UK: Vendor Beware; Misrepresentations And Exclusion Clauses In Property Transactions

Last Updated: 23 October 2018
Article by Andrew Baines

An attempt by a seller of property to avoid liability for misrepresentation by seeking to rely on an exclusion clause failed in the Court of Appeal on 19 June 2018: First Tower Trustees Limited & Intertrust Trustees Limited v CDS (Superstores International) Limited [2018] EWCA Civ 1396.

Buyer's due diligence

Caveat emptor (buyer beware) should be a familiar principle to all those involved in property transactions. Consequently, a buyer of property usually goes to some effort with his due diligence to discover everything he can which might affect his decision to buy a property. If the buyer makes enquiries of the seller, the law requires the seller to supply the buyer with accurate information to the best of his ability. However, the process has developed into an almost contentious process, with sellers frequently stonewalling buyers and telling them that they must satisfy themselves in relation to a particular enquiry. Not only that, but contractual terms designed to protect sellers from liability for misrepresentation have become common place. Such attempts often appear as 'entire agreement' or 'non-reliance' clauses in contracts. Often these clauses are included in contracts by the parties' lawyers without the parties themselves realising or truly understanding their effect. Lawyers frequently include them in contracts as a matter of course or (it has to be said) sometimes without thinking, simply because they are a common feature of precedent documents.

Attempted exclusion by the seller

In First Tower Trustees the Court of Appeal found that a landlord of business premises had misrepresented the position about environmental contamination (the presence of asbestos) during its tenant's enquiries before contract. The agreement for lease contained a 'non-reliance' clause which provided that the tenant agreed that it had not entered into the contract 'in reliance on any statement or representation made by or on behalf of the Landlord other than those made in writing by the Landlord's solicitors in response to the Tenant's solicitor's written enquiries'.

In addition, the lease itself provided that 'the tenant acknowledges that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord'.

Statutory limitations

In property transactions, it is conventional for the buyer's solicitor to make written enquiries of the seller's solicitors, who are in turn expected to give written replies. As a matter of law, it is accepted that the parties to a transaction may agree to confine themselves to a particular process which may have the effect of limiting the liability of one party to the other. Lawyers refer to this as 'contractual estoppel'.

But despite the ingenuity of lawyers in seeking to protect their clients from liability, the law still seeks to protect a buyer from things which a seller may very well know, or ought to know, yet is reluctant to disclose. Historically, the law was that a buyer would have to show that a seller's provision of incorrect information (his misrepresentation) was fraudulent, i.e. dishonest. The Misrepresentation Act 1967 removed that requirement and only permitted the maker of a false statement to escape liability if he could prove that he had reasonable grounds to believe, and did believe up to the time of the contract was made, that the facts represented were true.

Further, the Misrepresentation Act limits the effect of exclusion clauses, particularly the form of non-reliance clause seen in the First Tower Trustees case. It makes any attempt at exclusion subject to the test of reasonableness found in the Unfair Contract Terms Act 1977, section 11(1), which in turn places the burden of proving reasonableness on the maker of the statement, i.e. the seller.

In the First Tower Trustees case, both the trial judge and the Court of Appeal found that the landlord was aware of potential asbestos contamination. The Court accepted that the parties had agreed in the contract to limit the tenant's reliance on statements to those given in the written replies to enquiries, because that was their contractual right. However, the Court found that the landlord's knowledge of the true situation and its attempt to avoid liability by way of the 'non-reliance' clause in the lease, was unreasonable within the meaning of the Unfair Contract Terms Act. The landlord was therefore liable for the tenant's loss as a result of discovering the asbestos contamination.

Liability of trustees

This case is also a rich mine on the law relating to the liability of trustees and the procedural rules of litigation. It illustrates the potential liability of trustees, even though trustees themselves may not be directly involved in a transaction, or may not themselves have any knowledge of the matters about which a buyer enquires.

The lessons are clear: Whilst the principle of 'buyer beware' still applies, a seller must be aware that if he has knowledge of anything which might contradict the information given to a buyer he should consider the position carefully. The First Tower Trustees case makes it plain that the law may not protect a seller from liability for a misrepresentation, despite the best attempts of his lawyers.

Posted on 22 Jun 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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