not forewarn the client of the underlying Assumptions and Limiting
Conditions that are likely to be attached to an appraisal report; it is
only upon receipt of a completed appraisal report that a client becomes
aware of any exclusionary clauses. While imposing underlying Assumptions
and Limiting Conditions after the fact without a client's prior
consent or knowledge has not been an issue raised in any known
negligence claim against an appraiser, it might be more prudent to
submit the underlying Assumptions and Limiting Conditions with the
Letter of Engagement (28) and specifically reference them. (29)
Appraisals in Anticipation of Litigation. Appraisers do a
disservice to the public and the profession if they blindly accept
appraisal instructions from their clients without regard to the
Standards and their ethical and moral obligations to produce credible
work product.
Appraisals prepared in contemplation of litigation or
quasi-judicial proceedings are of particular concern, as an appraiser
qualified by the court or an administrative board to give testimony as
an expert witness is afforded significant latitude in submitting opinion
evidence while enjoying immunity from prosecution for acts of
negligence. (31)
When preparing reports in contemplation of litigation or
quasi-judicial proceedings such as expropriation, appraisers sometimes
rely on the Standards' Jurisdictional Exception, defined as an
assignment condition that voids the force of a part or parts of the
Standards. The Jurisdictional Exception provides that it is misleading
to fail to disclose in the report the part or parts of the Standards
disregarded and the legal authority justifying this action. Under the
Reasonable Appraiser test, it is the appraiser's responsibility to
determine whether the use of the Jurisdictional Exception is
appropriate. (32)
An emerging body of case law suggests that a "friendly"
expert witness hired to perform litigation support services who performs
those services in a negligent manner cannot use the shield of witness
immunity to hide from civil liability. (33) In Marrogi v. Howard, (34)
the Supreme Court of Louisiana ruled that a client could sue a
"friendly" expert witness for negligence in the performance of
the expert's duties before and during trial. In adopting this rule,
the court commented as follows:
Appraisers involved in litigation or quasi-judicial proceedings as
expert witnesses ought to carefully consider their role, their duties,
and their obligations. Certainly, it is not the function of an appraiser
to act as the client's advocate to either enhance or diminish the
value of a property in dispute. Some lawyers align themselves with
appraisers whom they can control, but the conduct of the directed
appraiser is the antithesis of the ethical requirements of the appraisal
profession. (35) Beyond questions of law, it is the appraiser's
responsibility to analyze and determine highest and best use, select the
appropriate valuation approaches, and develop unbiased opinions of
value.
Inappropriate Assignment Parameters
Appraisers also must be careful to avoid inappropriate assignment
parameters. Some examples of inappropriate assignment parameters
include:
* adoption of a foundation of property rights and a value
definition inconsistent with the appraisal problem, including purpose
and function. The Standards require disclosure of the property rights
appraised, the purpose of the assignment, including a relevant and
sourced definition of value, the identity of the client and intended
users, and the intended use of the appraiser's opinions and
conclusions.
* adoption of assumptions and limiting conditions that are
unwarranted or unreasonable, without which the value of the property in
its "as is" condition would be significantly less or more
valuable and inconsistent with the Reasonable Appraiser test.
* acceptance of legal instructions that go beyond questions of law
and impinge on the appraiser's expertise and independence to
determine highest and best use, select the appraisal approaches, and
formulate opinions of value, all of which must be consistent with the
Reasonable Appraiser test.
* reliance on an inappropriate valuation approach like the cost
approach rather than the income capitalization approach to estimate the
market value of an income-producing property such as a shopping centre
under lease to a number of tenants. The Standards require that the
appraiser disclose and support the reason for the exclusion of any of
the usual valuation procedures.
* adopting a highest and best which does not meet the four-pronged
test of being physically possible, legally permissible, financially
feasible, and maximally productive. The Standards require disclosure in
the report of the existing use and the use reflected in the appraisal,
and the appraiser must define and resolve the highest and best use.
* valuing raw land without any planning and subdivision approvals
(executed subdivision agreement) as if it were an actual subdivision and
applying the subdivision development method. (36) (There is no reference
to the subdivision development method as one of the three traditional
valuation approaches in the AIC Standards.)
Appraisals prepared on an "as if" or
"assumptive" basis have the potential to be misleading and
possibly fraudulent. The "as if" or "assumptive"
appraisal is a hypothetical appraisal as it assumes facts or conditions
not in existence at the time the appraisal is prepared, and the opinion
of value emanating from such a premise is both contingent and
prospective. The "as if" or "assumptive" premise
should not be adopted by the appraiser unless it is reasonable and
within the realm of probability (not distant or speculative), complies
with the Standards, and can be justified in the context of the intended
use of the appraisal as a valid objective.
Responsibility rests with the appraiser, not the client, to
determine whether an "as if" or "assumptive"
appraisal is an appropriate exercise of the appraiser's
professional expertise and is consistent with sound appraisal practice.
If an "as if" or "assumptive" appraisal is prepared,
the appraiser must disclose that the appraisal is hypothetical and that
the value estimate is both contingent and prospective, and not an
indication of the market value of the property in its "as is"
condition.
An "as if" or "assumptive" value estimate
conveniently bypasses the cost associated with the time, carrying
charges, and financial outlays required to achieve the value estimate,
and makes no provision for risk and entrepreneurial profit associated
with achieving the "assumptive" premise because the future
events, occurrences, decisions, approvals or rulings vital to the value
estimate are treated as if they had already taken place. It may be
appropriate to go one step further and provide an indication of the
market value of the property in its "as is" condition so as to
measure the impact on value of the "as if" or
"assumptive" premise.
In Transamerica Life Insurance Co. of Canada v. Hutton, (37) an
appraiser avoided a finding of negligence where the court found that the
appraiser had been instructed to appraise the property not on an
"as is" basis, but on the assumption of the proposed
improvements, and the covering letter and appraisal report specifically
stated that the valuation was for "the market value of the subject
property, when renovated, assuming the information received is correct
and subject to the attached contingent and limiting conditions."
In Transamerica Life Insurance, the "Highest and Best
Use" section of the appraiser's report stated the
building's current condition and indicated that the building was to
be renovated. The report also detailed the proposed renovations and
improvements and stated that when the renovations were completed,
assuming that the quality of the materials and workmanship was good, the
building should be in excellent condition. Other references to the
improvements included a statement that taxes would increase, that
financial statements indicating income and expenses would not be
available until the renovations were completed and that, in consequence,
costs would have to be estimated for the purposes of the appraisal. The
court ruled in favor of the appraiser, noting in disbelief that no one
from Transamerica claimed to have read the appraisal report in detail
and found that
Reporting Format. According to the Standards, a Full Narrative
appraisal report is comprehensive and detailed, and prepared without
invoking an Extraordinary Limiting Condition. (39) A Narrative appraisal
report is one where an Extraordinary Limiting Condition has been
invoked. (40) An Extraordinary Limiting Condition refers to a necessary
modification or exclusion of a Standard Rule. (41) Here again, the
Standards provide that the burden is on the appraiser in the report to
explain and justify the necessity for any Extraordinary Limiting
Conditions and "to conclude before accepting an assignment and
invoking an Extraordinary Limiting Condition that the scope of work
applied will result in opinions/conclusions that are credible."
