In what serves more as a reminder than as groundbreaking new law, a recent decision of the Court of Appeals of California, Sixth Appellate District, held that a borrower was not entitled to rely on Phase I and Phase II environmental site assessment reports prepared by a consultant to the borrower’s lender, and therefore had no claim against the consulting firm that was allegedly negligent in its preparation of the reports.
In Mao v. Piers Environmental Services, Inc. (H041214, February 8, 2017), the court cited uncontroverted evidence that the consultant’s contract to perform the site assessments was with the lender, not the borrower; that the reports were provided to the lender for purposes of its due diligence; and that the borrower hired the consultant for the first time only after the site assessment reports had been prepared for the lender. In short, the court found that the evidence established no privity of contract between the consultant and the borrower at the time the reports were prepared.
In reaching its conclusion, the Mao court rejected the borrower’s argument that it was readily foreseeable that negligence in the performance of the site assessments would harm the borrower as the prospective purchaser and eventual owner. The court distinguished the case from an earlier one in which the court had held that an architect owes a duty of care to future homeowners where the architect is a principal architect on the project, finding that the “end and aim” of the architect’s engagement had been to provide safe and habitable residences for future homeowners. The Mao court found that any intent of the environmental consulting services to affect or protect the borrower as a prospective purchaser or future owner was at best secondary; the primary intent, the court found, was to provide the lender with diligence information on the basis of which it could make a lending decision.
In our experience, lenders and borrowers too often look to rely on shared site assessment reports, without paying close attention to privity considerations. Mao is a reminder about the importance of privity, along with a number of other concerns relating to limitations on consultants’ contractual liability, when purchasing or leasing commercial property.