When is a non-reliance clause an exclusion clause? Allyson Colby has the answer, in one recent case at least
Key points
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A non-reliance clause was unreasonable because it excluded liability for all representations made to a tenant before the grant of a lease
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The clause might have been reasonable if the tenant had been permitted to rely on the landlord’s replies to its enquiries
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Trustee landlords were personally liable for misrepresentations in the replies to enquiries because a limitation clause inserted into their lease was not wide enough to protect them
Sellers often make representations during negotiations before exchange of contracts. However, most contracts for the sale of land include “non-reliance clauses” prohibiting or restricting reliance on statements made by or on behalf of the seller beforehand.
Are non-reliance clauses exclusion clauses? If so, the seller may have to satisfy the court as to the reasonableness of the clause. This is because section 3 of the Misrepresentation Act 1967 provides that clauses excluding or restricting liability for misrepresentation have no effect, except in so far as they satisfy the requirement for reasonableness laid down in the Unfair Contract Terms Act 1977.
Or could it be argued that non-reliance clauses set out the basis or terms on which the parties are contracting? A “basis clause”, recording that a particular state of affairs exists, creates a contractual estoppel from which neither party can renege. See, for example, Springwell Navigation Corporation v JP Morgan Chase Bank [2010] EWCA Civ 1221, in which the Court of Appeal saw “commercial utility” in such clauses being enforceable, since parties need certainty and to know “precisely the basis on which they are entering into their contractual relationship”.
Replies to enquiries
First Tower Trustees Ltd v CDS (Superstores International) Ltd [2017] PLSCS 51 illustrates how the courts distinguish between exclusion and basis clauses. It concerned tenants of warehouse premises, who sought to hold their landlords to account for statements made in replies to pre-contract enquiries confirming that they were unaware of any environmental problems at the property. Several weeks after replying to the enquiries, the landlords were advised that there was a problem with asbestos.
Unfortunately, they did not pass this information on to the tenant before completing the lease, although they should have done so because disponors have continuing responsibility for the accuracy of representations made to prospective disponees before exchange of contracts. Furthermore, the standard form enquiries used in this transaction specifically remind disponors of the need to update replies to enquiries that become incorrect before disponees enter into legal commitments.
The tenant discovered the asbestos soon after completing the lease and was unable to move in to the premises until remedial works, costing more than £428,000, were completed. Were the landlords liable for the losses suffered by the tenant as a result? Or were they entitled to rely on a provision in the lease stating that it had “not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the landlord”.
Exclusion clause
Did the clause set out the basis on which the parties had contracted? Or was it an exclusion clause? And, if so, was it a fair and reasonable clause to have included, having regard to the circumstances that were or ought reasonably to have been known to or in the contemplation of the parties when the lease was granted?
The Court of Appeal treated a similar provision in Springwell as an exclusion clause, and the judge took a similar view here. The clause had attempted retrospectively to alter the character and effect of what had been said and done and was, in substance, an attempt to exclude or restrict liability. Therefore, section 3 of the Misrepresentation Act 1967 was engaged. This meant that the judge had to decide whether the clause was reasonable in all the circumstances.
Both parties had been legally represented. They had equal bargaining power and were not dealing on the landlords’ standard terms. Nonetheless, the judge decided that the exclusion clause was unreasonable because it sought to exclude liability for any, and all, representations made to the tenant.
The clause might have been reasonable, had the tenant been permitted to rely on the replies to enquiries supplied by the landlords’ solicitors beforehand, as in Lloyd v Browning [2013] EWCA Civ 1637; [2014] 1 EGLR 73. Instead, the exclusion clause rendered the whole exercise of making enquiries and relying on answers “all but nugatory” in a conveyancing world where pre-contractual enquiries have well-recognised importance. That was unreasonable and the judge suspected that conveyancers would be appalled if the courts were to uphold such clauses.
Trustee liability
The landlords fell back on another provision in the lease stating that they had “contracted” in their capacity as trustees of specified trusts “and not otherwise”, and sought to limit their liability to pay damages to the tenant to the extent of the assets of those trusts.
The judge took the view that the provision was a basis clause; it set out the basis on which, and the capacity in which, the trustees were contracting. Alternatively, if it was an exclusion clause, it had been a reasonable limitation to include. The clause was plain to see, and the tenant could have negotiated it out or declined to proceed with the transaction.
However, the judge rejected the trustees’ defence on the ground that the limitation clause applied to their contractual liabilities. So the provision would have been effective had the tenant had a claim under the covenants in its lease, or perhaps even under a collateral contract. However, that was not the case here.
Although a claim for misrepresentation must result from a contract, it did not follow that a limitation of “contractual” liability included pre-contractual representations within its scope as well – unless the limitation clause actually said so. Consequently, the misrepresentation claim was not limited, as against the trustees, to the extent of the trust fund.
Allyson Colby is a property law consultant
