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Article first appeared in Estates Gazette, 17 May 2014
Lack of full disclosure by a seller or full due diligence by a buyer can result in post–completion disputes. William Thompson sets out best practice to ensure that transactions are plain sailing
In any property purchase, there will be features of the site that make it attractive to the buyer. Similarly, there will be many other issues (both hidden and obvious) that the buyer will want to know about to enable it to make an informed purchase.
Recent cases have highlighted the importance of proper disclosure by a seller and full due diligence by a buyer so that all important issues, regardless of whether they are defects in the traditional sense or not, are revealed, reviewed, understood and catered for. Failure to do so could result in a post–completion dispute – though by following the principles and drafting points given below they can be avoided.
Caveat emptor and disclosure
The overriding common law principle of caveat emptor is one that many will be familiar with and is the starting point when discussing who has responsibility for disclosure of information. The buyer should satisfy itself on all matters relating to the property; the onus is very much on the buyer to search for everything it needs to know. A buyer should always seek confirmation of the issues that are of greatest importance to it. It would be unwise for a developer, for example, to agree to buy development land without carrying out its own investigations of the planning authority or rights of light issues (if applicable) over adjoining premises. The general point remains, however, that a seller is under no general duty to disclose.
There are exclusions from caveat emptor in respect of title, however, the most common of which is the principle that the seller must disclose “latent defects” in title. While these are distinct from “patent” defects (those that are apparent from inspection) the boundaries between the two are unclear. In general, those that the seller is aware of and which the buyer could not have known about, will be deemed to be latent defects and must be disclosed. This ambiguity would suggest in practice that a seller should seek to disclose as much as it possibly can on matters that could not be discoverable without the seller’s input, regardless of whether it is an issue that the seller knows is important to the buyer. Liability for non–disclosure of latent defects cannot necessarily be excluded by contractual provisions unless the seller has disclosed the defect in title.
This duty only applies to defects in title and does not extend to physical or other defects that affect the property. In Sykes v Taylor Rose [2004] EWCA Civ 299; [2004] PLSCS 110 the seller was not deemed to have been under a duty to disclose that the property had been the site of a notorious murder, despite it having obvious implications on the prospects of an onward sale (although see the comments on drafting written enquiries below).
Terms and misrepresentation
During the negotiation stage, many things will be said and statements made by one party to the other in relation to the land and the encumbrances that may affect it or which is practical “on the ground” information. Some of these will be promotional statements used to try to sell the land, but some will be statements of fact concerning some aspect of the property.
A statement of fact that is incorporated as a term of the contract will be enforceable under general contract law. Other oral statements of fact (not opinion) which are representations that induce the buyer to enter into the contract with the seller (or vice versa) and which result in loss, may give rise to a claim for misrepresentation.
Land contracts and exclusion clauses
In most land transactions where the parties have legal representation, the contract for sale will usually include the following boilerplate clauses to create certainty as to the terms and representations that apply and are enforceable, and prevent disputes over oral statements that may or may not have been made:
1. “Entire agreement” clauses: these contain an acknowledgment that the written contract contains the only terms between the parties;
2. Non–reliance clauses: while the entire agreement clause confirms the position as regards “terms” of the contract, non–reliance clauses state that the buyer is not relying on any statement made by the seller save for those contained within the contract or within written replies to enquiries between the parties’ solicitors.
The intention of the above in tandem is to eliminate any “he said/she said” arguments post completion and to make certain what is being relied on.
Lloyd v Browning
How effective are these clauses in preventing claims that there is something else (outside written replies to enquiries and the terms of the contract) with legal teeth? The recent case of Lloyd v Browning [2013] EWCA Civ 1637; [2014] EGILR 3 (see EG, 18 January 2014, p85) provides an example of issues of disclosure giving legal effect to representations of great importance so that remedies can apply if all is not as the seller says it is.
The sellers sought planning permission to convert an old barn from an L shape to a U shape. Planning was refused on this basis, but eventually granted on resubmitted plans that retained the L–shaped building. The planning permission made no reference to the plans.
The property was marketed using the original unapproved U–shaped plans and the buyers made an offer. The particular element of the proposed development that appealed to them was that it had planning, they thought, for a U–shaped extension. At subsequent meetings between the parties, the sellers produced only the rejected U–shaped plans. The buyers employed an architect and planning consultant as further changes to the permission were needed. However, at no point were the correct plans provided, and they were not filed in the planning files with the local authority, which were reviewed by the planning consultant. Furthermore, their solicitor was instructed not to consider planning issues because a planning consultant had been instructed.
After completion had taken place, the real position became apparent. The deduction in potential value as a result of this difference was £55,000. While this was adjudged to be a clear misrepresentation, the contract for sale contained the standard provision stating that the buyers were not relying on any matter other than the express provisions of the contract or written replies to enquiries between solicitors.
The claim by the buyers concerned the question of whether the non–reliance clause could be struck out of the contract on the basis that it was not reasonable in the particular circumstances of the transaction. The argument continued that if the judge properly balances the position then he/she would find that this exclusion clause failed to satisfy the requirements for section 11 of the Unfair Contract Terms Act 1977, which states that an exclusion clause is only enforceable to the extent that it is reasonable.
Are exclusion clauses reasonable?
It was held that boilerplate clauses such as these are designed to achieve certainty and forestall disputes as to whether things were or were not said. Such a clause is therefore not intrinsically objectionable within contracts such as this. In addition, the judgment confirms that other factors can be relevant when deciding whether or not such exclusion clauses are reasonable and fair:
1. The relative bargaining strength of the parties: if both parties have employed solicitors to act on their behalf, then this will be evidence that both have entered into the contract with their “eyes wide open”. In this particular case, the fact that the benefit of specific planning permission for a specific extension was an essential requirement for the buyers, and that they had employed their own planning consultants, gave greater emphasis to the fact that the buyer knew what it was doing, and could not be bracketed as being an unrepresented party being coerced into a contract that it did not fully understand.
2. Is it the sort of clause which one would ordinarily expect to be contained within a document such as this? Boilerplate exclusion clauses of the type discussed above are standard within land sale contracts and in the case of this particular claim, the clause itself was in the form recommended by the local Law Society.
3. Land contracts themselves are formal documents that are designed by law to require all the agreed terms to be set out in one contractual document signed by the parties.
4. The clause by its very nature gave the buyer an ability to give legal effect to oral statements that had been made by the seller, by requiring them to be given in writing as a response to pre–contract enquiries.
While not part of the main judgment in Lloyd, obiter reference was made to the fact that it had been the buyers exerting the pressure to exchange and complete as soon as possible, and therefore they took a deliberate decision to proceed knowing that the information that they had on the planning position was incomplete.
It is conceivable that other factors may arise in different circumstances that could also assist in proving an exclusion clause as being reasonable, such as an inducement (for example a reduction in purchase price) to enter into the contract which contains an exclusion clause.
Drafting and practical points
- Solicitors should speak with their client to understand what discussions have taken place between the parties and what elements of the transaction are of particular importance to the buyer. Formal enquiries can then be made on those subjects to give legal effect to the representations made. As a general rule, if in doubt, a formal written enquiry should be made.
- When raising preliminary enquiries, particular care should be given to their wording. References to what the seller thinks should be avoided. Phrasing enquiries so that they are asking if there is anything that the seller knows of that it is reasonable for them to disclose can cast the net wider.
- If a matter is of great significance then consideration should be given to incorporating it as a term of the contract itself.
- If the bargaining position of the parties is not equal, or if one party is unrepresented, any exclusion clauses should be made absolutely clear and pointed out so that they are understood.