In these turbulent economic times, many companies are experiencing a general reduction in capital and expenditure, as a result of which there is an increasing focus on the value of an investment and the return. The state and condition of a property and its defects are of paramount importance when assessing the merit of an acquisition and it is important that all buyers and their professional advisers are aware of the implications of a failure to carry out thorough due diligence. This article provides some guidance and the issues to be aware of when buying a property.
- "Caveat Emptor"
"Caveat Emptor" is a fundamental principle of English law meaning "let the buyer beware": the buyer takes the property in its current condition and it is the buyer's responsibility to carry out a full and thorough investigation.
There is no general obligation on the seller to ensure that the buyer has all the relevant information, in particular there is no warranty as to the habitability / condition of a building or that it is fit for the buyer's purpose. The buyer and its professional advisers therefore need to establish what faults or flaws exist and must carry out a full investigation of the property (title investigation, physical inspection, survey, valuation, enquiries of the seller and a full set of relevant searches). There are, however, some exceptions to the rule.
As a general rule, a seller is not obliged to disclose patent defects, incumbrances which will be removed before completion, matters actually known to the buyer, planning matters and physical defects (whether latent or patent). Where, however, there is uncertainty (which can often be the case), they should seek legal advice.
Patent Defects
There is an implied term that the seller sells free of incumbrances except "patent defects". Patent defects are readily discoverable and visible, and which a buyer is able to discover if they carry out a reasonable inspection of the property (although it does beg the question as to what is "reasonable"). Consequently, the seller is not under an obligation to disclose patent defects and a buyer's surveyor needs to be very certain that they have inspected and reported on all of them, otherwise they will be liable to the buyer for any loss suffered.
Seller Must Disclose Latent Defects
If the seller sells with full title guarantee, it is implied that the property is free from all incumbrances except those which they do not and could not reasonably be expected to know about. Unlike a patent defect, a "latent defect" is one which, despite exercising reasonable care, is not apparent or cannot be discovered, when inspecting the property. A "latent incumbrance" is a deficiency in the seller's title affecting ownership or the right to deal with the property.
Consequently, whether or not the buyer raises enquiries about them, the seller must disclose latent defects or irremediable latent incumbrances on title (which will not be removed on completion). A seller has a duty to disclose latent defects of title of which it is aware or of which it has the means to know, acting reasonably and diligently. However, "a seller should not be required to look for a needle in a haystack where there is no apparent reason to believe that a needle has been lost" (William Sindall plc –v- Cambridgeshire County Council [1994]1 WLR 1016).
Despite the amount of case law on the subject, the distinction between latent and patent defects can be a grey area. A well-advised seller should therefore make full disclosure of all defects and incumbrances of which they are aware (rights of occupation, latent overriding interests, restrictive covenants and easements), in order to avoid a dispute in due course. The timing of the disclosure, however, can vary and sellers sometimes wait until the buyers have shown their commitment to the transaction and are near to exchange, which, depending on the importance of the defect, can understandably have a detrimental effect on the relationship between the parties and the transaction.
- Failure to Disclose
The sale contract may provide that the seller is not liable for any latent defects of which the seller is not aware or could not reasonably be aware. The contract, however, cannot exclude the seller from liability for non-disclosure of latent defects of which they are or ought reasonably to have been aware. Even if the seller's omission to disclose is without fault, the buyer may have a remedy.
Non-Disclosure
In the event of non-disclosure, the buyer may have a possible remedy for any of the following:
- Compensation: if the failure to disclose is not substantial, the buyer must complete, however the price may be reduced as compensation for the defect.
- Rescission for substantial non-disclosure: if the failure to disclose has the effect of substantially depriving the buyer of getting what it contracted to buy.
- Action for misrepresentation or deceit: if a statement or conduct conveys a false / wrong impression, the buyer may have an action in misrepresentation (whether it be fraudulent, negligent or innocent). The court has the power to award damages to a party that has been induced to enter into a contract by a misrepresentation made by the other party, and has consequently suffered loss (section 2(1) Misrepresentation Act 1967). There will, however, be no action if the party that made the misrepresentation can prove (i) that it had reasonable grounds to believe, and (ii) did believe, up until the time when the contract was made, that the facts represented were true.
Misdescription
A misdescription is a failure to disclose a matter relating to the type or tenure of the seller's title. The buyer may rescind the contract if there is a material misdescription, as a result of which the buyer does not get substantially what it bargained for. Otherwise the buyer may have a claim for compensation.
To claim the above remedies, the buyer should seek legal advice as to what constitutes "substantially depriving the buyer".
- Replies to Enquiries
As a direct result of the caveat emptor rule, in all arms length transactions buyers are advised to raise relevant enquiries as part of their due diligence, to discover as much information about the property as possible. Whilst a buyer can carry out various searches, one usually raises a set of standard enquiries in order to establish as much information as possible. Whilst these are not compulsory enquiries, sellers generally provide replies, to assist with the buyer's due diligence, thereby expediting the progress of the transaction.
In providing replies, sellers' solicitors often incorporate disclaimers to affect the degree of reliance which the buyer can place on them. Whilst the disclaimers do not exclude liability altogether, they do prevent an action for breach of warranty (William Sindall Plc v. Cambridgeshire County Council [1994] 1 WLR 1016), however a buyer may still, depending on the facts, make a claim for misrepresentation. Sellers frequently try to limit their duty to disclose, however such exclusion clauses are subject to the provisions of the Unfair Contract Terms Act 1977 and its reasonableness test.
- Buyer's Liability on Searches
In carrying out the investigation, the buyer's professional advisers owe a duty of care to the buyer. There is a recognised set of "usual" searches, which a prudent purchaser should always carry out. The buyer's solicitor is liable in negligence if its client suffers loss through their failure to make the usual searches or pursue replies to enquiries (Cottingham V. Attey Bower & Jones [2000] EGCS 48).
In addition, depending on the location of the property, there are often property specific searches, which a well-advised solicitor should make, failing which they could be liable in negligence if the buyer suffers loss (G & K Ladenbau (UK) Limited v. Crawley and De Reya (1978)).
In conclusion, buyers and their professional advisers should always bear in mind the "caveat emptor" rule.
Why This Matters
In 2010 clients acquired a property and inspected it before exchange, noticing various internal stains on a structural wall. The buyers commissioned surveyors to carry out an assessment: various minor issues were detailed, however none were sufficiently material for the buyers to abort or re-negotiate. According to the survey, the property was generally in good condition, in reliance upon which the parties exchanged at the agreed price.
Three months after completion, the buyers discovered that the marks were moisture, caused by an unknown source. Over the coming months, the stain grew increasingly noticeable, resulting in deterioration of the wall, worsening until fully treated. The repairs required the removal of all the fittings and fixtures (breaking some in the process), and re-plastering the entirety of the wall.
As the marks were visible on exchange, they were a patent physical defect which the sellers were not under a duty to notify. The total cost of the repair works was substantial. Had the defect been discovered before exchange, the clients would have sought to either re-negotiate or agree a retention (whereby the seller would have paid for the repairs to be carried out). Accordingly, the buyers notified the surveyors as soon as possible: as the clients' appointed professional advisers, the surveyors were under a contractual duty of care to the buyers and were therefore responsible for the losses incurred.
Whether you are a buyer, their solicitor or surveyor, whether the acquisition is residential or commercial, it is essential that you be aware of the rule of "caveat emptor" and its significance on the parties' liability in carrying out due diligence.