(42)
Hypothetical Conditions. The Standards allow an appraisal to be
based on hypothetical conditions only "when they are required for
legal purposes, for purposes of reasonable analysis, or for purposes of
comparison. Common hypothetical conditions include proposed improvements
and prospective appraisals." (43)
For every Hypothetical Condition, an Extraordinary Assumption is
required in the report. (44) An Extraordinary Assumption refers to
"a hypothesis--either supposed or unconfirmed--which, if not true,
could alter the appraiser's opinions and conclusions." Full
disclosure of any Extraordinary Assumption must accompany statements of
each opinion/conclusion so affected. (45)
The Standards provide that when an appraiser imposes a Hypothetical
Condition, it must be clear to the reader of the report that
1. the property condition does not in fact exist as at the date of
appraisal;
2. the analysis performed to develop the opinion of value is based
on a hypothesis, specifically that the property condition is assumed to
exist when, in fact, it does not;
3. certain events need to occur, as disclosed in the report, before
the property condition will, in fact, exist;
4. the appraisal does not consider unforeseeable events that could
alter the value conclusion; and
5. a different value conclusion would likely result but for the
hypothesis. (46)
Appraisers have a professional obligation and duty to disclose
within their reports that any variance from a Hypothetical Condition and
Extraordinary Assumption will render the conclusion invalid. Inserting a
companion statement disclosing that the indicated value premised on the
Hypothetical Condition(s) is not an indication of the market value of
the property in its "as is" condition would help to ensure
that any reader of the report is not misled or misinformed. The
Standards state that
Case Studies
The following cases brought against appraisers have been selected
to illustrate the factors considered by the courts in finding an
appraiser negligent and to explore how the AIC Standards might be
applied to the facts of each case. Without having the benefit of
reviewing the actual appraisals involved in the court cases, the
applicability of the Standards is confined to the appraisal information
contained in the court rulings.
Octagon Mortgage Corp. v. Senger
In the case Octagon Mortgage Corp. v. Senger, (48) Octagon Mortgage
had received an application for a mortgage loan from a mortgage broker
acting on behalf of a client seeking "bridge financing." As
security for the loan, the client offered a third mortgage on a
residential property he owned. An appraisal of the residential property
indicating a value of $710,000 supported the client's mortgage
request. The mortgage company retained its own appraiser, Stacey, who
purportedly was instructed "to review and substantiate the accuracy
of the appraisal and to visit and view the subject property." After
having visited the residential property, Stacey wrote to the mortgage
company that he had reviewed an appraisal on the property; he also
certified he had personally inspected the property, that he had no
interest in the property, and that his employment was not contingent
upon the amount of his valuation estimate. His report stated
The mortgage company advanced $164,000 on the strength of a third
mortgage against the residential property. The borrower defaulted and
the mortgagee took foreclosure proceedings. Pursuant to a court-ordered
sale, the residential property realized $549,000. The first and second
mortgagees were paid out and the third mortgagee sustained $81,955.76 in
lost principal, interest, and costs.
It turned out that the property's lot area was less than half
an acre, not 43,560 sf (one acre) as stated in the original appraisal
accompanying the mortgage application. In his review of the appraisal,
Stacey had failed to uncover the error in the lot size. The mortgage
company sued Stacey for the losses it had sustained.
At trial, Stacey admitted that his opinion of value would have been
affected to an extent of $100,000 or $150,000 if he had known the
lot's actual size. He unsuccessfully argued that he had conducted
an appraisal review and that the "review letter is not a full
appraisal." The court noted that Stacey's letter contained no
qualifying statements, (49) and it concluded that Stacy "failed in
his obligations to his client [the mortgage company]." Based on
this finding, the court awarded the mortgage company damages of
$81,955.76.
Application of the Standards. At the time Stacey prepared his
report, the Appraisal Institute of Canada did not have any appraisal
review standards such as the ones that currently exist. The current
Review Standard Comments provide guidance for situations similar to
Octagon Mortgage:
Review Standard--Purpose
* a review appraiser must ascertain whether the purpose of the
assignment includes the development of an opinion of value of the
subject property of the appraisal under review.
* if the purpose of the assignment includes the review appraiser
developing an opinion of value of the subject property in the appraisal
under review, that opinion is an appraisal whether:
a) it concurs with the opinion of value in the appraisal under
review;
1) at the same date of the value in that appraisal or;
2) as of a different date; or
b) it differs from the opinion of value in the appraisal under
review;
1) at the same date of the value in that appraisal or;
2) as of a different date.
* pursuant to either a) or b) above, the review appraiser must
identify and state any new information relied upon, the reasoning and
basis for the opinion of value and all assumptions and limiting
conditions (if different from or in addition to those in the appraisal
report under review) connected with the opinion of value.
* those items in the report under review that the review appraiser
concludes are in compliance with the Appraisal Standard can be used in
the review appraiser's development process. Those items not deemed
to be in compliance must be replaced with information or analysis
developed in accordance with the Appraisal Standard in order to produce
a credible value opinion. (50)
The appraiser in Octagon Mortgage failed to qualify his report to
caution his client that reliance was being placed on some or all of the
data contained in the appraisal report under review, including the
incorrect lot area.
Also, because Stacey had conducted research into comparable sales
in addition to those listed in the appraisal that he reviewed and had
concluded with his own value estimate, he had, in effect, prepared an
appraisal. Stacey's certification attesting that his employment was
"in no way contingent on the amount of my estimate" was
consistent with having prepared an appraisal. A review appraiser that
presents his own opinion of value as part of a review report must comply
with all of the Appraisal Standard Rules relating to developing an
appraisal.
