Recent Negligent Misrepresentation Case in Illinois Should be a Warning to Appraisers

by Ryan Endsley and Charles R. Franklin

The First District Appellate Court of Illinois recently published a new opinion, 21 Kristin Condominium Association v. Pioneer Engineering & Environmental Services, LLC. It raises concerns of importance for appraisers and other professionals in the business of providing information. In 2006, Pioneer conducted a Property Condition Assessment (PCA) for an Illinois real estate building being converted to condominiums. Pioneer identified defects and prior repairs and predicted that the roof of the building had a Remaining Useful Life of 15 years; that elevators had a Remaining Useful Life of 20 years; and that concrete in a parking structure had a Remaining Useful Life of 5 years. The condo units were sold and they formed a condo association. In 2017, over ten years after the inspection, the 21 Kristin Condominium Association sued Pioneer. The Association alleged that the building required substantial repairs much sooner than the useful life expectancies that Pioneer had predicted. The trial court initially dismissed the complaint for failure to state a cause of action, but the appellate court reversed the dismissal and revived the case, relying on the Restatement (Second) of Torts and common law.

Why is a case involving an engineering inspection of importance to appraisers? For one thing, many of the same defenses an appraiser would likely raise, including use by non-clients and statements of opinion versus fact, were at issue in this case, and the Court found against Pioneer on all fronts. The Court also relied upon a broad swath of real estate cases in reaching its opinion, including Duhl v. Nash Realty, Inc. and Kelley v. Carbone, which both specifically involved misrepresentations in appraisal reports. The Court implied that opinions on value can be deemed statements of fact, stating that “we find Pioneer’s representations similar to a realtor’s representations of the value of real estate[.]” Appraisers, like engineers, have special knowledge which is not shared by prospective purchasers which can render their statements of opinion as statements of fact.

Significantly, Pioneer also had used disclaimers in their report. The PCA report was “for the sole use of the Client identified in the report and cannot be relied upon by other persons or entities without the permission of Pioneer.” But the Court found those disclaimers ineffective. That finding is particularly concerning for appraisers, who rely on intended user statements which limit reliance to a client’s own use. Statements as to the uncertainty of physical deficiencies by Pioneer were held similarly ineffective, despite the ten-year gap between the report and the filing of the lawsuit. Based on this case, Appraisers should examine their existing disclaimers contained within both engagement letters and appraisal reports and consider adding more emphatic and definite language to them. While the value of property and property conditions can change dramatically over time, for a variety of reasons, it should come as no surprise to appraisers that sellers and purchasers do not always understand this . Further, modifications to intended user statements should also be considered. Please contact us if you have questions regarding what language should be included to minimize your exposure to risk.

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