The recent High Court decision of Greenridge Luton One Ltd & Another v Kempton Investments Ltd highlights the danger a seller may face if they fail to provide a buyer with up-to-date replies to enquiries during a transaction.

Background

Kempton Investments Ltd (the Seller) owned three office buildings collectively referred to as Wigmore Place (the Property). 79% of the Property was leased TUI Northern Europe Limited (the Tenant).

In March 2013, in anticipation of selling the Property, the Seller prepared draft Commercial Property Standard Enquiries (CPSE) replies. Later in the year, the Seller entered into negotiations with Greenridge Luton One Ltd (the Buyer) and provided them with CPSE replies in mid-August 2013.

The replies stated that there were no previous service charge disputes and that there were no service charge arrears. Despite the Buyer asking for current year management accounts and the collection of service charge for June 2013, no further information was provided.

Contracts were exchanged in September 2013 for the sale of the Property at £16.25million, and a £812,500 deposit was paid.

As you would expect, the contract provided for the sale to be free from any rights or claims which adversely affect the Buyer's use of, or the ability to transfer, the Property. The Seller warranted that full disclosure had been given of any such burdens. The Buyer would also be entitled to rescind the contract where an error or omission resulted from the Seller's fraud or recklessness.

The Buyer sought funding for the purchase. In preparing the valuation report, it transpired that there was a 'substantial service charge dispute' between the Seller and the Tenant, with the Tenant withholding payment.  The dispute involved sums in excess of £4million.

Unsurprisingly, the Buyer refused to complete the purchase unless the Seller clarified the service charge position. The Seller failed to clarify, and, following service of the Seller's notice to complete, the Buyer served notice to rescind the contract.

The Buyer then brought a High Court claim in order to claw back the deposit paid, and argued it was entitled to damages for the costs incurred in relation to its prospective purchase of the Property.

The Court's decision

The High Court held that the Buyer was entitled to have its full deposit returned due to the Seller's reckless/fraudulent untrue representations that there were no service charge arrears or disputes.

Given that the Seller could not have 'honestly' believed that the replies given were accurate, the court held that there had been an element of fraudulent misrepresentation (as opposed to negligent or innocent misrepresentation).

Additionally, the Buyer was entitled to damages in connection with the Seller's fraud totalling £395,948.

Comment

Update replies as necessary

Sellers are reminded to keep replies to enquiries up-to-date. This applies not only to property transactions, but all legal transactions where the buyer relies on the seller's representations.

Where there is an ongoing dispute, draft replies to enquiries should be updated by all those with knowledge of the property on issue, prior to exchange of contracts and on completion.  In addition, any change in circumstances prior to completion must be conveyed to the buyer's solicitors as soon as possible in order to prevent previous truthful replies inadvertently turning into misrepresentations.