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|The article below follows on from our series of seminars for Junior Land Buyers. Click here to read the previous article.|
Letters of reliance can feature low down on land buyers’ list of priorities, particularly in the context of the wider transaction. As a result, their negotiation can be left ‘til the last minute. Not only does this not leave sufficient time for the letters to be properly negotiated, and the underlying appointments to be checked, it also risks holding up completion of a deal (in which case, they’re probably not the shoulder you want to cry on or your best friend). But, if properly drafted and negotiated in good time, letters of reliance are a valuable addition to any land buyer’s contract suite.
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 and planning consultants for example, have provided specific reports or surveys (rather than in respect of consultants who provide a broader range services, such as an architect), where it is not generally appropriate for the consultant to provide a collateral warranty. Lending banks can also require that land buyers obtain letters of reliance as part of their security package.
What to look out for as a land buyer
Letters of reliance come in many different forms, but as a minimum they should all:
- clearly identify the beneficiary by its full company name and registered address;
- 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;
- confirm that the consultant owes the beneficiary a duty of reasonable skill and care in preparing the reports/ surveys;
- provide the beneficiary with a right to rely on the reports/ surveys as though it were the original client;
- grant a copyright licence to the beneficiary permitting it to use the reports/ surveys in connection with the relevant project; and
- create a binding contract (if not executed as a deed, the letter must deal with consideration and be signed as a simple contract).
Letters of reliance will often also a include a right for the beneficiary to assign the letter (depending on the future use of the site and whether the beneficiary will need to pass the benefit of the letter to a third party), and an obligation on the consultant to maintain professional indemnity insurance to a certain level. Whilst a land buyer should always seek evidence that a consultant obtains up-to-date professional indemnity insurance cover at the requisite level, the obligation to take out and maintain such cover is not a pre-requisite in letters of reliance, although it is certainly preferable. Consultants should be obliged to maintain professional indemnity insurance under their consultant appointments with their client (which is one reason why underlying appointments should be checked) and in any event, will generally have to maintain such insurance all the while that they provide their professional services.
Limitations of liability
Whilst the ideal situation for a land buyer is that there are no limitations of liability, it is 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 under 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) against the beneficiary under the letter. Land buyers should seek to expressly exclude rights of set-off and/or counterclaim from such clauses to prevent the consultant from setting-off amounts due to it from its client under the appointment against any claim by a land buyer.
- Limitation period clauses expressly state a limitation period. Land buyers should ensure such clauses do not conflict with the method in which the letter has been signed (simple contract) or executed (deed).
- 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 great liability’ or ‘equivalent rights of defence’ clause. Whether the level of the cap is acceptable to a land buyer will depend on the loss potentially sufferable by the beneficiary in the event the consultant has been negligent.
The following types of limitation of liability clauses are less common and should be resisted:
- ‘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. The clause ultimately limits the consultant’s liability to loss potentially sufferable by its original client, which could be entirely different from the loss that might be suffered by the beneficiary, albeit for the same breach. ‘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 sound fair, net contribution clauses cut across the normal common law right to sue one culpable party for the whole loss, meaning multiple claims might have to be made against various different parties to recover the full loss suffered.
It is important that the terms of the underlying appointments are checked to ensure that they line up with the terms of the letters of reliance. You will no doubt have noticed that various clauses within a letter of reliance refer back to or rely on 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).
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 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 a land buyer may find that it has little choice but to accept a letter that does not provide it with adequate security or in circumstances where the underlying appointment cannot be checked, if negotiations are left to the last minute. To avoid disappointment, letters of reliance should be negotiated upfront and at the same time as the sale and purchase agreement. It is 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 this is money well spent.
For more information on this article contact Tilly Traill.
|Ashfords run a series of seminars for anyone involved in the world of real estate development who would like to learn more about the legal process behind the deals. The seminars are led and organised by our team of residential development solicitors, providing an opportunity to share knowledge and build lasting connections in an informal and friendly environment. Here are a list of future seminars for Junior Land Buyers, please let us know if you would like to receive notification of these events.|