A landlord cannot rely on a lease clause limiting its liability for representations where it has made false or misleading statements to a prospective tenant before entering into the lease.

That is the decision of the Court of Appeal in First Tower Trustees Ltd v CDS (Superstores International) Ltd in its judgment of 19 June 2018.

The decision reinforces the importance of pre-contract enquiries in the conveyancing process. It highlights to landlords, sellers and others disposing of property the need to give full and accurate replies to enquiries raised by tenants and buyers. The judgment is also a reality check for landlords, many of whom often seek to restrict or limit their liability for statements made to tenants before they enter into a lease.

The facts

In this case, the landlord had made a false statement (known as a misrepresentation) to the tenant in its replies to pre-contract enquiries before the tenant entered into a lease of warehouse premises. The misrepresentation was that the landlord had no knowledge of environmental problems affecting the property. In fact, the landlord was aware of severe asbestos contamination in the premises. Extensive works were carried out to remedy the contamination and the tenant was forced to take a lease of alternative space to continue its business whilst those works were in progress.

The lease itself contained a clause stating: "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."

A legal dispute ensued and the landlord later appealed against a lower court's decision that it was liable to the tenant in the sum of £1.4 million plus interest as a result of the misrepresentation.

The issues and decision

The Court of Appeal rejected the landlord's appeal and upheld the decision of the lower court. There were three main issues which it had to work through in order to reach this conclusion.

Did the non-reliance clause fall within section 3 of the Misrepresentation Act 1967?

Section 3 of the Misrepresentation Act 1967 states that any term in a contract attempting to exclude or restrict the liability of a party by reason of a misrepresentation is of no effect, except if and to the extent that it satisfies the reasonableness test in section 11(1) of the Unfair Contract Terms Act 1977.

The landlord contended that the non-reliance clause was not within the ambit of section 3 as it was merely a clause setting out the basis on which the landlord and tenant had agreed to be bound to each other.

However, the Court decided that, without the non-reliance clause, the landlord would have been liable for the misrepresentation. The only doubt about its liability stemmed from the existence of that clause. Therefore, the clause was a term attempting to restrict liability for misrepresentation and section 3 applied to it

Was the non-reliance clause reasonable under the test in section 11(1) of the Unfair Contract Terms Act 1977?

Having held that the clause was subject to section 3 of the Misrepresentation Act 1967, the Court then addressed whether or not the clause satisfied the test of reasonableness in section 11(1) of the Unfair Contract Terms Act 1977. In deciding that the non-reliance clause in this case was not reasonable, the Court stressed the importance of pre-contract enquiries in the conveyancing process. The important function of those replies would be worthless, said the Court, if the non-reliance clause in the lease was enough to negate the landlord's liability.

The Court found it difficult to imagine a set of facts where a clause restricting liability for misrepresentations given in replies to pre-contract enquiries might satisfy the test of reasonableness, although it left this possibility open but only in exceptional circumstances which it did not define.

Given that the landlord was a trustee, was its liability limited to the extent of the assets of the trust?

It was well established that a person who entered into a contract in the capacity of trustee could limit his contractual liability to the extent of the trust fund, and would incur no personal liability in excess of the fund, provided that suitable words were used.

The wording in the lease, which simply stated that the landlord was contracting as trustee and not otherwise, effectively limited the landlord's personal liability in contract. However, misrepresentation was not a contractual claim, but one based on negligence or statute and much clearer wording would have been needed to limit the landlord's personal liability for those remedies.

The implications of the decision

The decision reinforces the importance of pre-contract enquiries in the conveyancing process, which are often taken too lightly by landlords and sellers. Failure to give full and accurate responses could lead to an action for misrepresentation.

In the leasehold context, landlords often attempt to exclude their liability for representations made otherwise than in formal responses to pre-contract enquiries through lawyers. A blanket exclusion of liability for all misrepresentations, as in this case, is less common. It is likely that a court would look more favourably on a clause which includes the usual proviso that only formal replies between legal advisers can be relied upon by a tenant.

The Court of Appeal did not address how it would view a landlord which makes a misrepresentation outside of formal replies to enquiries but does not repeat it in formal replies. On the basis of the usual non-reliance clause requiring replies to be through legal representatives, the tenant would appear to have no comeback. As a result, tenants should ensure that any statements made by landlords in lease negotiations on which they wish to rely, are given formally.

Trustees entering into leases and other contracts will also take note of the decision and the need to include very specific wording if they are to exclude personal liability in negligence and under statute, as well as under the specific contract they are entering into.