Allyson Colby reiterates why it is essential to be aware of the condition of a property before signing a contract
Key points
- A recent High Court decision reminds us of the value of special conditions negating reliance on representations, except when given in written replies to enquiries made by the buyer
- The judgment also puts paid to doubt about the enforceability of clauses enabling sellers to demand the balance of a partly paid deposit when a transaction goes awry
The state and condition of a property and the terms of the contract proffered by the seller are of paramount importance to a buyer. This was graphically illustrated in Hardy v Griffiths [2014] EWHC 3947 (Ch); [2014] PLSCS 340, which concerned the sale of a manor house in East Sussex.
The buyers contracted to buy the property for £37.6m and, instead of paying a 10% deposit, as is usual, paid a reduced deposit in the sum of £150,000. The completion date was postponed by agreement, but the buyers found themselves unable to complete when the time came to do so. They were unable to sell their own property and did not have the funds needed to complete the purchase.
Following the expiry of their notice to complete, the sellers forfeited the deposit that had been paid to them and rescinded the contract. They also demanded payment of the balance of the deposit, which had fallen due on the service of their notice to complete under one of the provisions in the contract.
The buyers alleged that the sellers had misrepresented the condition of the property and claimed that they had been entitled to terminate the agreement. They demanded the return of their deposit and claimed damages. Alternatively, they sought a declaration that the sellers were not entitled to any further payment.
Buyer beware
For reasons best known to themselves, the buyers had not paid sufficient attention to the common law rule “buyer beware” and did not arrange to have the property surveyed until just before completion, when they discovered that the property suffered from damp, as well as wet and dry rot. However, they had contracted to buy the property and, having done so, were not entitled to complain unless they could point to some actionable misrepresentation by the sellers.
Misrepresentation
Had there been any such misrepresentation? The judge doubted the buyers’ claims that the sellers had made oral misrepresentations about the condition of the property while they were inspecting it. However, she did consider what the position would have been, had the buyers been able to substantiate their claim.
The contract contained a special condition that stated that the buyers had relied only on written representations made by the sellers’ conveyancers before the date of the contract. However, 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. In other words, the term must be a fair and reasonable one 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 contract was made.
The judge decided that the special condition, which had been open to negotiation, was fair and reasonable. There was no imbalance of bargaining power between the parties and they had both been legally advised. The clause permitted the buyers to rely on written replies to pre-contract enquiries and offered both parties certainty, which was a reasonable aim to have had.
In fact, the buyers had raised a written enquiry about damp and wet and dry rot, but the judge accepted that the sellers had not misrepresented the position in their reply because they had not been aware of any such problems. They had also reminded the buyers of the age of the house and had stated that they were not giving any warranties about its condition. Consequently, there were no actionable misrepresentations and the buyers had not been entitled to terminate the contract.
Deposit
The agreement provided that, on receipt of a notice to complete, the buyers must forthwith pay the balance required to put the sellers in possession of a deposit totalling 10% of the purchase price. Did this obligation survive the subsequent rescission of the contract by the sellers?
The buyers relied on Lowe v Hope [1970] Ch 94, and on two subsequent commonwealth authorities, in which the court ruled that it would be contrary to principle if a seller who rescinded a contract were to be entitled to rely on a provision in the contract requiring the buyer to pay the balance of a partly paid deposit.
However, the judge noted that the Court of Appeal in Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445; [2011] PLSCS 283 had cited Damon Compania Naviera SA v Hapag-Lloyd International SA [1985] 1 WLR 435 and Firodi Shipping Ltd v Griffon Shipping LLC [2014] 1 CLC 1 with approval, when considering a deposit paid under a contract for the sale of land, and the analysis in these cases showed that Lowe was wrongly decided.
The sellers had acquired an unconditional right to receive the balance of the deposit on the service of their notice to complete. The subsequent rescission of the contract put paid to future obligations under the agreement, but did not discharge rights that had already accrued. Consequently, the sellers were entitled to be paid the balance of the deposit due under the agreement, even though they had rescinded the contract in accordance with the general conditions of sale.
Allyson Colby is a property law consultant
