Buyers – and sellers – beware

Appeal arising from events in the property downturn of 2009 has current relevance. In Lloyd and other v Browning and another [2013] EWCA Civ 1637, the buyers were keen to exchange contracts quickly. Had the buyers taken more time to nail down every last point from their due diligence, they may not have exchanged contracts at all. Once the buyers had full knowledge of the facts they made a claim against the sellers for oral misrepresentation. The sellers were protected by a boilerplate clause in the special conditions of sale.

The contract was on Standard Conditions of Sale, 4th edition.

As usual the parties’ solicitors had agreed special conditions to supplement the standard conditions. Special Condition 8 was a non-reliance clause which provided that ‘the buyer hereby admits that he has inspected the property and he enters into this contract solely as a result of such inspection and upon the basis of the terms of this contract, and that in making this contract no statement made by the seller or his agent has induced him to enter except written statements, if any, made by the seller’s conveyancers in replies to enquiries raised by the buyer’s conveyancers or in correspondence between the parties’ conveyancers’.

The facts were that the sellers were disposing of a barn within the green belt with planning permission for residential use. The planning consent was limited to the current footprint of the barn, but at three separate meetings the buyers were shown plans by the sellers which included an extension to the barn. These plans were an earlier version, and the planning permission actually granted did not include the extension. The buyers’ solicitors were instructed that the planning permission had been dealt with by the principals direct.

In terms of due diligence:

• The pre-contract enquiries did not cover planning permission;
• The planning permission itself did not make express reference to any plans;
• The local planning authority’s files had the earlier version of the plans which still showed the extension; and
• The buyer’s planning consultant noted that the minutes of the planning committee report did not refer to the extension.

The buyer’s planning consultant did not know what the buyer’s solicitors were doing, or instructed to do. Nor did the lawyers know what the planning consultant was doing. The judgment handed down by the Court of Appeal states: ‘it is not clear what knowledge of the local planning policies the planning consultant had’.

At first instance it was held that the seller knew that the planning permission did not authorise the extension and that the buyers wanted to build the extension. This misrepresentation induced the buyers to enter into the contract. A fortnight after completion the buyers discovered that the extension was contrary to local planning policies and could not be built. Did the non-reliance clause defeat the buyer’s claim for misrepresentation? And if it did, could the sellers rely on it?

Section 3 of the Misrepresentation Act 1967 means that a non-reliance clause is ineffective, unless it satisfies the test of reasonableness set out in schedule 2 of the Unfair Contract Terms Act 1977. That schedule has a list of some circumstances which are reasonable and the cases on the issue give us others. In summary, a clause of this nature will be upheld if it is a fair and reasonable clause to be contained in that particular contract. There are good general reasons for a non-reliance clause, such as certainty, and avoiding trials on contested issues of fact. However, the general reasons alone will not be enough to uphold a non-reliance clause. One must always consider the specifics of each case.

The Court of Appeal considered a number of issues when reaching their judgment. It was relevant that both parties were legally advised, and that the buyer had engaged an architect and planning consultants. The contract was for the sale of land, which brings attendant formalities. The parties had equal and corresponding negotiating positions. The clause was in common use and recommended by Eastbourne Law Society. The wording of the clause allowed the buyer to rely on correspondence as well as replies to enquires.

This meant that any issue of particular importance to the buyer could easily be elevated to the status of a representation covered by the clause. Lady Justice Arden also felt that it was relevant that it was the buyer who was putting pressure on the sellers to exchange, not vice versa. The buyers took a deliberate decision to exchange knowing that the information they had on the planning permission was incomplete. The buyers had no remedy against the sellers for misrepresentation.

The non-reliance clause itself will be of interest to lawyers. Note that it refers both to pre-contract enquiries and also to correspondence. The wording goes beyond the phrase considered in FoodCo UK LLP and others v Henry Boot Developments Ltd [2010] EWHC 358 Ch, as well as commercially available precedents such as those from the Practical Law Company. How often are additional enquiries picked up in email correspondence rather than in formal enquiries? The Eastbourne Law Society wording operates to protect buyers in these circumstances. But before copying the clause slavishly, lawyers should remember that a term which excludes or restricts liability for fraudulent misrepresentation is wholly ineffective as a matter of public policy.

Lady Arden’s comment about the pressure for exchange is interesting as the commercial property market becomes highly pressured in some parts of the country. In this case, the sellers had tried to sell the property for about eight months before exchange and reduced the price by £150,000. Would the parties have ‘equal and corresponding’ negotiating positions in circumstances where the property had gone to sealed bids, with 10 days to exchange?

The case also highlights the need for some sufficiently knowledgeable person to have oversight of all the advisers involved in the due diligence exercise. Often solicitors have this role. However, lawyers tend to be the most expensive professionals on any team, so either lawyers or clients sometimes reduce the scope of legal work to reduce the legal bill. This is not in itself wrong, as long as nothing falls between the various scopes of work.

Boilerplate special conditions are often used to reinforce the maxim of ‘buyer beware’. Those clauses will only succeed in that aim if they are reasonable in that particular contract. This case highlights that, when incorporating the usual boilerplates, the seller’s solicitor should also beware.

Suzanne Gill is a partner at Wedlake Bell