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Let the seller beware: inaccurate replies to enquiries held to be a fraudulent misrepresentation

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28/07/2016


In the recent case of Greenridge Luton One Ltd and another v Kempton Investments Ltd the High Court upheld a claim for fraudulent misrepresentation and decided that a buyer was entitled to the return of their deposit and an award of damages as a result of their reliance on an untrue representation made in replies to enquiries.

Introduction

Preparing replies to enquiries and reviewing the responses to those enquiries may sometimes appear to be a waste of time; a mere formality of a property transaction to be dealt with as quickly as possible with minimal effort. A recent decision of the High Court however highlights the importance of giving careful consideration to replies to enquiries.  In the case of Greenridge Luton One Ltd and another v Kempton Investments Ltd [1] the court considered a claim for fraudulent misrepresentation and held that a buyer was entitled to the return of their deposit because of an untrue representation made in replies to enquiries.

Let the buyer beware: replies to enquiries and misrepresentations

The starting point is that under common law, there is no legal requirement for a seller to provide replies to pre-contract enquiries. Under the principle of caveat emptor, the onus is on the buyer to obtain as much information regarding a property as possible prior to entering into a contract for its purchase.   A seller is only under a duty to disclose ‘latent defects’ being defects in title (not physical defects) which a buyer could not have discovered having made a reasonable inspection of the property (e.g. easements).

It is however standard practice for sellers to assist the buyer’s due diligence by providing replies to standard enquiries (Commercial Property Standard Enquiries (CPSE) for commercial property and The Law Society Property Information Form for residential property).  It should be noted that the interpretation provisions of CPSE.1 (the general pre-contract enquiries for all commercial property transactions) the seller acknowledges that it must supply the buyer with all details relevant to the replies whether or not specifically requested and confirms that pending exchange of contracts it will notify the buyer on it becoming aware of anything that may cause any reply given previously to be incorrect.

A statement of fact (as opposed to of opinion or law) will constitute a representation and, subject to any exclusion in the contract for sale, a buyer could have an action against the seller for a misrepresentation if the buyer relies on the representation and enters into the contract, the representation then turns out to be false at the time the contract was entered into and the buyer suffers loss as a result.

For a misrepresentation to be fraudulent a false representation must be made knowingly or without belief in its truth or recklessly as to its truth [2].  Fraudulent misrepresentation is founded on the tort of deceit which contains four characteristics [3]:

  • The defendant makes a false representation to the claimant;
  • The defendant knows that the representation is false or is reckless as to whether it is true or false;
  • The defendant intends that the claimant should act in reliance on the representation; and
  • The claimant does act in reliance of the representation and suffers loss as a result.

Where a fraudulent misrepresentation has occurred the buyer is entitled to rescind the contract, or claim damages in the tort of deceit or both). The damages will seek to put the claimant into the position he was in before the misrepresentation was made.  Unlike the tort of negligence where damages are restricted to reasonably foreseeable loss [4], the test of foreseeability does not apply in the context of the tort of deceit and the only requirements is that the damages flow from the fraud [5].

Facts

The seller owned three office buildings which were, in the main, let to one tenant. The management of the property was undertaken by an agent employed by the seller and the managing agent in turn referred certain legal and professional matters to its solicitor.

In January 2013 the tenant appointed a consultant to look into concerns that it had regarding the service charge levied at the property. The tenant withheld payment of a proportion of the service charge demands made in June and September 2013.  Between June and November 2013 the tenant and the managing agent’s solicitor corresponded regarding the service charge and in this correspondence the tenant stated that its concerns had given rise to a dispute on at least 5 occasions and subsequently the tenant instructed solicitors to act for it in relation to this dispute.

In March 2013, in anticipation of a sale of the property, draft replies to CPSE were prepared and later in the year the terms of a sale were agreed with a buyer.

The replies to CPSE which were issued to the buyer stated that there no historic or outstanding disputes and nor were any likely. They further confirmed that there were no service charge arrears.  The only disclosure regarding the issues relating to the service charge was that the tenant had raised queries on historical issues and had recently raised some further enquiries.  The buyer’s solicitor asked for additional documentation, including accounts and confirmation regarding collection of the service charge.  This information was not provided.

