Excluding environmental liability in property transactions: let the buyer beware

Asbestos corrugated roofing sheet being removed and sealed Print publication

06/08/2018

The Court of Appeal in First Tower Trustees Ltd. and another v CDS (Superstores International) Ltd [2018] EWCA Civ 1396 has held that a landlord was not permitted to rely on a clause restricting its liability for representations, where it had misrepresented to a tenant in response to pre-contract enquiries that it had no knowledge of asbestos contamination at a property.

In unanimously finding that non-reliance clauses are not immune from scrutiny under section 3 of the Misrepresentation Act 1976, the Court of Appeal has clarified this legal test and raised the prospect of clauses of this nature now needing to see off arguments as to their reasonableness on a case by case basis. The prominence of pre-contract enquiries in the conveyancing field as well as the wider use of non-reliance clauses in other areas serves to increase the potential impact of this decision.

The decision

The landlord had leased 4 industrial units to the tenant. Before entering the leases, as part of the standard pre-contract enquiries made by the tenant, the landlord stated that it was unaware of any actual or potential environmental problems relating to the property and that the tenant should satisfy itself as to the environmental condition of the property.

Unknown to the tenant, and prior to completion of the leases, the landlord became aware that the property was so badly contaminated with asbestos that it was dangerous to enter. In reality, extensive remedial works were required in order to deal with the problem.

The lease contained a clause stating that the tenant had not entered into the lease in reliance on any representation made by the landlord. The principle of contractual estoppel provides that parties are able to bind themselves to a particular state of affairs, even if they know that the state of affairs are untrue, however in this instance the Court of Appeal held that it was necessary to look further than this common law position, and consider if there is any ‘statute to the contrary’ which would override this common law presumption. The non-reliance provision therefore had to be interpreted with regard to section 3 of the Misrepresentation Act 1967 (MA 1967). The Court of Appeal held that the response to the pre-contract enquiry was a misrepresentation, as the landlord became aware of the asbestos problems prior to completion of the lease.

The non-reliance clause of the lease was therefore an attempt to exclude liability for misrepresentation. The Court held that but for the existence of the non-reliance clause in the lease the landlord would have been liable for misrepresentation as the tenant had entered into the lease on the basis of the landlord’s misrepresentation. The clause was therefore a contractual term which excluded liability for misrepresentation and would be void under section 3(1) MA 1967 unless it is deemed to be reasonable under section 11(1) Unfair Contract Terms Act 1979.

The Court held that the non-reliance clause was not reasonable. In doing so, Lewison LJ stressed the importance of pre-contract enquiries in the field of conveyancing and stated that if the non-reliance clause was deemed to be effective in this instance then the purpose of the enquiries became essentially worthless.

What this means

The overriding practical implication of this decision in a property context for sellers and landlords is to ensure that responses to enquiries are accurate and updated prior to completion if any facts change. It seems apparent that a standard pre-completion task should be to review any responses to enquiries that were given earlier in the transaction process. The decision of the Court of Appeal preserves the strength and importance of the pre contract enquiries as part of the conveyancing process. It is worth stressing that the Court held that the response by the landlord to the enquiry was a misrepresentation despite the fact that the landlord stated that the tenant should ‘satisfy itself’ as to the environmental condition of the property. This lends weight to the argument that parties giving responses to enquiries may be held to a high standard and may not be able to hide behind the traditional, if arguably evasive, ‘tenant to satisfy itself’ response.

This decision also reinforces the need to consider whether non-reliance clauses, which are almost boilerplate in many contexts, are appropriate when drafting a lease a sale contract or potentially other forms of contract. Clients and their legal representatives should be aware that this decision reduces the likelihood of escaping liability by virtue of a non-reliance clause, and highlights the importance of properly engaging with the disclosure elements of the conveyancing process. The importance of effective and thorough due diligence throughout the life of a deal has been put under the spotlight by the Court’s decision.

In an environmental context, the decision has potentially wide reaching consequences. Remediation costs for environmental issues, such as asbestos, are significant. Parties can no longer assume that, irrespective of their conduct, they will be able to pass these costs on to others.

The decision may also have wider ramifications outside of the landlord and tenant or environmental contexts. A range of commercial contracts that contain clauses which limit liability based on reliance on pre-contractual representations may need to be reviewed. The Court’s decision appears to emphasise the importance of a wider assessment of overall fairness, even in contractual agreements between commercial entities.

Compliance with due diligence will not be regarded as sufficient if it only captures a ‘snapshot’ in time; parties must be vigilant to disclose any material changes in information which they become aware of. If they fail to do so, the Court of Appeal’s decision is a strong indication that landlords or vendors could be deprived of their ability to rely on contractual terms that seek to limit their liability.

Contacts