Letters of reliance for land buyers – 'rely' on them at your peril without prior checks

Letters of reliance can feature low down on a land buyer’s list of priorities, against the backdrop of a complex transaction with many seemingly more important considerations. As a result, their negotiation can often be deferred until the last minute, leaving insufficient time for the letters themselves to be properly negotiated and the underlying appointments to be checked. If properly drafted and negotiated in good time, letters of reliance are a valuable addition to any land buyer’s contract suite – but if waived through at the last minute without proper thought, they can become a very problematic misnomer.

In this article we highlight the importance of letters of reliance and their minimum requirements, as well as outlining the types of typical limitation clauses often found in these documents. We also provide advice for land buyers when reviewing a consultant’s underlying appointment and negotiating a letter of reliance.

What are they and why are they important?

Letters of reliance allow land buyers to rely on the contents of reports and surveys prepared for the benefit of someone else, usually the seller in this context. They are used in circumstances where environmental, geotechnical or planning consultants for example have provided specific reports or surveys, in contrast to consultants who provide a broader range services such as an architect, where it's not generally appropriate for the consultant to provide a collateral warranty. Lenders sometimes specifically require land buyers and other developers to obtain letters of reliance as part of their security package.

What to look out for as a land buyer

Minimum requirements

Letters of reliance come in many different forms, but as a minimum they should all:

1. Clearly identify the beneficiary by its full company name and registered address.
2. Clearly list the relevant reports or surveys on which the beneficiary intends to rely, by reference to dates and any reference numbers identifying the reports/surveys.
3. Confirm that the consultant owes the beneficiary a duty of reasonable skill and care in preparing the reports/surveys.
4. Provide the beneficiary with a right to rely on the reports/surveys as though it were the original client.
5. Grant a copyright licence to the beneficiary permitting it to copy and use the reports/ surveys in connection with the relevant project.
6. Create a binding contract - if not executed as a formal deed, the letter must deal with the English law requirement of ‘consideration’ and be signed as a simple contract.

Optional extras

Letters of reliance will often also a include a right for the beneficiary to assign the letter; in other words, a right to transfer the rights and benefits arising under the letter to a third party. Whether such assignment rights are included will often depend on the intended future use of the site and whether the beneficiary will need to pass the benefit of the letter to a third party in practice. 

Another common clause is an obligation on the consultant to maintain professional indemnity insurance at a certain level. Whilst a land buyer should always seek up-to-date evidence that a consultant is holding professional indemnity insurance cover at an adequate level, an express contractual obligation to maintain such cover is not essential in letters of reliance, although it's certainly preferable to include such wording. Consultants should already be obliged to maintain professional indemnity insurance in their underlying consultant appointment with their ultimate client and, in any event, will typically maintain such insurance as standard business practice.

Limitations of liability

Whilst the ideal situation for a land buyer is for the letter to include no limitations on the consultant’s liability, it's common to see the following types of limitation clauses in letters of reliance:

• ‘No greater liability’ clauses provide that a consultant has no greater liability to the beneficiary under the letter than it would have if the beneficiary was named as client in the underlying appointment.
• ‘Equivalent rights of defence’ clauses, often combined with ‘no greater liability’ clauses, allow a consultant to rely on the protection of any limitation of liability in the underlying appointment with its client (such as a financial cap), when defending claims from the beneficiary under the letter. Land buyers should seek to expressly exclude rights of set-off and counterclaim from such clauses, to prevent the consultant from relying on non-payment of its fees (something outside of the beneficiary’s control) to reduce or extinguish the beneficiary’s claim under the letter.
• Limitation period clauses impose an express time-bar for bringing claims under the letter. Land buyers should ensure such clauses do not unduly restrict their ability to bring claims if there is a possibility of issues with the report or survey only being uncovered several years down the line.
• Liability cap clauses seek to financially cap a consultant’s liability under the letter of reliance. This is usually the case where the letter doesn’t already include a ‘no greater liability’ or ‘equivalent rights of defence’ clause. Whether the level of the cap is acceptable to a land buyer will depend on the potential amount of loss that the beneficiary could suffer in the event the consultant has been negligent in preparing its report or survey.

The following types of limitation of liability clauses are less common and should usually be resisted from a land buyer’s perspective:

• ‘No loss defence’ clauses are based on the notion that if no loss would have been suffered by the consultant’s original client, the beneficiary under the letter of reliance cannot bring a claim against the consultant for that loss. Such clauses ultimately limit the consultant’s liability to loss suffered by its original client, which could be entirely different from the loss that the beneficiary might incur, being a separate corporate entity with differing interests. ‘No loss’ clauses are often subsumed into the drafting of ‘equivalent rights of defence’ clauses and are not always easy to identify, so careful analysis of the detailed wording is critical.
• Net contribution clauses seek to limit the consultant’s liability to the amount that would be apportioned to it by a court in a multi-defendant scenario. Although they may appear fair at a glance, net contribution clauses actually cut across the normal common law right to sue one culpable party for the whole loss, with that single defendant then having to claim a contribution from any other responsible parties via the Civil Liability (Contribution) Act 1978. They are broadly considered to be off-market for this reason and are often particularly unpalatable to lenders.

Underlying appointments

It's important that the terms of the consultant’s underlying appointment with its client are checked, to ensure that they line up with the terms of the letter of reliance. As indicated above, various clauses within a letter of reliance will refer back to the provisions of the underlying appointment. This is particularly the case with clauses seeking to limit the consultant’s liability, which only increases the importance of checking the underlying appointments for any problematic drafting which could negatively impact the beneficiary’s rights of recovery under the letter.  

Negotiating letters of reliance

Letters of reliance are regularly procured after the consultant’s services are completed and its fees are paid. As such, unless a consultant is contractually obliged under its appointment to enter into a letter of reliance, there is often little incentive for it to do so. Seeking to negotiate a letter of reliance at the last minute can exacerbate this and result in a land buyer being forced to accept a substandard letter that does not provide it with adequate security. To mitigate these potential issues, letters of reliance should be negotiated upfront and at the same time as the sale and purchase agreement. 

It's also not uncommon for consultants to require a substantive fee for providing a letter of reliance, especially if they are not under a pre-existing contractual obligation to deliver such a letter. If a land buyer agrees to cover the cost of that fee, then it will wish to satisfy itself that the legal risk profile is adequate and that this is money well spent.

For more information on this article, please contact our construction team.