Matthew Bonye and Michael Tan explain the options for aggrieved parties and the risks for owners and property professionals following the repeal of the Property Misdescriptions Act 1991
There has always been overlap between the criminal and civil legal codes. This is just as true of real estate as any other area of the law. Imagine a slapdash gardener, whose out-of-control bonfire sets a neighbour’s house alight. The gardener will be liable to the neighbour for damages, under the tort of negligence. If that gardener was not only negligent but reckless (or, even worse, was deliberately setting out to burn down the house), he may also face conviction for arson (section 1(3) of the Criminal Damage Act 1971). Tort compensates the neighbour for loss. A criminal conviction is the public process to punish the wrongdoer.
So it has been with property misdescription. Civil remedies exist for a party who, say, has bought a house having been assured by the estate agent that it was connected to the water mains when it was not. The agent may in the past also have been prosecuted under criminal law for having made a false or misleading statement under the Property Misdescriptions Act 1991 (“PMA”). However, on 1 October 2013 the PMA was repealed.
So, what choices does an aggrieved party have now – and what are the risks that property owners and professionals should be aware of, to avoid the risk of liability, whether criminal or civil?
The PMA is dead: long live CPRs and BPRs
The PMA is no longer in the statute book because criminal sanctions are now available under the Consumer Protection from Unfair Trading Regulations 2008 (“CPRs”) and the Business Protection from Misleading Market Regulations 2008 (“BPRs”). As their names suggest, the CPRs concern business-to-consumer relationships, whereas the BPRs are for business-to-business practices. This subject has been covered in some detail (see EG, 19 January 2013, p82), so this is a summary.
The PMA applied only to estate agents, property developers and solicitors selling property, but the CPRs/BPRs are wider in scope. They cover all commercial practices, regardless of sector or profession. The PMA was a “one-trick pony”, focused only on property description. It dealt with what was stated, not what was omitted (except for omissions that made a statement false). In contrast, the CPRs/BPRs are applicable to all statements, practices, services or advertisements provided to clients/prospective clients.
The CPRs provide a broader framework of offences than the BPRs – reflecting the fact that the CPRs amount to “consumer protection” legislation. There is a general prohibition against “unfair” commercial practices. There are other prohibitions including “misleading actions”, “omissions” and “aggressive commercial practices”. 31 specified practices are outlawed, being unfair in all circumstances. It is also irrelevant, like under the PMA, whether there was ever a completed deal; the offence arises from behaviour and not from a transaction.
The PMA provided no civil remedy to the aggrieved party. No contract would be void or unenforceable by virtue of its provisions, and no damages available. However, the fact of a criminal conviction is admissible in evidence in civil proceedings, to prove that that person committed that offence, where this is relevant to any issue in the civil claim (section 11 of the Civil Evidence Act 1968). Likewise, a conviction under the CPRs or BPRs may assist in convincing a judge in civil proceedings that a tort or breach of contract has taken place (see below.) In particular, this may be so if the conviction is for breach of the general prohibition (regulation 3 of the CPR), where a conviction would only have been obtained if a prosecutor had been able to prove an intention to cause the breach, or recklessness. All other offences under the CPRs and BPRs are subject to strict liability, so no “state of mind” needs to be proved.
A person found guilty under the CPRs or BPRs faces an unlimited fine. Unlike under the PMA, an individual can also be imprisoned for up to two years.
Contractual claim: standard conditions of sale
Now, we move on to civil claims – where the offended party seeks damages and sometimes other remedies. In most cases, the starting point for a claim by a buyer will be its contract with the seller. The contract will usually incorporate the Standard Conditions of Sale (5th ed) (“SCS”) for residential transactions, or the Standard Commercial Property Conditions (2nd ed) (“SCPC”) for commercial transactions.
Both SCS and SCPC focus on the question as to whether “any plan or statement in the contract, or in the negotiations leading to it, is or was misleading or inaccurate due to an error or omission” (see SCS clause 7.1.1 and SCPC clause 9.1.1).
Where such an error occurs, then the buyer will be entitled to damages in contract, but only if there is a material difference between the property and the description. Damages will only arise if the buyer has suffered a loss, which is usually measured by the property being worth less than the one the seller contracted to sell based on the representation. There are several problems that buyers face when seeking compensation under the SCS or SCPC:
? The buyer can only seek compensation from the seller, and not, say, an estate agent;
? The incorrect statement must be contained within the contract, or it must be a statement on which the buyer is otherwise contractually permitted to rely. This is unlikely to include advertising or marketing: often the parties have agreed that reliance can only be placed on formal solicitor-to-solicitor pre-contract written enquiries and responses. This point is common both to SCS/SCPC claims and to misrepresentation generally. A recent example, where the seller was found not to be liable for misrepresentation, was Lloyd v Browning (Court of Appeal, 4 November 2013) (see below); and
? If the buyer wants to terminate the contract, there will be an additional hurdle, namely to show that the “error or omission” resulted from fraud or recklessness or that the property differed substantially in quantity, quality or tenure from the description. This may be a high bar. Absent fraud, if the property is materially but not substantially different from how it was represented to be, and no less valuable, there may be no claim for damages or termination.
