Real estate building blocks - Misrepresentation and pre-contract enquiries

Real estate building blocks - Misrepresentation and pre-contract enquiries

Real Estate Building Blocks - Authorised Guarantee Agreement

The prospective buyer of a property should try to find out as much information as possible about the property to enable it to make an informed decision as to whether or not to proceed with the acquisition. An integral part of this fact-finding exercise is raising pre-contract enquiries of the seller and considering the replies received.

In this article we discuss the process of raising and responding to pre-contract enquiries in a commercial property transaction and the potential pitfalls for a seller if they are not honest and accurate in their replies. We refer to seller and buyer throughout, but the matters discussed below are equally applicable to the parties to other property transactions, such as landlord and tenant or lender and borrower.

What are pre-contract enquiries?

Pre-contract enquiries are questions asked of the seller to elicit information which will assist the buyer in their due diligence of the property. The principal purpose of this exercise is to provide the buyer with enough information about the property to come to an informed decision about whether or not to purchase the property. It may be that issues uncovered can be adequately dealt with in the contract, which will enable the parties to proceed without having to abort the deal. Topics typically covered include rights benefitting and burdening the property, the extent and location of boundaries, physical characteristics of the property, the planning position, construction works, statutory requirements, environmental issues, disputes and tax. 

Pre-contract enquiries are usually raised in two stages. Initially, the buyer will request replies to the relevant forms of the Commercial Property Standard Enquiries (CPSEs). The CPSEs are a suite of standard enquiries tailored for a range of commercial property transactions. The second stage occurs after the initial replies to CPSEs have been received and it involves the raising of additional enquiries to fill in any gaps in the CPSE replies. These additional enquiries will also likely cover any issues or concerns identified following the buyer’s review of the title documentation, search results, building survey and inspection. 

Is the seller obliged to provide replies?

No. A fundamental principle underpinning all property transactions is "caveat emptor", or "let the buyer beware". In essence this means it is up to the buyer to satisfy itself as to the suitability of the property for its needs before committing to the purchase. 

Notwithstanding the above, a seller is under a duty to disclose any "latent defects" in the title to the property of which it is aware. In other words, the seller must tell the buyer about any adverse rights or interests it is aware of which affect the property and are not apparent on inspection, for example a right of way or of drainage over the property. Subject to this one exception, the seller’s role in the process can be a passive one as they are under no formal obligation to respond to enquiries. However, it is likely that any refusal to provide replies will be interpreted by the buyer as a sign that the seller is hiding something or that something is wrong with the property, not least because it is well established practice for sellers to provide replies to enquiries in all property transactions. 

What are the seller’s duties when responding to enquiries?

If the seller does provide replies to enquiries, it must answer truthfully and accurately to avoid any risk of being held liable for misrepresentation or fraud. The seller is also under an obligation to update their replies if they become out of date. So, if a reply previously given subsequently becomes inaccurate, either because the facts have changed or something new has come to the seller’s attention, the seller must correct it before the contract is entered into. This duty to update arises because replies to enquiries are not fixed on the date they are given, but instead they are treated as continuing representations given up to the point the contract is entered into.

Whilst it is very common for solicitors to draft replies on behalf of their client, responsibility for the replies ultimately lies with the seller. However, lawyers acting for sellers should be aware that they could be held liable for negligence if a successful misrepresentation claim is made against the seller because of their actions. 

Should the replies be qualified in any way?

In most cases, yes, although straightforward answers such as "yes" or "no" are fine if the seller is certain about them or if they are matters of fact.

There may be good and justifiable reasons why the seller does not have a full picture of the property. For example, the seller may have owned the property for a long time and relevant documentation may have been lost or destroyed, or the seller may be a corporate entity and the persons with the requisite knowledge of the property have left or retired.

If these circumstances apply, it would be sensible for a seller to qualify its replies to reflect the seller’s actual knowledge of the property. A common qualification is to use wording such as "not so far as the seller is aware", or similar. However, care should be taken when using such statements as they have been interpreted by the courts as including an implied warranty that the seller has taken reasonable steps to investigate the matter. If such steps have not been taken, and the reply given is inaccurate, the qualifying wording is unlikely to be effective in excluding the seller's liability for the inaccurate reply.

What is misrepresentation?

In the context of a property transaction, a misrepresentation occurs when a seller makes an untrue statement of fact or law which the buyer then relies on in deciding to go ahead with the transaction and as a result, the buyer suffers loss. A claim for misrepresentation is the usual remedy where a buyer suffers loss because of an inaccurate reply to enquiry. 

The reason for the inaccuracy of the reply is immaterial. The untrue statement does not need to be a deliberate lie; it could be a statement made by the seller carelessly or without a reasonable basis for believing in its truth. The untrue statement must both be believed by the buyer and relied upon by the buyer to a material extent when deciding to enter into the contract or there will be no misrepresentation. The question to ask is whether the buyer would have bought the property had the untrue statement not been made. The burden is on the seller to prove that the buyer did not rely on the untrue statement or that if they did, it was not reasonable for them to do so.

Misrepresentation can be either fraudulent, negligent or innocent, depending on the mindset and knowledge of the seller at the date of the contract (not the date that the relevant reply to enquiry was made). Each of these categories of misrepresentation may result in a different remedy for the buyer. A seller who has made a misrepresentation may find themselves liable for damages and the innocent party may be able to rescind (unwind) the contract, which has the effect of putting the parties back in the position they would have been in if the contract had not been entered into. 

Negligent misstatement is an entirely separate category of claim which also may be available to the recipient of an incorrect reply to enquiry. This occurs where the seller makes an untrue statement to the buyer where there exists a duty of care between the parties. Unlike with misrepresentation, reliance on the statement by the buyer is not required.

Can liability for misrepresentation be excluded?

This is often attempted by sellers. There may be a statement accompanying the replies, or a term in the contract, purporting to exclude the seller’s liability for misrepresentation. There also may be a "non-reliance statement", which attempts to achieve the same thing by different means, by taking the form of an acknowledgement by the buyer that it is not relying on any replies to enquiries (reliance being an essential component of a misrepresentation claim) in deciding whether to enter into the contract.

It is unlikely that any such wording or contract clause will be effective to protect the seller. Most property contracts expressly reserve a buyer’s ability to rely on written replies to enquiries and therefore any purported exclusion clause would not catch any such replies. If there is wording which does seek to exclude liability for replies to enquiries, such wording must satisfy the so-called "reasonableness test" to be effective. This test essentially requires that it must be fair and reasonable in all the circumstances for liability to be excluded. It is unlikely that, except for in the most unusual circumstances, it would be reasonable to exclude liability for replies to pre-contract enquiries, given that that such a clause would effectively render the whole pre-contract enquiries exercise – longstanding and almost ubiquitous in property transactions – redundant.

The above is intended as an overview of the process of raising and replies to enquiries in commercial property transactions and is not a comprehensive analysis of the relevant law. If you have any questions on the above or require advice in this area, please contact our real estate team.

Contact our experts for further advice

Search our site