Barry J. Black Investments, Inc. v. Walker, Ellis & Pezzack
In the case Barry J. Black Investments, Inc. v. Walker, Ellis &
Pezzack, (51) Mega Corporation proposed acquiring property owned by
Standard Commercial Tobacco Company of Canada Ltd. for $1.7 million. The
property consisted of three parcels: Parcel 1 was 9.02 acres and
improved with warehouse buildings; Parcel 2 was vacant land of 2.01
acres; and Parcel 3 was vacant land of 0.16 acres. Acting on behalf of
Mega Corporation in the capacity of mortgage broker, CBN Financial Group
Limited retained an appraiser to value all three parcels, with specific
instruction that Parcel 1, the improved property, be appraised based on
the "income approach." (52)
The appraiser prepared his appraisal as of March 24, 1987,
indicating a combined value of $2,356,000: $1,931,000 was attributed to
Parcel 1 improved with the warehouse buildings; $400,000 to Parcel 2;
and $25,000 to Parcel 3. On the strength of the appraisal at $2,356,000,
the mortgage broker was able to obtain a mortgage commitment on May 5,
1987 for $400,000 in private funds (handled through the investor's
law firm) toward a $550,000 second mortgage behind a first mortgage of
$700,000 confined to Parcel 1. The value reported to obtain the
$400,000, however, was incorrectly conveyed as $2,536,000, and the
mortgage broker failed to disclose that the appraised value applied to
all three parcels, and that there was a pending transaction for Parcel 1
at $1,275,000.
Sometime after the closing, the second mortgage went into default
and the investor's law firm settled the investor's
(plaintiff's) claim by paying $326,757.47 plus legal costs. The law
firm tried to recover against the appraiser, but despite the
court's finding of negligence against the appraiser, the law firm
was held solely responsible for the investor's losses. In finding
the appraiser negligent, the court relied upon the AIC Standards of
Professional Practice, Regulation No. 7. (53) The court attacked the
appraisal on many fronts taking exception to numerous violations of the
AIC'S Standards of Professional Practice.
In Black Investments, the appraiser's actions were contrary to
the requirement that if an appraiser is not providing a market value
estimate, the appraiser "must include a definition of the value
being reported, along with a statement to the effect that the reported
value is not market value, as well as provide an explanation of how it
differs from market value." The appraiser made no such disclosures
in his definition of value. The court observed:
The court criticized the appraiser's report because it omitted
specific information on the property's tenancies and income. The
court found that the comments relied upon by the appraiser to negate the
legitimacy of his appraisal did not detract from his obligation to
provide reasoning to support a valuation. As to the absence of any
reasoning in support of the valuation, the court came to the inescapable
conclusion that
The appraiser's certification that "[n]o important facts
have been withheld or overlooked" did not square with the finding
of the court that the appraiser "withheld or overlooked important
facts." In summary, the court found that the appraiser was
negligent in the preparation of his appraisal report and the valuation
was not based on market value.
Application of the Standards. In the Black Investments case, the
Standards would have required the appraisers report to
1. describe and apply the appraisal procedures relevant to the
assignment;
2. support the reason for the exclusion of any of the usual
valuation procedures;
3. detail the reasoning supporting the analyses, opinions and
conclusions of each valuation approach; and
4. analyze and disclose any current Agreement for Sale, option or
listing of the property (if such information is available in the normal
course of business). (54)
The Standards also provide that "excluding any of the three
traditional approaches to value that would be considered pertinent under
the Reasonable Appraiser standard, constitutes an Extraordinary Limiting
Condition that requires disclosure with reasoning. (55) The exclusion of
a relevant approach must not result in a report that is misleading. (56)
The Standards further provide that the reasoning in an appraiser's
report "requires the logical review, analyses and interpretation of
the data in a manner that would support the conclusion, not mislead the
reader and be to a level consistent with the 'Reasonable
Appraiser' standard." (57)
In Black Industries, the intended function of the appraisal was for
mortgage financing, and the appraiser knew that the lender would be
relying on his appraisal report. When the property to be mortgaged is
income producing, a lender's primary concerns are the market value
of the property and the debt coverage ratio. In this lawsuit, the
appraiser's definition of market value deviated from any
authoritative definition of market value, and made no reference to the
existing rental income (being significantly lower than what was
projected), so that both the opinion of value and the income stream on
which the lender relied were misleading.
As noted previously, the Standards require disclosure and analysis
of any current Agreement for Sale, option, or listing of the property if
such information is available to the appraiser in the normal course of
business. Any prior sales of the property within three years (58) also
have to be disclosed and analyzed, and any impact on the price paid
under known undue stimulus noted. Any pending or prior sale involving
atypical financing would require that the purchase price be adjusted to
its cash equivalent, consistent with the concept of market value. When
an income capitalization approach is applicable, an appraiser must base
projections of future rent and expenses on reasonably clear and
appropriate evidence. In Black Investments, the lender was induced to
make a second mortgage loan to its detriment based on the strength of
the misleading appraisal that did not disclose the pending sale of
Parcel 1 at $1,275,000. (59)
A member of the Appraisal Institute of Canada must perform
assignments ethically, objectively and competently in a meaningful
manner in accordance with the Standards. Further, it is unethical for a
member to develop, use or permit others to use, for any purpose any
report which the member knows, or ought to know, is misleading.
Esselmont v. Harker Appraisals Ltd.
In the case of Esselmont v. Harker Appraisals Ltd., (60) Harker
prepared an appraisal report for the owners of a 127-acre undeveloped
tract as of September 23, 1975, indicating a value of $1,440,000 by the
subdivision development approach and $953,400 by the market data
approach, now known as the direct comparison approach. Subsequently, in
July 1976, the owners placed the appraisal before Esselmont in support
of a request for a third mortgage loan of $200,000. There was an
existing first mortgage of $200,000 and a second mortgage of $150,000.
On the strength of the Harker appraisal report, Esselmont and five other
investors placed a $200,000 third mortgage for a term of six months
against the property.
Eventually there was default on all three mortgages and the first
mortgagee foreclosed on the mortgage. Esselmont, as third mortgagee,
claiming to have relied on the September 23, 1975 appraisal, launched an
action against Harker for sustained losses of $303,546.36.
At trial, the appraisal report was impugned for its many major
defects. Evidence was presented indicating that the owners had
"shopped for value" within the appraisal community. Two other
commissioned appraisals prepared as of the same effective date
(September 23, 1975) indicated values of $170,000 and $318,000, neither
of which were brought to the attention of Esselmont.
In the Harker appraisal, under "Summary of Salient Facts and
Important Conclusions," the zoning was incorrectly reported, both
as to zoning category and minimum size requirement; the property was
within the 5-acre minimum "Agricultural Land Reserve
[ALR]"classification. Because the appraiser's conclusion that
the highest and best use for the property was "development by
subdivision," the zoning was a critical factor. The court commented
as follows:
Harker admitted he knew that the land was under the ALR, which did
not permit subdivision, and that he should have mentioned this fact. To
the contrary, his report indicated that water and sewage disposal
services were to be extended to the subject area, although Harker
admitted that he had not made any inquires in this regard. The court
concluded "there was not the slightest justification for Harker to
put any such thing in his appraisal."
