Best Practices: Reducing Valuation- Related Litigation Risk: Practical Release and Acknowledgment Strategies for SBA Lenders

Adhering to the prudent lender guidelines, SBA lenders frequently obtain business valuations and real estate appraisals during loan origination, servicing, workout, and liquidation activities. While these reports are usually prepared for the lender’s underwriting and credit administration purposes, obligors often request copies of the reports and may later seek to rely upon them in disputes involving loan enforcement, collateral disposition, or alleged lender liability claims.

Although no release document can eliminate all litigation risk, lenders can take several practical steps to reduce the likelihood that obligors will later assert counterclaims based upon their receipt or use of lender-commissioned valuations and appraisals.

As a practical first step, lenders should consider requiring a written release from the party that is seeking to obtain a copy of the valuation as a condition for its release.  This release or letter may contain an acknowledgment confirming that: the report was commissioned by the lender for its own internal credit purposes; the lender does not guarantee the accuracy or future validity of the report; market conditions may change after the report’s effective date; and/or the obligors understand that they should consult their own advisors before relying upon the report.

Another useful provision is one confirming that the obligors are exercising their own independent business judgment and are not relying upon the lender’s appraisal or valuation in making business, investment, or litigation decisions.

Most appraisal and/or valuation reports expressly state that only a lender that engaged the appraiser, along with the SBA, may rely upon the report. When releasing a copy to the obligors, lenders should consider obtaining an acknowledgment that receipt of the report does not create any third-party reliance rights against the lender, appraiser, or valuation professional.  This language is typically consistent with limitations already contained in the appraisal engagement letter and report itself.

To the extent permitted under applicable law, lenders may also seek to include language in this document detailing that the obligors will not assert claims against the lender based upon alleged inaccuracies in the appraisal or valuation; subsequent changes in market value; lender’s decision to rely upon the report in underwriting, servicing, or liquidation activities; or obligors’ own decision to rely upon the report after receiving it.  Lenders should be cautious to avoid language that could be construed as attempting to waive claims based upon fraud, willful misconduct, or other non-waivable rights.

Many SBA lenders already include broad release, waiver, and lender-liability provisions in their loan documents. Before releasing an appraisal or valuation, lenders should review those provisions and consider incorporating references to them in any appraisal release agreement.  A standalone acknowledgment that supplements existing lender-liability waivers may strengthen the lender’s position if litigation later arises.

Business valuations and real estate appraisals can become focal points in workout, foreclosure, and collection litigation. By obtaining carefully drafted acknowledgments and limited releases before providing such reports to obligors, SBA lenders may reduce the risk of later claims alleging reliance, misrepresentation, or improper use of valuation information. Because enforceability varies by jurisdiction, lenders should consult counsel regarding the scope of any release language used in their forms and procedures.  Should you have any questions or need assistance with your own release acknowledgment, please contact Lyndsay Rowland at 267-470-1154 or lrowland@starfieldsmith.com.