Michael Sullivan

In the recent case of Buffalo-Water 1 LLC v. Fidelity Real Estate Co. LLC, the Massachusetts Supreme Judicial Court decided that Massachusetts courts should not consider invalidating a binding real estate appraisal because the appraiser’s firm, but not the appraiser himself, allegedly had a conflict of interest. Rather the SJC decided, consistent with its earlier rulings, such appraisals should only be invalidated when the appraiser himself had a conflict of interest.  

The plaintiff in the Buffalo-Water case had leased a Boston property to the defendant Fidelity Real Estate Co. The parties’ lease agreement contained a purchase-option that allowed Fidelity to buy the property at the end of the lease. The option language provided that, if Fidelity wanted to purchase the property, but the parties could not agree upon its fair market value, the value would be determined through a binding arbitration process. In this process, each party would select its own appraiser, and if their appraisals were more than 5 percent apart, then a mutually-agreed third appraiser would determine a purchase price within the range of the first two appraisals. 

The appraisers of neither Buffalo-Water nor Fidelity could substantially agree upon the fair market value of the property (in fact, the appraisers were $19 million apart). So, a third appraiser – from the Boston office of a prominent national real estate services company – was chosen to appraise the property and determine its purchase price. The third appraiser came up with a $22.9 million purchase price, which was much closer to the value previously found by Fidelity’s appraiser.  

Unsatisfied with this outcome, Buffalo-Water sought to have the third appraiser reconsider his opinion, which Fidelity naturally resisted. Buffalo-Water then learned that, before the events in question, “Fidelity had retained [the national real estate services firm for which the third appraiser worked] for a national representation contract.”  

Buffalo-Water requested that the third appraiser be disqualified. Failing in that, Buffalo-Water then filed a state Superior Court complaint seeking to invalidate the $22.9 million purchase price and redo the arbitration with a new appraiser. 

Fidelity successfully moved to dismiss Buffalo-Water’s complaint. Relying on well-established precedent, the trial judge refused to reconsider the outcome of the arbitration, because the facts alleged by Buffalo-Water did “not amount to the kind of bad faith, fraud or corruption required for a court to invalidate an independent appraisal agreed to by the parties.” Still unsatisfied, Buffalo-Water appealed to the state appeals court, and the SJC then took the case for itself to decide.    

Decision Rests on Prior Law 

In deciding whether Buffalo-Water’s complaint should be allowed to proceed, the SJC agreed with the Superior Court judge’s assessment of the SJC’s prior law on the subject: as long as the parties’ arbitration-appraisal agreement was not violated in some manner, the appraisal to which they both agreed should be upheld, absent evidence of “fraud, corruption, dishonesty or bad faith.”  

The SJC found that the agreement between Buffalo-Water and Fidelity – as well as the applicable code of appraisal ethics – did not require that the third appraiser’s firm not have performed other work for Fidelity. The SJC then noted that the third appraiser himself was not alleged to have performed any other work for Fidelity (or to have known about his firm’s other work for Fidelity).  

He was not alleged to have misrepresented his and his firm’s lack of financial interest or bias in the outcome of his appraisal. In the absence of such allegations, the SJC did not find that any perceived conflict of interest arising from the firm’s other work for Fidelity evidenced the type of serious misconduct historically required to invalidate a binding appraisal. Along the way, the SJC declined Buffalo-Water’s invitation to expand the law to encompass situations like this one.  

It would appear that the SJC ultimately came down against Buffalo-Water not because the circumstances at hand did not raise an eyebrow, but rather because it felt that these two commercially sophisticated parties had every ability to craft whatever agreement they desired, and also because the courts typically err on the side of finality when it comes to private arbitrations.  

Here, if either party wanted to disqualify the third appraiser because either he or his firm had performed work for the other party, then that party could have requested that such a proviso be added to the agreement. If that request were refused and the party felt strongly enough about the issue, it then could have refused to sign the agreement.  

Stated another way, if you run in the circles of a Buffalo-Water or a Fidelity, then you will be hard-pressed to convince a court to deviate from the strict language of your agreements – especially if it relates to the terms and conditions of binding arbitration. 

Michael T. Sullivan is a litigation partner in the Boston law firm of Conn Kavanaugh Rosenthal Peisch & Ford LLP who handles real estate and construction disputes. He can be reached at MSullivan@ConnKavanaugh.com.