As to the market data (direct comparison) approach, the court
stated that the comparables should be "as close to the subject as
possible geographically and in size, and where the value is established
by a sale, that sale [be] as close in time as possible to the effective
date of the appraisal." The court noted that the subject property
was approximately 127 acres of undeveloped land, about 15 miles from the
center of the city, while the appraisal listed eight comparables,
varying in size from 2 acres to 11.79 acres; five of the eight
comparables were 5 acres or less. With the exception of Harker, the
appraisers who gave evidence were unanimous in condemning the use of
these comparables to estimate the value of the subject property. When
questioned on the use of these comparables, Harker claimed that he could
not find any true comparables.
In reference to Harker's appraisal section "Development
Approach to Value," the court's reaction was less than
complimentary:
When Harker prepared his appraisal in September 1975, he had in his
possession two purported bona fide offers for the subject property--June
17, 1975 for $850,000 and July 23, 1975 for $750,000--which were refused
by the property owners. Harker did not take these offers into account in
estimating the value of the property. He claimed that since the purpose
of his appraisal was to advise the property owners of the market value,
i.e., what they might reasonably accept, he did not need to include the
two offers.
The court noted that had the two offers been used in Harker's
calculation, the final estimate of value would have been lower than it
was. In finding the appraiser negligent, the court concluded that his
appraisal was "reckless, mendacious and irresponsible" and
constituted "a gross overvaluation," and the appraiser had
fallen "far short of the standard of care which the law imposes on
a professional appraiser."
Application of the Standards. In the Harker case, the Standards
would have required the appraiser's report to
1. disclose the scope of work necessary to complete the assignment;
2. disclose all assumptions and limiting conditions;
3. disclose any hypothetical conditions;
4. disclose land use controls;
5. state the existing use and the use reflected in the appraisal;
6. describe and analyze all data relevant to the assignment;
7. describe and apply the appraisal procedures relevant to the
assignment;
8. detail the reasoning supporting the analyses, opinions and
conclusions of each valuation approach;
9. analyze the effect on value of anticipated public or private
improvements; and
10. analyze and disclose any current Agreement for Sale, option, or
listing of the property (if such information is available to the
appraiser in the normal course of business). (62)
In Harker, the scope of work undertaken by the appraiser was
insufficient to result in opinions/conclusions credible in the context
of the intended use of the appraisal, which was to ensure adequate
security for mortgage financing. There were numerous unidentified
Extraordinary Assumptions, and the use of the "development approach
to value" [subdivision development method] was not warranted, as
subdivision was not the highest and best use of the property. (63)
Physically, the undeveloped tract did not have access to services,
subdivision was not legally permissible, and there was no evidence of
demand for residential housing in the area where the tract was located.
No inquiries of any municipal departments and governmental agencies were
ever undertaken by the appraiser to ascertain the viability of
subdivision or the steps and timing involved in the subdivision
approvals process.
Impressing upon the undeveloped tract an imaginary subdivision was
a hypothetical exercise and resulted in a value on an "as if"
or "assumptive" premise, rather than a value of the tract in
its "as is" condition. In addition, a "land freeze"
eliminated any possibility of development, so that characterization of
the subject property as a speculative land holding with an uncertain end
use would have been a more appropriate conclusion. The reported zoning
and comparable sales did not fit the actual characteristics of the
subject property. Under the Standards, an appraiser must collect and
verify relevant information in a manner consistent with Reasonable
Appraiser standards. There was a failure to perform ethically,
objectively and competently. A member of the AIC must develop and
communicate his/ her analysis, opinions and advice in a manner that will
be meaningful to the client, that will not be misleading in the
marketplace, and that will be in compliance with the Standards.
Finance America Realty Ltd. v. Block, Prossin & Schelew
In the case of Finance America Realty Ltd v. Block, Prossin &
Schelew, (64) Conrod owned a seven-acre parcel, which he wanted to
subdivide into eight lots. The parcel was encumbered by a first mortgage
of $31,000 when Conrod applied to Finance America Realty (Finance
America) for a second mortgage. On February 6, 1976, Finance America
arranged for the appraisal of the property. Conrod told the appraiser
retained by Finance America that the subdivision was not approved but
approval was imminent.
The appraiser prepared his appraisal report as if approval had been
received for an eight-lot residential subdivision, despite the
appraiser's knowledge to the contrary. He valued the property at
$97,200. Without subdivision approval, the land was worth only $65,000.
Based on the reported value of $97,200, Finance America approved a
second mortgage of $25,000. But for the higher value, Finance America
would not have advanced the second mortgage as it was not a loan
conditional on subdivision approval. Conrod defaulted, and Finance
America subsequently sold the property for $45,000, sustaining a loss of
$20,898. Finance America then launched an action against the appraiser
to recover the financial losses it had sustained as a result of the
appraisal.
At trial, evidence was presented as to the status of the Conrod
property with regard to the proposed subdivision. An application for a
development permit had been submitted to the County of Halifax and the
cities of Dartmouth and Halifax in October 1975 with respect to the
Conrod lands. The application was forwarded to the Department of
Highways, and the department reported that the proposed road layout, as
shown on the plan, met with the requirements of the department subject
to the provisions of department specifications for subdivision roads. On
January 30, 1976, however, the Director of Development and Planning for
the County of Halifax wrote to Conrod advising him that the property was
not eligible for a regional development permit, and that if he wished to
discuss the matter further to contact his office. In the meantime,
Conrod's application would be held in abeyance awaiting
Conrod's written response. Conrod never responded.
The economic impact of subdivision approval or nonapproval on the
value of a property was significant. On the assumption of a subdivision
of eight lots--one of which included a half-built house--the property
was appraised at $97,244, consisting of $41,244 for the house and its
lot and well, and $8,000 each for the other seven lots. Without
subdivision approval, all that Conrod had in legal fact was a large
seven-acre lot with a half-built house and driveway worth a total of
about $65,000.
When the appraiser had met with Conrod to inspect the property,
Conrod showed the appraiser a (conceptual) subdivision plan of eight
lots and a road, where the lots had been laid out on the ground and
marked by surveyor's stakes, and a 66-foot-wide, well-built road,
which Conrod claimed had passed Department of Highways standards. He
also showed the appraiser the half-built house, serviced by a well and
septic tank, located on one of the back lots. The appraiser did verify
that there was a file relating to the property in the county office, but
he did not carry his investigation any further as to the status of the
subdivision application. The appraisal report contained no reference to
subdivision approval or lack thereof. The district was described in the
appraisal report as a "developing residential area," and the
lots were described as "all having road frontage." The
appraiser in his certificate stated that to the best of his knowledge
and belief, the statements contained in the report, and upon which his
estimate of value was based, were correct.
The Supreme Court of Nova Scotia found that the appraiser breached
his duty to Finance America by failing to inform his client of a vital
fact that the appraiser knew, namely, that the subdivision plan had not
yet been approved.
