28-10-2011

Seller’s failure to reply to pre-contract enquiry on sale of land lets buyer off the hook

A buyer of land has been given the right to get out of the contract after the seller failed to update his reply to one of the buyer’s pre-contact enquiries about planning issues, even though the contract contained a common clause saying he couldn’t.

During negotiations for a sale of land the owner told a potential buyer – who intended to develop the land – that no planning applications had been made in relation to it. Two days later the owner was notified that a planning application had been made by a third party. The owner should have told the buyer of the change, but failed to do so.

The buyer only found out about the application after exchanging contracts to buy the land – that is, after he had become legally bound to buy it. The buyer argued that there had been a misrepresentation by the seller and he should be entitled to get out of the contract.

The contract incorporated standard conditions called the Standard Commercial Property Conditions, which are endorsed by the Law Society and very commonly used. Condition 7 says:

"An error or omission only entitles the buyer to rescind the contract: (a) where it results from fraud or recklessness, or (b) where he would be obliged, to his prejudice, to accept property differing substantially (in quantity, quality or tenure) from what the error or omission had led him to expect".

The owner said that the misrepresentation did not make the property substantially different from what the buyer expected, so the buyer could not rescind the contract – that is, treat it as if it had never been entered into.

The law governing unfair contract terms says that clauses limiting a person’s liability for misrepresentation (or restricting the legal remedies available to the other side) has to be fair and reasonable, given the circumstances when the contract was made. The buyer argued that Condition 7 was not fair and reasonable. The court agreed with the buyer.

On appeal by the seller, the Court of Appeal said it could only interfere with the original decision if it was plainly and obviously wrong. It started by saying that Condition 7:

  • Was not "self-evidently offensive" but was a commercially justifiable apportionment of risk in the interests of certainty and the avoidance of litigation.
  • Had been incorporated into contracts for the sale of land for many years.
  • Was endorsed by the Law Society.

It also took account of the fact that both buyer and seller had been advised by solicitors and had negotiated amendments to other Conditions, but not Condition 7.

However, it went on to acknowledge that there were exceptional features to this case. For example, the seller knew the development potential of the land was very important to the buyer, so that the buyer would not have exchanged contracts had he known of the planning application. These meant that, in the circumstances, Condition 7 was not fair and reasonable, and the buyer could rescind the contract.

Recommendation

Sellers should

  • Ensure that initial replies to a buyer’s enquiries before contract are accurate.
  • Make sure their replies are refreshed if circumstances change or risk the contract being rescinded for misrepresentation, even if the Standard Commercial Property Conditions are incorporated into the contract.