Property transactions generally involve some form of pre-contract enquiries and the person providing the replies may assume that they are required to do nothing more than provide an honest answer at the time. The recent case of First Tower Trustees Limited and Intertrust Trustees Limited v CDS (Superstores International) Limited [2017] EWHC B6 (Ch) has, however, highlighted that this is not necessarily the position and made it clear that it may be very difficult for any seller/landlord successfully to exclude liability for its replies by way of an exclusion clause.

Background 

The claimant in this case, First Tower Trustees Limited ("FTTL") proposed to lease warehouse premises to the tenant CDS (Superstores International) Limited ("CDS"). FTTL provided replies to enquiries in February 2015 and stated that it was "not aware of any [environmental] problem, but the buyer must satisfy itself." An agreement for lease completed on 30 April 2015 and CDS entered into occupation shortly thereafter.

CDS subsequently discovered that there were issues with asbestos at the property despite FTTL's representation that it was not aware of any such issues. This resulted in a dispute, with CDS alleging misrepresentation.

Issues

CDS claimed that FTTL had been made aware of the presence of asbestos in the time between the replies to enquiries being given and the lease completing. FTTL had, in mid-April 2015, received reports and correspondence from its contractors which stated that asbestos was present and represented a potential health and safety risk. FTTL did nothing to update its replies to enquiries and CDS argued that this constituted a misrepresentation.

FTTL disputed CDS' claim, and asserted that even if its failure to update the replies was a misrepresentation, it was not liable to CDS due to clause 5.8 of the lease which, on its face, excluded all liability for pre-contract representations:

"The Tenant acknowledges that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord".

This wording was inconsistent with the agreement for lease which contained the following clause:

"The Tenant acknowledges and agrees that it has not entered into this Agreement in reliance on any statement or representation made by or on behalf of the Landlord other than those made in writing by the Landlord's solicitors in response to the Tenant's solicitors' written enquiries…Nothing in this Agreement shall be read or construed as excluding any liability or remedy resulting from fraudulent misrepresentation."

The issues facing the Court were:

  1. Did FTTL's failure to update the replies to enquiries constitute a misrepresentation?
  2. If so, did clause 5.8 of the lease exclude FTTL's liability for the misrepresentation?

Misrepresentation

The Court had little difficulty in establishing that a misrepresentation had occurred, referring to the general legal principle that "a representation may continue after it is made for so long as the representee is likely to rely on it". In this case CDS was relying on the representation until the point of completion, and so when FTTL acquired the knowledge that the initial reply was no longer true, it was obliged to update it. FTTL's failure to update the reply meant that the reply constituted a misrepresentation notwithstanding the fact it was true at the point when it was made.

It should also be noted that the statement that the buyer must satisfy itself was not sufficient to shift any responsibility to CDS; FTTL were still obliged to update the reply.

Exclusion clause

The Court highlighted three issues relating to the validity of the exclusion clause 5.8. These were:

  1. Should the clause be construed so as to include the more usual wording found in the agreement for lease?
  2. If not, is the clause a "basis" clause or an "exclusion" clause?
  3. If it is an exclusion clause, is it reasonable?

Issue 1 : There was no clear reason why the clause in the lease was different to the clause in the agreement for lease. The judge noted that no sensible draftsmen would intend there to be a difference, and indicated that he was tempted to conclude that the clause should be construed so as to incorporate the wording in the agreement for lease. This would have produced a result which aligned with commercial common sense, but the judge was not able to reach that conclusion following the decision of the Supreme Court in Arnold v Britton [2015] UKSC 36. This judgment, the leading authority on contractual interpretation, stressed that the words used in a contract are to be given their plain meaning. If there is no ambiguity in the language then it is not open to the courts to interpret the words differently, even if the plain meaning does not make a great deal of commercial common sense. Hence the wording in clause 5.8 of the lease could not be construed to incorporate the wording from the agreement for lease.

Issue 2: A basis clause is a clause which is drafted so as to document the basis upon which the parties have intended to contract. An exclusion clause is a clause which seeks to exempt one party from liability irrespective of the factual background, and must satisfy a reasonableness test in order to be valid.

The judge held that clause 5.8 was an exclusion clause, as it was "an attempt retrospectively to alter the character and effect of what has gone on before and so is in substance an attempt to exclude or restrict liability". The wording of the clause in the agreement for lease probably informed this decision, as it clearly demonstrated that the parties had not always intended to contract on the basis that the replies to enquiries would not carry any liability.

Issue 3: Section 3 of the Misrepresentation Act 1967 states that any clause attempting to exclude or restrict liability arising from a misrepresentation can only be valid if the term was fair and reasonable in the circumstances when the contract was made. The judge held that the clause was not reasonable, as it allowed FTTL to withhold its knowledge of serious problems and require CDS to carry out its own due diligence. He further stated that this seemed "highly unreasonable, particularly in the conveyancing world, where pre-contractual enquiries have a particular and well-recognised importance. With clause 5.8 they become a worthless, and indeed positively misleading exercise. I do not think this is reasonable."

Clause 5.8 was therefore held to be invalid, and CDS' claim succeeded.

Commentary

This judgment highlights some important practice points regarding replies to enquiries and exclusion clauses. Firstly, a seller/landlord must always be aware of the requirement to keep its replies to enquiries up to date. These replies will constitute continuing representations until the lease/sale completes, and any failure to update them could lead to a claim for misrepresentation. Stating that the buyer/tenant is required to conduct its own investigations will not be sufficient to shift the responsibility from the seller/landlord, and the duty to update the replies will continue.

Secondly, if a party is attempting to include an exclusion clause in a contract it should be aware of the requirement for it to be reasonable. Courts generally respect parties' freedom to strike a bad bargain, and if a clause is freely negotiated between well informed commercial entities the courts are reluctant to interfere. Exclusion clauses are a notable exception – the statutory reasonableness test will always apply and this judgment highlights that it can be a difficult test to satisfy. This is especially true if an exclusion clause seeks to restrict liability for replies to enquiries, which are recognised as having particular importance.