Buyer (and seller) beware
Locations
This article was first published in Estates Gazette on 15 April 2016 and is reproduced with permission.
In most property transactions, the process of providing and receiving replies to standard enquiries can often seem a futile one. When receiving replies to enquiries you can expect to see the raft of classic replies, such as “not as far as the seller is aware” and “the buyer should rely on its own enquiries”. Substantive responses can be considered rare. The object for the seller seems to be to limit its risk as much as possible with the outcome being a set of generally unhelpful replies.
Although sellers may think that they are reducing risk in using this approach, it is important to know the law on this subject and how to avoid pitfalls which can result in costly misrepresentation claims. Equally, buyers and their professional advisers should be aware of how far the duty to pursue proper replies to enquiries extends for solicitors and other methods of eliciting information that can be used.
The seller’s duty
Under common law, there is no legal requirement for the seller to provide replies to pre-contract enquiries. The position starts at “buyer beware”, and the onus is on the buyer to find out as much as possible about the property before it enters into a contract to buy it. The duty upon the seller is only to disclose “latent defects”, being title (not physical) defects which the buyer could not have discovered having made a reasonable inspection of the property; for example, easements and restrictive covenants.
However, normal practice is for the seller to provide the buyer with replies to standard enquiries (for commercial property, the Commercial Property Standard Enquiries (“CPSE”), or for residential property, the Law Society Property Information Form). This is to assist with and expedite the buyer’s due diligence.
Misrepresentation
In giving replies to enquiries, sellers and their advisers should note that a statement of fact (rather than of opinion or law) in a reply to an enquiry will constitute a “representation”. Subject to any exclusion clause in the contract, the buyer could have an action against the seller in misrepresentation if:
a) the buyer relies on the representation and enters into the contract;
b) the representation turns out to be false at the time the parties entered into the contract; and
c) the buyer suffers loss.
“As far as the seller is aware”
Most replies to enquiries will be stated as being limited to what is in the seller’s awareness. But what is considered to be within the seller’s “awareness”? In William Sindall plc v Cambridgeshire County Council[1993] EGCS 105, it was held that answering an enquiry in terms of the seller’s “awareness” implies that the seller has taken reasonable steps to identify the correct answer. This can include, for example, checking its records for the property and checking with individuals within its organisation that may have the requisite knowledge.
Making these investigations can prove difficult, particularly if the person managing the property has changed, where the property has been held for a long period or records have been lost or are incomplete.
Where it has not been possible to make reasonable investigations into a reply, the reference to the seller’s awareness may need to be qualified; if the seller does not hold complete records or have the requisite knowledge, the reply should state this.
Continuing representations
Representations made in pre-contract replies to enquiries are treated as “continuing” representations; they will be considered as having been represented from the moment the reply is given to the moment of exchange of contracts (FoodCo UK LLP (t/a Muffin Break) v Henry Boot Developments Ltd [2010] EWHC 358 (Ch)).
For this reason, if it is found prior to exchange that: (a) an erroneous reply was given; or (b) a reply given was true at the time it was given, but circumstances have changed and the reply is no longer true; steps should be taken to alert the buyer of this as soon as possible and, in any event, prior to exchange of contracts (Schyde Investments Ltd v Cleaver and others [2011] EWCA Civ 929).
“Buyer should rely on its own enquiries”
Sellers will often caveat a reply to an enquiry by inviting the buyer to rely on its own enquiries. In Morris vJones and others [2002] EWCA Civ 1790 it was shown that the phrase “but caveat emptor must apply and the purchasers should rely entirely upon their own inspection and survey” may be useless in defending a claim for misrepresentation if the statement made before the caveat is false. For this reason, if the seller is unsure of a reply, it may be prudent not to give the reply at all, or to make clear that the information may not be correct.
Buyer beware
It is the buyer’s solicitor’s duty to pursue proper replies to enquiries, follow up where replies are not satisfactory and report to their client the result of these enquiries (even when this means reporting that a reply is not complete or that the seller will not give further information).
Since replies to enquiries can often be unhelpful, this will mean asking the seller for disclaimers and qualifications to be removed from replies where they are not reasonable and for proper answers where a matter would usually be in the seller’s knowledge (eg whether it has received any notices in relation to the property).
It can also mean raising further enquiries from other appropriate sources and asking the seller’s solicitors further questions where replies to enquiries and information received from other sources do not match up (Computastaff Ltd v Ingledew Brown Bennison & Garrett and another (George Trollope & Sons and Westminster City Council, third and fourth parties) [1983] 2 EGLR 150).
