Liability for Pre-contractual Statements

A recent case involving the sale of a residential property has highlighted the importance of pre-contractual statements in a transaction.

The case is centred around a property called Lake Barn situated just outside of Buckland in Oxfordshire. The property was on the market in 2017 and prospective buyers, Mr & Mrs Powell, entered into a conveyancing process to purchase it for £1.085 million. The property, which is a modern barn conversion, is situated in the countryside with farmland surrounding it and was advertised with equestrian facilities.

As part of the residential conveyancing process, sellers are asked to complete a pre-contract questionnaire called a property information form (TA6). One of the sections of the TA6 relates to planning and the seller’s awareness of any notices that relate to surrounding property which might affect the value of property, or the buyer’s enjoyment of it once it has been sold on.

In this case, the sellers became aware of a large development to the rear of the property for a 61-bedroom motel called ‘Mollies Diner’. Mollies Diner, as the name suggests, is based on the idea of an American diner with a large neon signage board at the front. As you can imagine, this is unlikely to be what the buyers envisaged when they put an offer in for the countryside property.

The sellers made no mention of their knowledge of this in their TA6 replies and now claim that, at the time of filling in the form, the diner was only visible from the annexed barn, not the actual main house and so they did not feel the need to include it in their replies.

The issue for the buyer is that they did not become aware of the planning application until contracts had been exchanged, making the contract between the parties legally binding. The buyers pulled out of the contract and so lost their deposit of £108,000. They had also spent a significant amount of money on a horse and furniture, as such their total claim against the sellers equates to around £300,000.

This case turns around whether the sellers have made a misrepresentation in their replies and, in doing so, they have terminated the contract, not the buyers. In sale/purchase transactions there is some form of pre-contractual due diligence, because of the common law principle of ‘caveat emptor’ or ‘let the buyer beware’. The seller is under no obligation to actually provide a response, however, if there is no response once a question has been asked, unfavourable inferences can be implied.

If a reply is given, there is an ongoing obligation on the seller to change that response should it become incorrect, right up to the date of exchange of contracts. Further, where replies are given in property transactions in the form of a TA6, there is an obligation to immediately inform the buyer of any change of position.

Of course, the issue in the Lake Barn case is now proof. Unless some definitive piece of evidence can show the sellers knew of the planning application pre-exchange of contracts, it is likely to boil down to ‘your word vs mine’.

This case really highlights two points. One is that buyers in any type of transaction, whether it relates to a property or a business, should make in depth investigations into what they are buying. This means being involved in the process, asking questions, doing your own research and importantly actually visiting and seeing what you are buying. Secondly, it also demonstrates quite plainly why we go through a due diligence process and how it becomes ineffective when sellers try to withhold information. This legal challenge in the courts will likely cost thousands of pounds; time and money the sellers might have saved if they had disclosed at the point of becoming aware.

The case continues and it will be interesting to see the court’ decision and whether it believes a misrepresentation was made.