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Do you get what you pay for? Reasonable non-reliance clauses defeat misrepresentation claims

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24/01/2014

One would think that a property buyer should be entitled to a remedy where a seller makes untrue misleading representations about a property, inducing a sale that would not have happened but for those representations. And yet it is also reasonable for the parties to achieve certainty by agreeing that the terms of the contract alone constitute the extent of the agreement between them.

The recent Court of Appeal case of Lloyd v Browning [1] confirms that a seller’s liability for misrepresentation can be excluded by the terms of the contract provided that the exclusion clause is fair and reasonable in accordance with the Unfair Contract Terms Act 1977 (UCTA).

The facts

To sell their farm, the defendant farmers sought to make the sale more attractive by obtaining planning permission to extend an L-shaped barn into a U-shaped building which would be split into three dwellings. Planning permission for the extension was denied, but planning permission was later granted for amended plans that did not include the extension.

Looking to buy separate yet adjacent properties, the claimants were interested in buying the barn and build the U-shaped extension. During various meetings at the property, the defendants produced the unamended plans and the claimants were led to believe that the planning permission that had been granted covered the U-shaped extension.

In the pre-contract enquiries the claimants’ solicitors made no enquiry at all about the planning permission plans nor did they send any letter to clarify the point. Unfortunately, due to “some error” by the local council, the amended plans were not put on the file, which was flagged by the claimants’ planning consultant.

In short, the claimants bought a property that they would not have purchased if they had known that the U-shaped plans had been rejected. The court accepted that the difference between the value of the property without the extension, as opposed to with it, was £55,000.

The contract

The contract in this case contained the following special condition:

“The buyer 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.”

This ‘non-reliance clause’ purported to limit the parties to the terms of the contract and written correspondence and excluded reliance on any oral representations made during the sale negotiations. Such non-reliance clauses are ineffective to the extent that they do not satisfy the reasonableness test of section 11 of UCTA [2].

Section 11 of UCTA requires that the term, “shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”

At first instance, the judge found that there had been a clear provable misrepresentation causing a measurable loss, but the non-reliance clause was effective to exclude the defendants’ liability for misrepresentation.

The Court of Appeal dismissed the claimants’ appeal and held that the defendants had shown that the special condition was a fair and reasonable exclusion clause, which operated to exclude the defendants’ liability for their misrepresentation. Various factors indicated that the exclusion clause was reasonable:

  • the parties were both represented by solicitors with equal bargaining power
  • the clause had been added by the agreement of both parties, rather than it being a ‘small print’ clause.
  • the clause was clear and unambiguous and in common use by the regional Law Society
  • it was designed to achieve certainty; avoiding the need to dissect pre-contract oral discussions
  • the clause itself gave the parties permission to rely on written statements made by the seller in response to the buyer’s written enquiries (or in correspondence). It included a means to give legal effect to any pre-contract representation.

The fact that the defendants knew the claimants would not purchase the property if they had known about the true extent of the planning permission had no bearing on the reasonableness of the clause. It had been the claimants that had pushed for the exchange of contracts despite knowing that the planning information they had was incomplete. The importance of the barn extension should have led the claimants to clarify the issue in writing as dictated by the clause.

The aim of non-reliance clauses, to reduce any important representation to writing and prevent disputes about pre-contract oral discussion, was endorsed by the Court of Appeal. Where one is included in a contract, the parties should reduce any oral statements at least in writing or, better, within the terms of the contract itself. It is important to remember that no contractual clause can exclude fraudulent misrepresentation. In this case, the buyers were given the impression that the property came with the U-shaped barn planning permission. Had they been deliberately misled, the exclusion clause would have failed.

The case also highlights the need for thorough due diligence. The buyers should have clarified the planning permission ambiguities prior to exchange. Just two weeks later the council confirmed that the extension was not permitted. In their eagerness to exchange, the buyers ended up owning a property which was worth much less than what they paid for.

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[1] Lloyd v Browning [2013] EWCA Civ 1637
[2] Section 3 of the Misrepresentations Act 1967

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