Key points

  • A seller who fails to update a pre-contractual statement if it becomes incorrect could be liable in misrepresentation
  • Misrepresentation could entitle the buyer to rescind the contract, even where the contract on its face limits the buyer's ability to do so

Standard conditions of sale

Many property sale contracts incorporate a set of standard conditions. Two sets are commonly in use: the Standard Conditions of Sale (used mainly on residential transactions), and the Standard Commercial Property Conditions. The parties will usually make some amendments to the standard conditions to suit their circumstances, but many of the conditions are often incorporated without amendment.

Cleaver v Schyde Investments Ltd concerned one of the provisions in the Standard Conditions which is rarely amended (the Standard Commercial Property Conditions contain a similar provision). Standard Condition 7 deals with the remedies which are available in the event that there has been a misrepresentation by the seller. It provides (among other things) that:

"An error or omission only entitles the buyer to rescind the contract: (a) where it results from fraud or recklessness, or (b) 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".

Replies to enquiries

The parties in the case had entered into a sale contract. The buyer intended to develop the property for housing. A local GP was also interested in developing the property as a medical centre.

The seller provided replies to standard pre-contract enquiries. One of the enquiries asked the seller to supply details of any application for planning permission which had been made but not decided. The seller replied "There are none".

Two days after the replies to enquiries were given, a planning consultant acting for the GP approached the seller and gave it a notice of a planning application which had been made for the development of the property as a health centre. The introduction to the enquiries provided that:

"The seller confirms that pending exchange of contracts ... it will notify the buyer on becoming aware of anything which may cause any reply that it has given to these ... enquiries to be incorrect".

The seller did not correct the replies it had given to the buyer's enquiries. Contracts were exchanged in due course.

After exchange, the buyer discovered the planning application made by the GP. This was of great concern to the buyer as it thought that there would be more local support for a medical centre on the site than for its housing proposal. The buyer sought to rescind the contract for misrepresentation.

Could the buyer terminate the contract?

The seller contended that standard condition 7 applied. It argued that the right to rescind for misrepresentation was not engaged, because the existence of the planning application did not make the property substantially different in quantity, quality or tenure.

Under the Misrepresentation Act 1967 and the Unfair Contact Terms Act 1977, a contractual term which restricts the liability of a party for misrepresentation, or the remedies of the other party for misrepresentation, must be fair and reasonable, having regard to the circumstances in which the contract was made. The trial judge ruled that, in the circumstances of this case, standard condition 7 was not a fair and reasonable one to include. The seller appealed to the Court of Appeal.

The Court of Appeal noted that it had a limited role on appeal. Previous case law makes it clear that views on what is reasonable may properly differ, and so there will sometimes be room for a legitimate difference of judicial opinion as to on what side the balance should come down. On that basis, the appellate court should refrain from interfering with the original decision unless it is satisfied that it is plainly and obviously wrong.

Decision

The Court of Appeal thought that there was "nothing self-evidently offensive" about Standard Condition 7. It was a commercially justifiable apportionment of risk in the interests of certainty and the avoidance of litigation. The court noted that Standard Condition 7 had a "long history", and was endorsed (as all the Standard Conditions are) by the Law Society. It also noted that both sides had had legal representation and had negotiated variations to some of the other Standard Conditions. On that basis, the Court of Appeal thought that it would require some "exceptional feature" to enable a court to conclude that Standard Condition 7 did not satisfy the requirement of reasonableness.

However, this case did have some special features. All parties knew that an important aspect of the value of the property lay in its development potential. The planning application did not affect the quantity, quality or tenure of the property. However, the seller was aware that a planning application for a change of use to something different from the buyer's intended use would be a material consideration for the buyer. Had the buyer known of the application, it would not have agreed to buy the property. In these circumstances, Standard Condition 7 was not fair and reasonable.

The buyer was therefore entitled to rescind the contract.

Things to consider

As the comments of the court make plain, its decision does not necessarily mean that every contract containing Standard Condition 7 (or its equivalent in the Standard Commercial Property Conditions) will be open to challenge in the same way.

A clause will fail the test in the Unfair Contract Terms Act if it is not a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made. Such circumstances will clearly vary from case to case, but the court made it clear that a contractual provision excluding the right to rescind for an innocent misrepresentation will not always be unreasonable simply because the seller was aware of the true facts.

Nonetheless, sellers must be mindful of the need to update any replies to enquiries which subsequently become incorrect, or risk being liable for misrepresentation.