An end to caveat emptor? | Fieldfisher
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An end to caveat emptor?

Gary Pickard
Might a recent practice guide by the Law Society mean a change to the principle of caveat emptor?

This article was originally published by Estates Gazette

A recent practice guide by the Law Society has managed to drop a small bombshell on land law practice by suggesting that consumer protection laws might affect a significant number of everyday transactions by imposing on solicitors a direct requirement to disclose defects with a property.

Consumer protection has long been one of the pillars of EU law. The Unfair Contract Terms Act 1977, a key early act, has steadily been extended, including major changes via the Consumer Protection from Unfair Trading Regulations 2008 (“the 2008 regulations”), which replaced many earlier acts and created new offences. The Consumer Protection (Amendment) Regulations 2014 (“the 2014 regulations”) changed the landscape by creating a number of private law remedies for consumers where there are breaches of the 2008 regulations’ prohibited practices.

It is the 2014 regulations which are causing such consternation for, as well as introducing the new private law actions open to consumers, it also changed a number of definitions.

The law outside of the regulations

The 2008 regulations were designed for the state control of offensive trading practices (eg pressure selling tactics) and the 2014 regulations added direct remedies for consumers. What neither did is remove other legal remedies; however, the 2014 regulations do prevent a duplicated claim for the same loss.

Most people have heard of the saying caveat emptor (or “buyer beware”), which is the classic position for land contracts in England and Wales: it is up to the buyer to make proper enquiries and inspect as they will be deemed to take the property as is. This is far from the whole position and there are a number of significant exclusions:

• Latent defects: technical defects in the quality of the legal title to a property that are not reasonably discoverable by looking at the paperwork or from inspecting the property, eg an undisclosed restrictive covenant. If they exist, their presence may allow the buyer to walk away from a transaction.

• Fraud: for example, a buyer removing various paving slabs from around a listed building for use elsewhere and denying they were part of the listing of the building (Taylor v Hamer [2002] EWCA Civ 1130[2003] 1 EGLR 103).

• Misrepresentation: incorrect replies to enquiries that cause damage to the buyer/tenant can lead to a claim. A misrepresentation is not only an out-and-out incorrect answer but also overly rose-tinted views of the position. For example, playing down a tenant not having paid the service charge because there were “historical issues” rather than the more correct position that there was a pending dispute gave rise to an action in Greenridge Luton One Ltd and another v Kempton Investments Ltd [2016] EWHC 91 (Ch)[2016] PLSCS 26.

Key concepts

Two key concepts in the 2008/2014 regulations which are drawn upon time and again in how they regulate trader (business) and consumer relationships are:

• Commercial practice: “…any act, omission… by a trader which is directly connected with the promotion, sale or supply of a product to or from consumers, whether occurring before, during or after a commercial transaction (if any) in relation to a product” (2008 regulation 2(1)).

• Average consumer: “An individual acting for purposes that are wholly or mainly outside that individual’s business” (2008 regulation 2(3)). As to “average”, it may be assumed that the party is “reasonably well-informed and reasonably observant and circumspect, taking into account social, cultural and linguistic factors” (Office of Fair Trading v Purely Creative Ltd and others [2011] EWCA Civ 920). But “average” must also be considered in the context of the group that a product or service is targeted at. If that group is vulnerable then this will be reflected in the standard (2008 regulations 2(2)-(6)).

The 2008 offences

The 2008 regulations created the following offences with penalties of up to two years’ imprisonment:

• General prohibition (regulation 3(3)): carrying out a commercial practice that is unfair by contravening the requirements of professional diligence and materially distorting the economic behaviour of the average consumer. The regulations set out a number of such prohibited practices, eg false time-limited offers.

• Misleading action (regulation 5): providing false information or presenting information in a way which deceives or is likely to deceive the average consumer and, as a result, causes or is likely to cause the average consumer to take a transactional decision that they would not otherwise have taken.

• Misleading omission (regulation 6): omission or hiding of material information or providing material information in a manner which is unintelligible, ambiguous or untimely, or fails to identify its commercial intent and, as a result, causes or is likely to cause the average consumer to take a transactional decision that they would not otherwise have taken.

In addition to the criminal sanctions, the 2014 regulations also give consumers an assortment of claims against the trader, which can include: unwinding the transaction or claiming a discount; and damages (not only for financial loss but also for more general alarm, distress and inconvenience). It should be noted that these rights only affect transactions involving certain “relevant leases” (eg assured tenancies/assured shorthold tenancies) and are only usually enforceable as against a “trader” rather than their advisers.

Impact on advisers

While trader clients have been subject to the 2008 regulations for some time, the 2014 regulations crucially changed the definition of “trader” to include not only a person acting for the purposes of the person’s business but also someone “acting in the name or on behalf” such a party. A solicitor will often act “on behalf” of a client in matters such as issuing replies to enquiries, so their action may directly affect the client.

It is also suggested by the Law Society that, as a solicitor is carrying out a commercial practice, then any dealing with a consumer on the other side could involve a trader-consumer relationship caught by the regulations – crucially this then opens up the 2014 regulations remedies to this non-client consumer. If this is correct, then all advisers in such a consumer deal could be caught by owing direct obligations to the consumer.

Doubt has been cast on this interpretation as this would generate a “trader” relationship for a transaction that was otherwise between consumers (eg a typical house sale and purchase). Such an interpretation also starts delving into the law of tort, which would typically govern such an indirect relationship, rather than staying in the field of controlling unsavoury practices designed to entice consumers into entering into unfavourable contracts, which the regulations are intended to control.

When looking at the nature of the potential “consumer” (either as a direct client or the other party to the transaction) then the test to be applied is “wholly or mainly outside that individual’s business”, so the skilled and experienced investment purchaser may still be a consumer.

Additionally, solicitors and other professions owe a number of professional duties, eg solicitors owe duties of:

• honest and fair dealing under the Solicitors Regulation Authority code; and

• confidentiality to their client.

The risk

The Law Society guidance seems pretty clear – solicitors need to advise their client in a potential trader-consumer deal to be open and honest. Anything less than this could open up both solicitor and client to possible claims under the 2008 regulations and, possibly, the 2014 regulations. If the client insists on acting in a prohibited manner, including if the adviser becomes aware of something that should possibly be disclosed and is told not to disclose, then it is likely the solicitor will have a conflict and must cease to act.

Where next?

Regardless of whether the Law Society note is overly cautious as to the effect of the 2014 regulations applying a direct relationship to agents, what it does is to remind the profession that it is not safe to issue vague or spun replies to enquiries where the facts are known to the seller/landlord or their lawyers. The Law Society guidance goes so far as to state that the solicitor professional standards of fair dealing and good practice require the disclosure of material information – this would throw caveat emptor out of the window.

Consumer protection is an area which is likely to increase in regulatory control (Wales has recently introduced a set of model short-term residential tenancies) and now is the time to put suitable processes in place to avoid issues in the future at Fieldfisher.