In September 2013 contracts were exchanged for a sale of the property at £16.25 million.  A deposit of £812,500 was paid. The buyer sought funding for their purchase and as part of this a valuation report was prepared which revealed the existence of the substantial service charge arrears.  The total sum at that time in dispute was approximately £3.6 million.

The buyer’s solicitor observed that there appeared to have been a material misrepresentation by way of non-disclosure. The seller’s solicitor subsequently served a notice to complete and although the buyer was keen to continue with the purchase, subject to being supplied with further information regarding the service charge, their solicitor claimed to rescind the contract in an attempt, they said, to try and procure the additional information.  The seller’s solicitor alleged that the contract had repudiated the contract with the result that the deposit was forfeit.

The decision

The High Court held that untrue representations had indeed been made to the buyer in the negotiations leading up to the contract and that the buyer had been induced to enter into the contract on the basis of such misrepresentations. The misrepresentation that there were no service charge arrears was, in the court’s opinion attributable to fraud or recklessness.

The replies to CPSE given stated that there were no arrears of service charge and although this response might have been correct when the replies were first prepared they were not accurate either when the replies were provided to the seller, or at the date of the contract. This amounted to a misrepresentation.

The replies also misled the buyer in their comments on disputes and complaints as they confirmed that whilst the tenant had raised enquiries regarding the service charge there were no disputes or complaints. The tenant had however repeatedly used the word ‘dispute’ in their correspondence and the seller’s solicitor had warned that the seller would take appropriate measures to protect their legal rights if any money was withheld.  However, the Seller was not found to have been fraudulent or reckless in relation to whether or not there was a ‘dispute’.  The managing agent sought legal advice on this point, the conclusion of which was that there was no ‘dispute’. Having relied on this advice, however erroneous it may have been, the Court was comfortable in finding that the seller had an honest belief that there was no dispute with the tenant.

The contract itself gave a further misrepresentation as it confirmed that the seller had made full disclosure of all matters which would have been disclosed by searches and enquiries which a prudent buyer would have made. This included the matters that should have been disclosed in the replies to CPSE.

The evidence adduced by the buyer showed that they had been induced to enter into the contract by the misrepresentations. For example, it showed that its solicitor had reviewed the replies to CPSE and requested materials relating to them, including service charge information.  It was also evident that the contract was drafted on the basis that there were no arrears of service charge.

The likelihood was that in the period leading up to exchange of contracts the seller, their agent and solicitor were alive to the fact that the replies to CPSE stated that there were no arrears of service charge when in fact, there were. They may have believed that the tenant had no grounds for complaint but it remained the fact that they lacked an honest belief in the representation that they had made that there were no arrears. That representation was made, at the very least, recklessly.  As a result, the buyer was entitled to have its deposit returned as the untrue representation resulted from fraud or recklessness.  The buyer was further entitled to an award of damages in the amount of £395,948.

 WM Comment

Whilst this case largely turned on its facts, it provides a very useful reminder of how the courts will deal with a fraudulent misrepresentation. The damages the court awarded were for the costs that the buyer incurred in the purchase which had been wasted as a consequence of the misrepresentation (i.e. professional fees and other costs relating to the structuring of the purchase) rather than punitive damages.

The case also highlights the importance of providing accurate replies to enquiries. Full disclosure must be given of all matters, regardless of the seller’s view of the validity of any dispute or complaint. If a seller seeks to rely on inaccurate information, they will need to show good reason for having an honest belief in the information provided (acting on the advice of a solicitor in this case). To prevent arguments arising as to the honesty of their belief, a seller should take great care to provide accurate information. Representations made in pre-contract enquiries are treated as ‘continuing’ representations in that they will be considered to be represented from the moment they are given to the moment of exchange of contracts.  As such it is important that if prior to exchange it is found that in an incorrect reply was given or a reply that was true has subsequently untrue as a result of a change in circumstances, steps should be taken as soon as possible to alert the buyer to that fact.

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[1] Greenridge Luton One Limited and another v Kempton Investments Limited [2016] EWHC 91 (Ch).
[2] Derry v Peek [1889] App Case 337.
[3] Eco 3 Capital Limited and others v Ludsin Overseas Limited [2013] EWCA Civ 413.
[4] The Wagon Mound [1961] AC 388.
[5] Doyle v Olby (Ironmongers) Limited [1969] 2 QB 158