Where further enquiries or searches are made to get to the bottom of issues which may not have been clear in initial replies or search results, the buyer’s solicitor is under a duty to report the findings of these to his client, even though such further enquiries or searches go over and above the searches and enquiries which would usually be undertaken. As good practice, the buyer’s solicitor should summarise to its client the result of each search commissioned (Orientfield Holdings Ltd v Bird & Bird LLP [2015] EWHC 1963 (Ch); [2015] PLSCS 215) and the outcome of its enquiries.
In terms of contractual provisions, the buyer’s solicitor should seek to include a provision making clear that the buyer has relied on the replies to enquiries, making it easier to found a claim in misrepresentation and, if possible, include a provision whereby the seller warrants that it has disclosed any matters of which it is aware and subject to which the property is sold, opening up an action in breach of contract should the warranty turn out to be untrue.
The buyer’s solicitor should also make its client aware that, where there is a “non-reliance” clause in the contract, it may ultimately not be able to rely on information received directly from the seller or its agent in a misrepresentation claim. In a typical “non-reliance” clause, the buyer agrees that it has not relied on any information other than that included within written replies to enquiries given to the buyer’s solicitor by the seller’s solicitor. The buyer should be advised that any information it receives directly from the seller or its agent which the buyer considers important should be confirmed in writing by the seller’s solicitor to the buyer’s solicitor.
Remedies
The most usual claim brought by a buyer for an inaccurate pre-contract statement is misrepresentation. The remedies available are rescission and/or damages. (If the buyer did not enter into the contract in reliance on the false statement, but still otherwise relied on it, there would not be a claim for misrepresentation, but there may be an action in tort for negligent misstatement, which is not discussed here).
Most commercial or residential contracts, if they incorporate the Standard Commercial Property Conditions (SCPC 2nd edition) or Standard Conditions of Sale (SCS 5th edition), will have a contractual limitation of the remedy for misrepresentation whereby: “An error or omission only entitles the buyer to rescind the contract: (a) where the error or omission results from fraud or recklessness, or (b) where the buyer would be obliged, to its prejudice, to accept a property differing substantially (in quantity, quality or tenure) from that which the error or omission had led it to expect.” Damages are available where there is a material difference between the represented and actual description or value of the property (SCPC Clause 9.1).
However, these sorts of contractual exclusions are only enforceable subject to a “reasonableness” test under the Unfair Contract Terms Act 1977 in the case of a “business to business” sale (the test is different in the case of a business selling to an individual), and, in the case of measuring damages, may not be enforceable if fraud is proven (Greenridge Luton One Ltd and another v Kempton Investments Ltd [2016] EWHC 91 (Ch);[2016] PLSCS 26).
It is all too easy for a seller to treat replies to enquiries as a tick-box exercise, but this is an area where the seller too has to beware.
Why this matters
Greenridge Luton One Ltd and another v Kempton Investments Ltd [2016] EWHC 91 (Ch); [2016] PLSCS 26is a timely reminder to sellers of the importance of:
a) avoiding “rose-tinting” information in replies to enquiries as a means of avoiding price reductions and delays in transactions; and
b) ensuring updates are made to the replies, especially if they are drafted well in advance of a sale.
In this case, the seller was selling a property at which the main tenant had withheld a proportion of service charge payments for the June and September 2013 quarters. There had been correspondence between the seller’s managing agents and the tenant about the tenant’s perceived issues with the service charge as far back as January 2013.
The CPSE replies were prepared in March 2013, before the tenant had started withholding service charge, and issued to the prospective buyer of the property in August 2013. They stated that there were no disputes or service charge arrears. All that was disclosed in relation to the issue was that the tenant had raised queries on “mainly historical issues and had recently raised further enquiries”. The replies were not updated before they were issued to the buyer or prior to exchange. The seller did not provide up to date service charge documentation upon request from the buyer in the lead up to exchange.
Once contracts had been exchanged for the sale of the property for £16.25m, the service charge issues came to the buyer’s attention. It then sought to rescind the contract on the grounds of a material non-disclosure in line with SCPC 9.1 and started proceedings for the recovery of its deposit and damages.
As it was found that the representation that there were no service charge arrears was made fraudulently or recklessly (as both the seller’s managing agent and its solicitor lacked an honest belief in the truth of the statement) the buyer was entitled to rescind the contract and claim back its deposit under SCPC 9.1.
Moreover, it was found that SCPC 9.1 does not limit liability for damages for fraudulent misrepresentation (since it expresses no clear wording doing so), and so damages were assessed in the tort of deceit rather than as contractual damages. This meant that the losses claimed did not have to be reasonably foreseeable. As a result, the buyer was also awarded damages of £395,948 for wasted costs, including the cost of surveys, a valuation report and legal fees.
Jayne Elkins is a partner and Elinor Dean is an associate in the real estate team at Fieldfisher LLP.