The Court of Appeal has held that a buyer was entitled to rescind a contract for the purchase of a site with development potential because the seller failed to disclose a rival planning application.

The contract provided for a delayed completion to allow the buyer to obtain planning permission for the development of a block of apartments. The seller had responded to Commercial Property Standard Enquiries that it was unaware of any planning applications in respect of the site, but later received notice of an application for planning permission for the development of a medical centre. Crucially, the seller did not disclose this application to the buyer, despite the duty to correct any incorrect replies to enquiries.

The buyer became aware of the planning application and, fearing that it would make the grant of permission for residential development less likely, sought to rescind the contract. The seller counterclaimed for specific performance of the contract or damages in lieu, arguing that the claim had been issued because of a dramatic fall in property prices since exchange of contracts. The county court judge found for the buyer because he had relied on the enquiry replies and would not have entered into the contract if the planning application had been disclosed.

The contract incorporated the Standard Conditions of Sale (fourth edition) including condition 7.1.3 (which is the same as condition 7.1.1 of the fifth edition and condition 9.1.3 of the Standard Commercial Property Conditions):

Standard Condition 7.1.3

 “An error or omission only entitles the buyer to rescind the contract where it results from fraud or recklessness or where he would be obliged, to his prejudice, to accept property differing substantially (in quantity, quality or tenure) from what the error or omission had led him to expect”.

Failure to correct the replies to enquiries gave rise to an innocent misrepresentation, which, but for inclusion of this condition, would entitle a buyer to rescind the contract. However, section 11(1) of the Unfair Contract Terms Act 1977 provides that exclusion of liability for misrepresentation is only valid where the term is fair and reasonable in all the circumstances. The county court judge found that condition 7.1.3 was not fair and reasonable in the circumstances of the case.

The seller appealed, arguing that the county court judge had failed to give sufficient weight to the fact that the parties were separately represented, that they had made a number of variations to the Standard Conditions but had not amended condition 7.1.3, that the Standard Conditions are endorsed by the Law Society and, in particular, that condition 7 is well established and its predecessor conditions have been amended from time to time in response to judicial criticism.

The Court of Appeal acknowledged that it had limited discretion to disturb a first instance decision on the question of what is fair and reasonable in the circumstances and should not interfere with it unless satisfied that it proceeded on some erroneous principle or was plainly and obviously wrong. Whilst the judge considered some of the appellant’s arguments to be highly persuasive it could not find that test was satisfied here. The planning application did not affect the “quantity, quality or tenure” of the property. Nonetheless the seller knew of its importance to the buyer and failed to disclose it at the very time they were entering into a contract which would on the face of it remove the right to rescind for innocent misrepresentation.

The case highlights that sellers must be mindful of their duty to correct any replies to enquiries which become incorrect or which are superseded before contracts are exchanged.

Source: Cleaver v Schyde Investments Limited [2011] EWCA Civ 929