One of the critical stages in buying or leasing property is the raising of pre-contract enquiries. The underlying principle in all property transactions is “caveat emptor” - buyer beware - and it is for this reason that a buyer will want to make as many enquiries of their seller or landlord before committing to the transaction.

A seller is under no obligation to answer pre-contract enquiries but a refusal to do so is unlikely to be attractive to a potential purchaser, who may decline to proceed with the transaction or try to negotiate a better price. It is, however, essential that any replies given to pre-contract enquiries are accurate to avoid any subsequent claim by the buyer, either to rescind the contract (e.g. to treat the contract for sale as not existing) or for compensation by way of damages, or both, based on the law of misrepresentation.

This will be of relevance and importance to managing agents also, who often deal with replies to pre-contract enquiries on behalf of their landlord clients.

What is misrepresentation?

If a seller makes a false statement of fact relating to the property and that statement is relied upon by the buyer and causes him loss, the seller can be said to have made a misrepresentation.

There are three different types of misrepresentation :-

1. Fraudulent - where the false statement is made knowingly or without belief in its truth, or recklessly and careless as to whether it is true;

2. Negligent - where the false statement is made carelessly or without reasonable grounds for believing its truth; or

3. Innocent - where the seller has reasonable grounds for believing the false statement was true.

In the case of fraudulent or negligent misrepresentations, a buyer may seek to rescind the contract or damages, or both. When assessing the level of damages, the Court will aim to put the buyer into the position he was in before the misrepresentation took place. When an innocent misrepresentation is proven, the buyer may only seek to rescind the contract however the Court can order damages instead, but not both.

In practice, contracts for sale will often attempt to limit a seller’s liability for their replies to pre-contract enquiries and any remedies that will be available. Similarly, it is commonplace for disclaimers to be added to replies to try and avoid any claims should the replies subsequently be found to be inaccurate. A seller should always seek advice to ensure that any such disclaimers or limitations of their liability are effective and do not fall foul of the rules against unfair contract terms.

An ongoing duty

The representations made at the start of a transaction are treated as continuing until contracts are exchanged. A seller can correct a mistake or inaccuracy if it becomes aware prior to exchange of contracts that its first reply is incorrect or inaccurate. If it does not correct the position, it may be liable for misrepresentation.

In the case of Greenridge Ltd -v- Kempton Investments Ltd [2016] EWHC 91 (Ch), the seller (Kempton) owned three office buildings in Luton, the majority of which were let to the travel company TUI. Kempton employed managing agents to manage the building, who in turn referred any legal matters to a solicitor.

In March 2013, relies to pre-contract enquiries were prepared by the solicitor in anticipation of the buildings being sold. The replies included representations that (a) there were no disputes relating to the property, particularly the service charges; and (b) there were no service charge arrears.

Between June and November 2013, TUI raised issues with Kempton’s solicitors regarding the service charges for the building and withheld part of the charges demanded; some £95,000.

In August 2013 the replies to pre-contract enquiries, as prepared in March 2013, were provided to Greenridge and contracts were exchange in September 2013 for £16.25 million, with a £812,500 deposit being paid.

Whilst Greenridge finalised funding for the purchase in readiness for completion, it discovered that substantial service charges were owed to Kempton.

Greenridge commenced proceedings against Kempton to rescind the contract, for the return of the £812,500 deposit and for damages for its wasted expenditure of almost £400,000.

The High Court accepted that a false statement had been made to Greenridge in the replies to pre-contract enquiries, which had induced Greenridge into entering into the contract. Whilst the Court accepted that Kempton’s solicitor and managing agent had honestly believed there to be no “dispute” with TUI (e.g. (a) above), both the solicitor and managing agent lacked an honest belief in the statement that there were no service charge arrears. That representation was found to be reckless, and Greenridge was entitled to rescind the contract. As a result, Greenridge was entitled to the return of the deposit and a further £395,948 in damages (and presumably its costs).

Conclusion                                                   

Replies to pre-contract enquiries are often a point of contention and a seller should always consult their property lawyer when considering how to answer replies. A well-advised seller should never “sugar-coat” replies to make the property more attractive, and often the best way to avoid a subsequent claim by a buyer is to provide full and accurate answers to pre-contract enquiries.

For more information, please contact Kevin Lever, Principal Solicitor, on 01435 897297 or Kevin.Lever@kdllaw.com.

Disclaimer

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