Misrepresentation generally
This claim arises even where the contract does not provide a specific remedy (as the SCS and SCPC do).
The component elements are:
1. One party (ie the seller) must have made a representation of law or fact to another party (ie the buyer) or must have noticed that a misrepresentation has been made to the other party;
2. The representation must be untrue; and
3. The buyer must be materially influenced by the representation, must rely on it, and must enter into a contract with the seller, causing a loss.
Whether a representation has been made is to be assessed objectively, according to the effect that the statement may be expected to have on a reasonable person in the position of the actual buyer. A statement of opinion will generally not be a misrepresentation, unless it is a statement of fact and the person who gave it did not hold that opinion, or could not reasonably have held it, when it was made.
Generally it is necessary to show that the seller intended the buyer to be induced to rely on the representation and enter into the contract. It is possible for the seller to be liable where the representation was made by a duly appointed agent (say an estate agent), provided that the agent was acting within its authority.
There are different categories of misrepresentation, depending on the seller’s mindset. The remedies then change accordingly (see below).
Damages for fraudulent and negligent misrepresentation are assessed on the same basis, but the hurdles to proving fraud are substantially higher. Compared to negligent misstatement (see next heading), a claim can be simpler as there is no need to show a “duty of care”, and damages are not limited to what was reasonably foreseeable.
Negligent misstatement
Negligent misstatement is a claim in tort. There does not need to be a contractual relationship between the parties. A separate claim may usefully exist against an estate agent where, for example, the seller had no money to satisfy a claim. Hedley Byrne & Co Ltd v Heller and Partners Ltd [1964] AC 465 established that where a person carelessly makes a false statement to another person who subsequently relies on it and suffers loss, the maker of the false statement may be liable for damages.
It must be shown that:
1. The person who made the false statement owed the buyer a duty of care not carelessly to cause the type of harm suffered, and that this duty was breached; and
2. The buyer suffered loss and that this loss was caused by the breach of duty by the person who made the false statement.
A difficulty for the buyer may be showing that a duty of care existed. General marketing materials may not be sufficient: it may be difficult to show that it was reasonably foreseeable that the statements made would be relied on by the buyer.
Damages may extend to the costs of taking preliminary steps such as instructing surveyors and/or valuers, as well as any loss arising from the purchase itself. However, the scope of damages ?that can be recovered will be limited to what was reasonably foreseeable. Furthermore, negligent misstatement ?only gives a remedy in damages, not termination.
Redress schemes
There may be a complaint mechanism open to the buyer. All persons engaged in residential estate agency are required by law to belong to an officially approved redress scheme (unless exempt). This must be a free and independent service for buyers and sellers, capable of investigating complaints and, if appropriate, able to require the estate agent to pay compensation or apologise to the complainant. If complainants remain unsatisfied with the outcome, there is also recourse to the property ombudsman.
A range of options
An aggrieved buyer has a number of civil avenues to choose from, including breach of contract, negligent misstatement, misrepresentation and non-litigious redress schemes. The CPRs and BPRs offer no right to compensation but may be deployed to penalise a party that has contravened their wide provisions, resulting in the risk (at least) of a fine, even if there has been no completed transaction.
Lloyd v Browning
Court of Appeal, 4 November 2013 (unreported): seller not liable
The buyers of agricultural land asserted that they were induced to purchase by a misrepresentation by the seller. The misrepresentation was that the land benefited from a planning permission to build an extension to the barn situated on the land. In fact, the permission was for an amended scheme. A clause in the sale contract stated that the buyers admitted that they had inspected the land, entered into the contract solely on the basis of the inspection, and had not been induced to enter into the contract by any statement by the seller other than written replies to solicitors’ enquiries. It was held by the Court of Appeal that the clause was effective in excluding liability for misrepresentation, and it was not struck down by section 11 of the Unfair Contract Terms Act 1977 as being unreasonable. It was held that the clause was in common commercial use, and had the buyer wished to rely on the representation, a formal written enquiry should have been made.
| Type of misrepresentation | Mindset of the seller | Remedy available |
|---|---|---|
| Fraudulent | Knowingly making a false representation, or without honest belief in its truth, or reckless as to its truth | Damages (not subject to reasonable foreseeability); Rescission |
| Negligent | Carelessly making a representation or without objectively reasonable grounds for believing its truth | Damages (not subject to reasonable foreseeability); Rescission (although the court may decide to award damages instead) |
| Innocent | Making a representation with reasonable grounds to believe it is true | Rescission (although the court may decide to award damages instead) |
Matthew Bonye is a partner and head of the real estate dispute resolution group, and Michael Tan is a trainee solicitor at Herbert Smith Freehills
