‘Buyer beware’ and the duty to disclose defects in title

11th July 2022

A recent case considered: how does the principle of caveat emptor (‘buyer beware’) sit with a seller’s duty to disclose defects in title?  Walker Morris’ Commercial Dispute Resolution and Real Estate specialist Charlotte Spowage explain and offer practical advice for property sellers/purchasers.

Why is this case of interest?

The recent case of SPS Groundworks & Building Ltd v Mahil [1] provides helpful clarification of the relationship between the long established principle of caveat emptor (let the buyer beware) and a seller’s duty to disclose defects in title. The case also discusses what a court will take into account when considering the important issue of whether a pre-contract statement can amount to a misrepresentation, and can therefore give rise to liability and to potentially significant post-contract consequences.

Questions surrounding the information which should be disclosed to a potential purchaser pre-contract, or the extent to which any such information can constitute legally binding representations, arise often in the context of land and property deals. The buyer-friendly decision in this case left the seller reeling. It represents a cautionary tale which confirms that a seller cannot rely on caveat emptor to save it where it has not specifically brought defects in title to a [potential] purchaser’s attention.

What is the commercial context?

During the vast majority of commercial negotiations, and certainly in the case of most land and property transactions, parties hold various discussions, and provide and exchange a variety information, at the marketing and pre-contract stage. It’s an essential part of progressing a deal. The fundamental principle of caveat emptor generally protects a seller against the need to disclose absolutely all information. ‘Buyer beware’ protects a seller by placing the onus on a buyer to determine relevant information about a property before purchasing it.

However, a key point that is often overlooked or misunderstood is that there is a crucial, conflicting principle: a seller’s duty to disclose known defects in title to the buyer.

Balancing these contrasting principles has caused difficulty over the years.  SPS Groundworks v Mahil highlights some of the factors that a court will take into account when considering whether steps taken by a seller to disclose defects in title are reasonable/sufficient, and so whether the seller attracts, or can escape, liability.

To what extent should defects in title be brought to the attention of a potential purchaser?

The following key points arise:

• The defect should be specifically brought to the attention of the buyer, rather than merely referring to it in a set of legal documents. ‘Clever’ drafting will not meet the threshold for complying with the duty to disclose defects in title.

• The seller’s duty to disclose defects in title cannot be displaced by contractual conditions deeming the buyer to have knowledge of defects, nor by pre-contractual references to the need to read separate documents/legal pack.

• With regard to auctions, the defect should be mentioned by the auctioneers before proceeding and written reference to the defect should be included clearly in the property documents, rather than simply referred to in a legal pack.

• All representations, including any verbal representations and including in relation to the scope for investment of land, should be in line with the restrictions/defects affecting the property.

A related point is, of course, the relevance of the seller’s knowledge. The duty is to disclose known defects. So, is it enough to simply ‘plead ignorance’ in relation to potential defects, and thereby seek to avoid liability for failing to disclose them?

In fact, sellers should be aware that where any representation is qualified by words such as “not so far as the seller is aware”, this actually generally amounts to an implied representation that the seller [2] has no actual knowledge of a relevant matter and that they have made all the investigations that a prudent seller and seller’s solicitor would be expected to have made to find out.  If that’s not true, there may be an actionable misrepresentation.

What practical advice arises?

Parties must make sure that statements made are accurate and not misleading. Sellers should bear in mind the following practical advice:

• Take care to ensure that all forms of pre-contract communications, including auction catalogues and descriptions of the property, are accurate.

• The duty is ongoing, so ensure that any information or documents discussing the features of the property are kept accurate and up-to-date on an ongoing basis.

• Prior to conclusion of any contract, check whether any circumstances or key terms have changed since communications and negotiations began. If they have, make sure that all parties are aware and remain happy to proceed before you complete.

• Note that, while silence per se may not amount to a misrepresentation, knowingly allowing someone to enter a contract in reliance on an obvious error or misunderstanding without correcting them, might.

• Educate sales staff, negotiators and anyone involved in sales by auction as to the dangers of misrepresentation.

• For further information in relation to the law of misrepresentation, please see this previous briefing [3].

What happened in the particular case?

The case concerned the sale of land by auction. The defendant (a potential purchaser) was the highest bidder. It paid a deposit and agreed a completion date to send the remaining funds. However, the defendant argued the claimant (the seller) had misrepresented a defect in title by not bringing it to their attention. The claimant then sold the land at a separate auction for a lower price. It claimed the difference between the original price and the subsequent sale price.

The claimant knew that a large part of the land was important open space and that a previous planning application to develop had been refused. In the auction catalogue, the claimant described the land as having ‘excellent scope for development’ and as a ‘superb investment opportunity’. On the face of it, it would seem that the claimant had misrepresented. However the claimant had included the phrase ‘subject to planning permission’, and had provided a legal pack which included documents showing the correct position.

The claimant argued that it had provided all necessary documents to show the defect in title, which would allow the defendant (an experienced property developer) to make an informed decision. The defendant countered that reference to the defect in title in the legal pack was not enough to specifically bring the defect to a buyer’s attention.  It argued that the claimant had not discharged its duty to disclose.

The High Court decided that including the defect in the legal pack, and even making reference to the need to read the legal pack, was not enough to comply with the seller’s duty. The seller should have taken further steps to bring the defect to the attention of a potential buyer by including details of the defect in the auction brochure and by requesting the auctioneer to verbally mention the defect. (These steps had taken place at the second auction, but had not happened at the auction involving the defendant.)

The court also stated that no reasonable person could describe the property as having excellent scope for development/investment. Although legal arguments alleging misrepresentation failed due to a lack of reliance, the judge stated that the description of ‘excellent scope for development’ was false. Had the defendant relied on the statement, the description would have constituted misrepresentation.

The decision highlights that the threshold to comply with the duty to disclose defects in title is high. A seller cannot rely on ‘buyer beware’ to save itself where it has not met this duty. The obligation to investigate a property remains with the buyer. However a seller must take additional steps to ensure potential buyers have been made aware of defects in title.

The decision also reiterates that any information or documents discussing the features of a property must be accurate.

How we can help

Charlotte Spowage advises on all forms of development projects and disputes – from the transactional side, from a pre-emptive risk management perspective, and when it comes to resolving issues after they have arisen.

If you have any queries or concerns in relation to pre-contractual disclosures or negotiations; if you would like tailored advice or assistance in relation to any development related project or dispute; or if you are interested in staff training on misrepresentation or on any related development issues, please do not hesitate to contact Charlotte.

[1] [2022] EWHC 371 (QB)

[2] and the seller’s solicitors if they have been involved in the preparation of the representations, for example in the case of replies to pre-contract enquiries

[3] Previous article