Application of the Standards. In the Finance America Realty case,
the Standards would have required the appraiser's report to
1. disclose the scope of work necessary to complete the assignment;
2. disclose all assumptions and limiting conditions;
3. disclose any hypothetical conditions (including proposed
improvements);
4. disclose land use controls; and
5. state the existing use and the use reflected in the appraisal.
(66)
An appraiser's failure to disclose an assumptive premise on
which a value estimate rests is a contravention of the Ethics Standard,
which provides that it is unethical for a member to develop, use or
permit others to use, for any purpose any report which the member knows,
or ought to know, is misleading. The appraiser in Finance America Realty
should have made inquiries to the appropriate agencies and governmental
bodies regarding the status of the subdivision application and the steps
necessary in achieving subdivision. The fact that the property owner had
commenced infrastructure improvements in anticipation of subdivision
approval did not justify the valuation of the property as if it had
already been legally subdivided. Accordingly, the appraiser erred in his
opinion of highest and best use of the property as an eight-lot
residential subdivision, which led to a gross overvaluation of the
property in its existing use as a large single lot with partially
completed improvements.
Conclusion
A difference of opinion as to the value of a property is not, in
and of itself, proof of negligence. The courts recognize that appraisal
is not an exact science, and divergences in opinions of value are not
uncommon. However, a failure to follow generally accepted appraisal
procedures and practices, and errors of omission and commission are
factors that the court considers when assessing a claim of negligence
against an appraiser. The acceptability or unacceptability of an
appraiser's actions (or inactions) are judged in the context of the
standards of the appraisal profession and of the Appraisal Institute of
Canada at the time the disputed appraisal was prepared, applying the
Reasonable Appraiser test.
A disturbing pattern noted in the cases reviewed here is the
failure to disclose important property-specific information such as a
pending Agreement for Sale or an existing lease pertaining to the
property being appraised; this constitutes a form of concealment. It is
difficult to imagine any circumstance in which an appraiser could be
justified in withholding critical information such as a pending
Agreement for Sale, when the very purpose of the appraisal is to
estimate the market value of the property. What better indication of
market value could there be than a pending sale of the property to be
appraised, provided that the transaction meets the definition of market
value. The same holds true for a recently executed arm's-length
lease, without tenant inducements, as an example of market rent for use
in the income capitalization approach of the property being appraised.
Of course, other independent market data would still need to be
researched to test the reliability of subject-specific valuation
benchmarks.
A hypothetical "as if" or "assumptive"
appraisal has been shown to be another source of potential negligence
claims against appraisers. This type of appraisal is contingent and
prospective, and because the value presupposes assumptions or conditions
that have not yet occurred, the indication of value is not the market
value of the property in its "as is" condition. Failure to
reference the "as if" or "assumptive" value estimate
in some meaningful way to the market value of the same
property in its "as is" condition can be misleading and
result in financial losses. All assumptions must be within the realm of
probability and be achievable within a reasonable period of the date of
appraisal, and the steps, time and costs involved in achieving the value
of the "as if" or "assumptive" premise must be
disclosed. Allowances for risk and entrepreneurial profit associated
with the prospect of achieving the "as if" or
"assumptive" premise must also be taken into account.
An appraiser acting in the capacity of a reviewer must make clear
the scope of the review and be careful not to cross the line that
distinguishes the review function from the appraisal function, and to
make clear the scope of the review and the extent to which the data in
the appraisal is being relied upon and not independently verified.
Review appraisers who present estimates of value and fail to follow
appraisal standards or provide a disclaimer for reliance on information
in the appraisal under review could find themselves answering to a claim
of negligence if the failure to comply with the appraisal standards or
data contained in the reviewed appraisal causes a financial loss to
someone entitled to rely on the review appraiser's work product.
Appraisers who have historically enjoyed immunity from claims of
professional negligence while acting as expert witnesses in
contemplation of litigation and quasi-judicial proceedings may no longer
enjoy such a privilege. A number of courts have ruled that a
"friendly" expert witness, hired to perform litigation support
services but who performs those services in a negligent manner, cannot
hide from civil liability behind the shield of witness immunity. The
"friendly" expert will be held to the same professional
standards and duties as other appraisers practicing outside of the
courtroom in a business environment.
(1.) The 2004 edition of the Canadian Uniform Standards of
Professional Appraisal Practice can be viewed and downloaded on the
Appraisal Institute of Canada Web site at www.aicanada.orq. The
Standards meet the sponsor criteria of The Appraisal Foundation in their
international membership category, and are similar in substance to the
Uniform Standards of Professional Appraisal Practice (USPAP), which can
be viewed at www.appraisalfoundation.org.
(2.) Appraisal Institute of Canada, The Appraisal of Real Estate,
Canadian Edition (Chicago: Appraisal Institute, 1992), 9.
(3.) Appraisal Institute, The Appraisal of Real Estate, 12th ed.
(Chicago: Appraisal Institute, 2001), 24.
(4.) Jabbour v. Bassatne, 673 A.2d 201 (D.C. App. 1996).
(5.) Appraisal Institute, The Appraisal of Real Estate, 63-64.
(6.) Appraisal Institute of Canada, Canadian Uniform Standards of
Professional Appraisal Practice (Ottawa, ON: Appraisal Institute of
Canada, 2004), 2.
(7.) In Kokanee Mortgage MIC Ltd. v. Concord Appraisals Ltd.,
[2000] B.C.J. No. 1629 (BCSC), the court in finding the appraiser
negligent, in part, in respect of the direct comparison approach
concluded that "a reasonable appraiser should do two things: ...
obtain as much information as possible to adequately inform himself
about the comparables available.... [and] alert his reader to the
possibility that his appraisal was less reliable because of the absence
of appropriate comparables."
(8.) Canadian Uniform Standards of Professional Appraisal Practice,
lines 481-485.
(9.) See Queen v. Cognos, [1993] 1 S.C.R. 87.
(10.) Friedland v. Derochie, Hoffman Ltd., [1992] O.J. No. 1179 DRS
93-02410; see also Indian Head Credit Union Ltd., [1992] S.J. No. 342
DRS 95-05060 Q.B. No. 1725 of A.D. 1991 J.C.R [1994] S.J. No. 126 (Sask.
C.A.).
(11.) William F. Foster, "Accidental Misrepresentations: The
Problems of Liability and its Avoidance," Appraisal Institute
Magazine (November 1981): 17.
(12.) Kripps v. Touche Ross & Co., [1997] B.C.J. No. 968
(BCCA).
(13. Joseph R. Nolan et al, Black's Law Dictionary, 6th ed.
(St. Paul, MN: West Publishing Co., 1990), 1032.
(14.) Ibid., 29.
