Allyson Colby considers the consequences of providing inaccurate information in replies to a buyer’s enquiries
Key points
- Sellers should check that replies to preliminary enquiries are accurate when given, and immediately before contracts are exchanged.
- The standard conditions in contracts for sale will not prevent rescission or relieve a seller from liability in damages for fraudulent or reckless misrepresentations.
To expedite sales, sellers and their advisers often prepare the paperwork before, or while, a property is on the market. Greenridge Luton One Ltd v Kempton Investments Ltd [2016] EWHC 91 (Ch); [2016] PLSCS 26 reminds us of the consequences of providing inaccurate information in replies to enquiries and the importance of checking whether replies prepared in anticipation of a sale are still correct.
The case concerned premises, most of which were let to a single tenant. The property had been on the market for some time and the seller’s replies to enquiries, which were prepared in March 2013, were not supplied to the buyer until August 2013. They confirmed that there had been no complaints from, and were no disputes with, the tenant and that there were no arrears of rent or service charge. The seller added that the tenant had, from time to time, raised queries on mainly historic issues, and had recently raised further enquiries.
In fact, the tenant had been unhappy about the operation of the sinking fund for some time. At the end of May, it informed the landlord that it considered that there was now a dispute between them and began withholding service charge payments in June.
After exchanging contracts to buy the property for £16,250,000, without having seen up-to-date service charge figures, the buyer discovered how things stood and sought to rescind the contract on the ground that the seller had misrepresented the position. Was the seller entitled to treat this as a repudiatory breach of contract and forfeit the buyer’s deposit?
Contract
The parties’ contract incorporated the Standard Commercial Property Conditions (Second Edition) (“SCPC”). SCPC 9.1.3 states that the buyer is not entitled to rescind even though a plan or statement in the contract, or in the negotiations leading to it, is, or was, misleading or inaccurate, unless the error or omission was the result of fraud or recklessness on the part of the seller (or the property differs substantially in quantity, quality or tenure).
Where there is a material difference between the description or value of the property as represented and as it is, SCPC 9.1.2 states that the buyer is entitled to damages.
Representations
In With v O’Flanagan [1936] Ch 575; [1936] 1 All ER 727, the court ruled that a person who makes a representation which is initially true but ceases to be true before exchanging contracts must disclose the change in circumstances. This is because the other party will ordinarily understand the representor, by his conduct in continuing the negotiations and concluding the contract, to be asserting that the facts remain as represented: see the Australian case of Jones v Dumbrell [1981] VR 199, 203.
Furthermore, the replies to enquiries stated: “The seller confirms that pending exchange of contracts or, where there is no prior contract, pending completion of the transaction, it will notify the buyer on becoming aware of anything which may cause any reply that it has given to these or any supplemental enquiries to be incorrect”.
Fraudulent or reckless
The trial judge agreed that the seller’s replies to enquiries had given a false impression, which induced the buyer to enter into the contract. The replies might have been correct when they were prepared, but were not accurate when they were supplied to the buyer or, more importantly, at the date of the contract.
The buyer did not challenge the reasonableness of SCPC 9.1.3. Consequently, the judge had to decide whether the replies were fraudulent or reckless. The classic test is set out in Derry v Peek [1889] 14 App Cas 337, which defines a fraudulent misrepresentation as a false statement, made knowingly, or without belief in its truth, or recklessly without caring whether it is true or false.
To prevent a statement being fraudulent, the representor must honestly believe in its truth. The judge was prepared to accept that the seller honestly, but erroneously, believed that there was no real dispute with the tenant. But the replies to enquiries stated that there were no service charge arrears when in fact there were. The judge accepted that the seller might have believed that it could solve the problem by issuing a credit note for the sums that had been withheld (which it did shortly before the transaction should have completed). Nonetheless, the reply was incorrect and, because the seller knew this, its statement that there were no arrears was reckless, if not fraudulent. Therefore, the buyer was entitled to rescind the contract and recover its deposit.
Damages
That was not the end of the matter. The buyer also claimed £396,000 in damages to cover costs wasted on the transaction. The amount represented the sums spent on surveys, reports, legal and other fees, aerial photographs, and advice on tax and capital allowances.
The seller relied on SCPC 9.1.2. It argued that this was a condition that the buyer must satisfy – by showing that there was “a material difference between the description or value of the property as represented and as it is” – in order to obtain damages. But the judge noted that the condition does not expressly state that damages are to be available “only” in such circumstances and ruled that SCPC 9.1.2 was not sufficiently clear and unambiguous to exclude or limit liability for deceit (if, indeed, it was possible to do so). Therefore, the buyer was also entitled to the damages sought.
Allyson Colby is a property law consultant
