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The SJC Confirms The Importance Of Carefully Drafted Appraisal Provisions

On November 28, 2018, the Massachusetts Supreme Judicial Court declined to extend the grounds to invalidate an appraisal under Massachusetts common law to include the appearance of bias on the part of the entity that employed the appraiser and instead invited parties to address the issue of appropriate impartiality requirements through a carefully negotiated agreement.

The SJC emphasized that parties are free to define the contractual terms regarding the appraiser’s obligations and the grounds for invalidating the appraisal.

The case is Buffalo-Water 1, LLC v. Fidelity Real Estate Company LLC (SJC 12487) (Nov. 26, 2018). The underlying dispute arose in connection with a repurchase option, which granted Fidelity the option to buy back a piece of commercial real estate that it had sold to Buffalo-Water in 2004. Fidelity exercised its option, but the parties could not come to an agreement regarding the property’s fair market value. Buffalo-Water’s appraiser valued the property at $36 million, while Fidelity’s appraiser valued it at $17 million. Therefore, the parties agreed to retain Cushman & Wakefield as a third appraiser. The Cushman & Wakefield appraiser submitted a valuation of $22.9 million accompanied by a Certification which the SJC noted said “We have no present or prospective interest in the property that is the subject of this report, . . . . no personal interest with respect to the parties involved,” and “no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.”

After the Cushman & Wakefield appraiser submitted his valuation report, Buffalo-Water learned that before the parties engaged the appraiser, Fidelity had retained Cushman & Wakefield for a national representation contract. Buffalo-Water filed a complaint seeking to invalidate the appraisal, which was dismissed by the Trial Court. On appeal, the SJC transferred the case on its own motion and solicited amicus briefs, which were submitted by the Appraisal Institute and Massachusetts Board of Real Estate Appraisers, and by the Greater Boston Real Estate Board.

The well-settled rule set forth in Eliot v. Colter, 322 Mass. 86, 91 (1947) permits a court to modify an appraisal only if the principles and methods of valuation are found to be tainted by fraud, corruption, dishonesty or bad faith. The SJC, relying in large part on the absence of any allegation that the appraiser knew of the national contract, found no suggestion of such conduct. Therefore, the SJC considered whether to modify this common-law rule and allow the court to invalidate an appraisal where there is the appearance of bias on the part of the entity that employed the appraiser. The SJC declined to do so and concluded that an appearance of bias alone is insufficient to invalidate an appraisal.

The SJC emphasized that parties are free to define the contractual terms regarding the appraiser’s obligations and the grounds for invalidating the appraisal. Here the Court found that the neither the engagement agreement nor the option agreement required the disclosure of the national agreement between Cushman & Wakefield and Fidelity. In particular, the conflict of interest provision in the engagement agreement was drafted only to protect Cushman & Wakefield should it withdraw from an assignment because of a conflict of interest. The Court also rejected Buffalo-Water’s argument that disclosure was required because the appraisal was to be conducted in accordance with the Uniform Standards of Professional Appraisal Practice and the Code of Ethics and Certification Standards of the Appraisal Institute. The Court found that these rules only referenced the individual appraiser, not the appraiser’s employer. The SJC suggested “just as the parties required the individual appraisers to have at least 10 years experience valuing greater Boston property, they could have required disclosure of any information concerning Cushman’s business dealings with Buffalo Water or Fidelity that might create an ‘appearance of bias,’ and agreed to invalidate the appraisal if such a disclosure was not made.” If the parties decline to include such provisions in their agreements, however, in light of this SJC ruling, any challenge to the valuation is unlikely to be successful absent allegations sufficient to plausibly suggest fraud, corruption, dishonesty or bad faith.

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Amy McCallen