(15.) VSH Management Inc. v. Neufeld, [2002] B.C.J. No. 1673 BCSC
755. The appraiser did not take the necessary steps to properly inform
himself of the reliability of the property's rental income and was
found negligent for overstating the rent that the prospective purchaser
of the hotel could expect to obtain.
(16.) Cameron Harvey, "Liability of Appraisers for
Negligence," The Canadian Appraiser (Winter 1988): 25.
(17.) Queen v. Cognos.
(18.) Ibid.
(19.) See Royal Bank of Canada v. Burgoyne, [1995] N.S.J. No. 538,
DRS 96-09243 (NSSC).
(20.) Baxter v. Gapp & Co. Ltd., [1939] 2 K.B. 271, [1939] 2
All E.R. 752, at p. 758 (C.A.); see also Friedland v. Derochie, Hoffman
Ltd.; Cari-Van Hotel v. Globe Estates Ltd., [1974] 6 W.W.R. 707 B.C.S.C.
(21.) Austin v. Knowles, Lambert, Canning & Associates Ltd.,
[2002] O.J. No. 1380. A similar clause was relied upon in Grey Mortgage
Investment Corp. Campbell & Pound Ltd., [2002] B.C.J. No. 964. If an
appraisal is prepared for the function of mortgage financing, this type
of exculpatory clause may prove beneficial against a claim for
negligence where the existing loan is subsequently renewed without the
benefit of an updated appraisal or the advice of the appraiser of the
original appraisal and the renewed loan goes into default.
(22.) "Definitions," Canadian Uniform Standards of
Professional Appraisal Practice.
(23.) VSH Management Inc. V. Neufeld.
(24.) Ibid.
(25.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 1334-1345.
(26.) This clause, as part of the Certification and Statement of
Limiting Conditions of an appraisal report addressed to a specific
"banking/mortgage lender client," would not entitle a third
party to rely upon the report in Grey Mortgage Investment Corp. v.
Campbell & Pound Ltd., [2002] B.C.]. No. 964 BCSC 685.
(27.) Royal Bank of Canada v. Burgoyne.
(28.) For further discussion of engagement letters, see also Guide
Note 9, "Use and Applicability of Engagement Letters," Guide
Notes to the Standards of Professional Appraisal Practice of the
Appraisal Institute (Appraisal Institute, 2003).
(29.) The Practice Notes of the Standards refer to Extraordinary
Assumptions and Limiting Conditions as one of the items that could be
included in a "Letter of Engagement."
(30.) Tony Sevelka, "Appraisal Review: An Emerging
Discipline," The Canadian Appraiser, Part I of II, 1996, Vol. 40,
Bk. 4, 38; Part II of II, 1997, Vol. 41, Bk. I, 42.
(31.) In Jinda Singh et al v. Bank of B.C. et al, [1990] B.C.D.
Civ. 3711-07 (BCCA), the appeals court overruled the lower court's
ruling calling an action for negligence against an appraiser involved in
a foreclosure proceeding an "abuse of process." The appeals
court held that "a claim in negligence brought against an expert
witness for a mortgagee in foreclosure proceedings (an appraiser)
wherein the mortgagor alleges that a negligent appraisal of the
mortgaged premises resulted in a sale of such at a loss to the mortgagor
cannot be considered to be an abuse of process or res judicata by reason
of the court's acceptance of the valuation in approving a sale of
the lands." In reference to "witness immunity," the
appeals court noted the "rapidly expanding basis for
liability" imposed in accord with the Hedley Byrne principle
establishing in law a "duty of care."
(32.) Canadian Uniform Standards of Professional Appraisal
Practice, 3.
(33.) See Levine v. Wiss & Co., 97 N.J. 242, 478 A.2d
397(1984), holding that immunity would not protect an expert
witness-accountant from a negligence claim even though the accountant
was appointed by the parties pursuant to court order; Mattco Forge, Inc.
v. Arthur Young & Co., 5 Cal. App. 4th 392, 6 Cal. Rptr. 2d 781 (Ct.
App. 1992), holding that witness immunity would not shield an expert
witness accounting firm from otherwise actionable professional
malpractice. In LLMD of Michigan, Inc. v. Jackson-Cross Company, 740
A.2d 186 (Pa. 1999), the Pennsylvania Supreme Court noted that
"[t]he goal of ensuring that the path to truth is unobstructed..,
is not advanced by immunizing an expert witness from his or her
negligence in formulating that Opinion. [Witness immunity should not
protect expert witnesses who do not] render services to the degree of
care, skill, and proficiency commonly exercised by the ordinarily
skillful, careful and prudent members of their profession."
(34.) Marrogi v. Howard, 805 So.2d 1118 (La. 2002).
(35.) J. D. Eaton, Real Estate Valuation In Litigation, 2nd ed.
(Chicago: Appraisal Institute, 1995), 541.
(36.) AIC Claim Prevention Bulletin CP-7 (Revised Oct. 1994), 3,
states "[T]he Residual Approach should only be used when
development of the site is not too distant, there is obvious demand for
the resultant product, and there is at least some documentary evidence
that such a development will be approved. Ideally, the development or
subdivision plans should be available, all municipal consents obtained,
and necessary services available. It is certainly not desirable to take
a piece of raw land, assume a potential development, and proceed to the
Residual Approach [Subdivision Development Method]. in addition, the
Residual Approach should never be used without the Comparison Approach
in at least a 'back-up' role." Also see Bulletin CP-7
(August 1993), "Application of the Residual Approach to
Value". The AIC Handbook of Disclosure Guidelines for the Valuation
of Real Estate Assets (1996), 12, cites Clarkson Co. v. Penny and
Keenleyside Appraisal Ltd.., (1985), 64 BCLR 343, [1985] 5WWR 538
(S.C.), in reference to a negligence claim involving the appraisal of
raw land the court found that the appraiser knew or ought to have known
that the report would be examined by a potential lender. The court,
however, held that there was no negligent misrepresentation by the
appraiser because the value of $68,750 was for development purposes, and
no reasonable lender would rely on an appraisal of raw land for
development purposes.
(37.) Transamerica Life Insurance Co. of Canada v. Hutton, [2000]
O.J. No. 2240.
(38.) Ibid.
(39.) The corresponding appraisal report under the U.S. Uniform
Standards of Professional Appraisal Practice (USPAP) is a
"self-contained" report.
(40.) USPAP does not recognize the "Narrative" reporting
format, but invoking an Extraordinary Limiting Condition would result in
a "Limited Appraisal". See the DEPARTURE RULE under USPAP.
(41.) "The Rules are based upon accepted appraisal teaching
that incorporates the minimum compulsory content of principles for
appraising, reviewing or consulting assignments necessary to provide a
credible result." Canadian Uniform Standards of Professional
Appraisal Practice, 2.
(42.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 1499-1502.
(43.) Ibid, lines 1509-1511.
(44.) USPAP also requires disclosure of any hypothetical condition
and extraordinary assumption, but distinguishes between the two to the
extent that one does not have to accompany the other.
(45.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 1494-1497.
(46.) Ibid, lines 1527-1536.
(47.) Ibid, lines 1541-1544.
(48.) Octagon Mortgage Corp. v. Senger, [1994] B.C.J. No. 225 DRS
95-03191
(49.) The judge alluded approvingly to a qualifying statement
contained in another appraisal prepared and submitted in defense of
Stacey's report which cautioned that "... Typical of
professional appraisal review standards, we have relied without
verification on the description contained in the appraisal. We summarize
below the property description on which the appraisal was based. Should
the properly vary materially from this description, our analysis may no
longer be valid." However, the appraisal assumed a one-acre tot,
which the judge criticized as a "touch of make-believe in the face
of the known facts."
(50.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 2343-2365.
(51.) Barry J. Black Investments, Inc. v. Walker, Ellis &
Pezzack, [1995] O.J. No. 1633
(52.) Parcel 1 consisted of storage rental warehouses and, as an
income-producing property, the income capitalization approach would
generally be the most appropriate valuation method. From a lender's
perspective, knowledge of the actual and anticipated net income from the
warehouses would assist in establishing the loan amount, calculating the
debt coverage ratio, and determining the amount of rent that the
facility could be expected to generate in the event of mortgage default.
(53.) Now replaced by the provisions of the Canadian Uniform
Standards of Professional Appraisal Practice.
(54.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 1035, 1043-1059.
(55.) Standard 1 of the American USPAP does not permit the
exclusion of a pertinent valuation approach required to produce a
credible opinion of value.
(56.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 1644-1648.
(57.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 1654-1657.
(58.) An appraisal of a one-to-four-family residential property
requires the appraiser to analyze and report any prior sales of the
subject property that had occurred within one year. USPAP makes no
distinction among property types, and requires disclosure of all sales
of the subject property (whether nonresidential or residential) that
occurred within three years of the effective date of appraisal.
(59.) An appraiser appearing on behalf of the negligent appraiser
testified "that there was no obligation on [the appraiser] to
disclose the actual rental income for the past year of operation or to
disclose the selling price of $1,700,000 for the combined three
parcels." It is difficult to conceive of any circumstance that
would justify withholding such critical information and not disclosing
it in the appraisal report.
(60.) Esselmont v. Harker Appraisals Ltd., [1979] B.C.I. No. 275
(BCSC).
(61.) Ibid.
(62.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 1009, 1017, 1029-1037, 1041-1043, 1047, 1055, 1059.
(63.) The AIC Standards make no reference to the subdivision
development method as one of the three traditional valuation approaches.
(64.) Finance America Realty Ltd. v. Block, Prossin & Schelew,
[1979] N.S.J. No. 61 (S.C.A.).
(65.) Ibid.
(66.) Canadian Uniform Standards of Professional Appraisal
Practice, lines 1017, 1029-1033, 1037.
Tony Sevelka, MAI, SREA, CRE, AACI, P. App., is the president of
InterVal (International Valuation Consultants Inc. and International
Forensic & Litigation Appraisal Services Inc.), an appraisal and
consulting firm in Toronto, Ontario, Canada. He has been appraising
since 1972, and specializes in forensic and litigation work. Contact:
2601 Matheson Blvd. East, Suite 38 Mississauga, Ontario, Canada L4W 5A8;
T 905-602-4350; F 905-602-4360; E-mail: tonysevelka@intval.com
Appraisers perform analyses and render opinions or conclusions
relating to the nature, quality, value, or utility of specified
interests in, or aspects of, identified real estate. Appraisal
is defined as the act or process of estimating value. An appraisal
is an estimate of value. Real estate appraisal involves selective
research into appropriate market areas; the assemblage of pertinent
data; the use of appropriate analytical techniques; and the
application of knowledge, experience, and professional judgment to
develop an appropriate solution to an appraisal problem. (2)
[a] reasonable person would assume land to be equivalent
to specified cash only in its current ["as is"] condition
on the competitive market, not after costly alterations
as yet unmade had turned it from raw land into
a "developable" condition.... [as the trial court stated]
"the prudent, well informed buyer would know the
current condition of the land and pay a reasonable price
for the land, not a price that assumed the land to be in
a 'different' or 'more developed' condition."
A member must not render Appraisal, Review or
Consulting services in a careless or negligent manner.
This requires a member to use due diligence and due
care. The fact that the carelessness or negligence of a
member has not caused an error that significantly affects
his or her opinions or conclusions and thereby
seriously harms an intended user does not excuse such
carelessness or negligence. (6)
The question of negligence must be determined in the
context of the professional activity of the defendant. Was
their course of conduct a breach of the professional standards
applicable to real estate appraisers in general, and
in particular was it in accordance with the principles
established by the Canadian Institute of Appraisers? (10)
... if a person engaged in the real estate appraisal business
holds himself out as possessing a particular expertise,
not normally found in the average real estate appraiser,
in the appraisal and valuation of certain types of
property (e.g. agricultural, commercial, industrial, etc.)
then a higher degree of care and skill is expected of him
than of one who does not profess to be so qualified. (11)
The omission to do something which a reasonable
man, guided by those ordinary considerations which
ordinarily regulate human affairs, would do, or the
doing of something which a reasonable and prudent
man would not do.
The term refers only to that legal delinquency which
results whenever a man fails to exhibit the care which
he ought to exhibit, whether it be slight, ordinary, or
great. It is characterized chiefly by inadvertence,
thoughtlessness, inattention, and the like, while "wantonness"
or "recklessness" is characterized by willfulness.
The law of negligence is founded on reasonable
conduct or reasonable care under all circumstances of
particular case. Doctrine of negligence rests on duty
of every person to exercise due care in his conduct
toward others from which injury may result. (13)
The breach or nonperformance of a legal duty,
through neglect or carelessness, resulting in a damage
or injury to another. It is failure of duty, omission of
something which ought to have been done, or doing
of something which ought not to have been done, or
which reasonable man, guided by considerations
which ordinarily regulate conduct of human affairs,
would or would not do. Essential elements are failure
to exercise due care, injury, or damage, and proximate
cause. (14)
will be based on whether or not the appraiser acted
reasonably having regard to the standards prevailing
in the profession [Canadian Uniform Standards of
Professional Appraisal Practice] and the imprecision
inherent in the methods [Approaches to Value] by
which the value of the property is determined. This is
the minimum standard that an appraiser must meet
in order to not be found negligent. (15)
A finding of negligence will most often flow from
sloppy compilation of objective [and factual] data,
the use of inappropriate valuation methods, and the
failure to carry out relevant analysis, as compared to
errors in judgment in dealing with the applicable data,
valuation method(s) and analyses ... [I]n supplying
information and advice, negligent misrepresentation
can occur not only in what is actually said, or written,
or considered, but also by what should have been
said, written, or considered. (16)
There is some debate in academic circles, fuelled by
various judicial pronouncements, about the proper
test that should be applied to determine when a 'special
relationship' exists between the representor and
the representee which will give rise to a duty of care.
Some have suggested that 'foreseeable and reasonable
reliance' on the representations is the key element to
the analysis, while others speak of 'voluntary assumption
of responsibility' on the part of the representor.
Recently, in Caparo Industries plc v. Dickman, [1990]
1 All E.R. 568 (H.L.), ... the House of Lords suggested
that three criteria determine the imposition of
a duty of care: foreseeability of damage; proximity of
relationship; and the reasonableness or otherwise of
imposing a duty. (18)
Because market conditions, including economic, social
and political factors, change rapidly and, on occasion,
without notice or warning, the estimate of
market value expressed herein, as of the effective date
of this appraisal, cannot necessarily be relied upon as
of any other date without subsequent advice of the
author of this report. (21)
[the appraiser] was unable to provide any name of
any person with whom he may have discussed the
information provided in the appraisal. In fact, what ...
[the appraiser] did was to refer to a collection of other
appraisals of like properties. As that was the source of
his information, ... [the appraiser] should have said
so in the appraisal report and not led Mr. Binkley
[the client and prospective purchaser] to believe that
he had actually made the effort to have discussions
with owners, managers, agents and others knowledgeable
with this type of property. (24)
Written consent from the author and supervisory appraiser
must be obtained before all (or any part) of the
content of the appraisal report can be used for any
purpose by anyone except: the client specified in the
report and, where the client is a mortgagee, its insurers
and the borrower, if he/she paid the appraisal fee. The
author's written consent and approval must also be
obtained before the appraisal (or any part of it) can be
conveyed by anyone to any other parties, including
mortgagees other than the client and the public through
prospectus, offering memo[randum], advertising, public
relations, news, sales and other media. (26)
Clearly, the report, on its face, contains no limitation
on its use by the client, other than it must be in respect
to "deliberations affecting the subject property"
and must be "used in its entirety".... [T]he fact [the
appraiser] may not have been aware of the particular
financial institution that would be presented with the
report is irrelevant. A finding that the Bank is one of
a limited group he could reasonably foresee as using
and relying on the statements contained in his report
means the [Bank] is one of a "limited class" to whom
it was reasonably foreseeable the report might be given.
If, as author of the report, [the appraiser] wished or
intended to limit or exclude persons, who would otherwise
be reasonably foreseeable as being in a limited
group that might use and rely on the report, then the
responsibility is on him, as the author, to set out any
such limitation or exclusions. (27)
For professionalism to be effective and of social relevance
in this day and age, a meaningful ethical consciousness
which transcends personal financial enrichment
must prevail. Third parties and the general public
have a vested interest in the activities of all professionals
and must not be financially damaged by the
misguided loyalties of professionals to their clients and
their inappropriate relationships. (30)
The benefit to the judicial system in the rule we announce
today is a practical one: ridding the system of
incompetent experts and ensuring that reliable opinion
testimony is presented to the fact-finder.... Without
some overarching purpose, it would be illogical,
if not unconscionable, to shield a professional, who is
otherwise held to the standards and duties of his or
her profession, from liability for his or her malpractice
simply because a party to a judicial proceeding
has engaged that professional to provide services in
relation to the judicial proceeding and that professional
testifies by affidavit or deposition.
the Appraisal Report was prepared ... on an
assumptive, or completion, basis and that this was in
accordance with instructions [provided to the appraiser
and if] anyone ... on behalf of Transamerica
had read the report, this should have been obvious. (38)
The hypothetical condition must be clearly disclosed
in the report, with a description of the hypothesis,
the rationale for its use and its effect on the result of
the assignment. An analysis based on a hypothetical
condition must not result in an appraisal report that
is misleading. (47)
I have considered the comparables used and the
comparables of other recent sales and agree that a value
range of the subject property is $675,000.00 to
$725,000.00 and a single estimate of value, as of October
25th, 1990 of $700,000.00.
Apportioned as follows:
LAND: $400,000.00
IMPROVEMENTS: $300,000.00
... [A]n appraiser cannot arrive at market value by the
utilization of one approach to value in isolation to
other relevant information which may impact on
market value. For example, if there is relevant direct
sales information, an appraiser has an obligation to
disclose that information in his report and comment
on its applicability or non-applicability to the market
value estimate.... an appraiser has an obligation to
disclose any relevant information of which he or she
has knowledge which may have an impact on the estimated
value. If the relevant information is not disclosed
there is a contravention of the Standards of
Professional Practice, S.R. 1.4 which states that it is a
contravention, "to fail to consider all physical, functional,
locational, and economic factors as to their
effect on the estimate of value".
[t]he reason that [the appraiser] provided no reasoning
for his valuation is: there was no reasoning which could
support a value of $1,931,000 on parcel 1 using the
income approach only when he knew that parcel 1 was
being purchased for $1,275,000, a difference of almost
$700,000 for which he had no explanation.... [The
appraiser] overvalued parcel 1 by utilizing the income
approach to value only and ignoring other relevant information
and in the result did not provide a proper
estimate based on market value.
To sub-divide [sic] the subject property thus would
require first a successful application to the Land Commission
to release the property from the A.L.R., popularly
known as the "Land Freeze". The latter took precedence
over any local zoning, such as the SH1A zoning
(by the City of Kamloops) over the subject property.
Once a successful application to release this land
had been carried out, the local zoning would be in effect.
Then the developer would have had to go through
the City of Kamloops authorities. In this instance that
would have presented some very sizable difficulties, because
as the appraisal is based on 2 acre plots ..., the
City zoning (SH 1A) was a minimum of 5 acre plots. (61)
There is no proper comparison at all between the two
properties, but of course the use of [the selected comparable]
gives an end result valuation [of $1,440,000]
to the subject property grossly and mendaciously
[lyingly] inflated.
... [T]he appraiser knew that the subdivision had not
been approved and thus did not legally exist ... [H]e
was obligated to emphasize that fact in his report and
to make clear that his appraisal applied only if and
when approval had been obtained, no matter how sure
he might have been that approval was 'imminent.'
That is the fault for which the [appraiser] must be
liable.... [The appraiser] did not exercise reasonable
care in preparing the appraisal report. I prefer to describe
[the appraiser's] breach of duty as being his failure
to report the non-approval, a material fact actually
known to him rather than the failure to verify the
legal status of the subdivision. (65)