A recent High Court decision has highlighted to property sellers that the general rule of caveat emptor has its limitations and that the seller must still comply with its equitable duty of disclosure. It is the extent of this equitable duty which was considered in the case of SPS Groundworks and Building Ltd -v- Mahil  EWHC 371 (QB) (the ‘SPS Groundworks case’).
Caveat emptor is a well-known legal principle which means ‘let the buyer beware’.
Essentially, the principle sets out that the onus is on the buyer to make its own investigations in relation to a prospective property, and for it to establish the information it requires so that it can purchase the property without any ‘nasty surprises’ down the line that would have been apparent from the pre-contract investigations. Whilst all buyers will take their own view on risk, the point remains that the buyer has the opportunity to make these investigations prior to exchanging legal contracts.
On the other hand, the seller has a duty in equity to disclose any defects in title and/or encumbrances which it is aware of. The failure by the seller to disclose a material defect in title/encumbrance enables a buyer to rescind a contract.
But what is the extent of this duty in real terms?
The SPS Groundworks case related to a parcel of land which was sold at auction. The appellant (buyer) contracted to buy the land from the respondent (seller) relying on the contents of the auction catalogue.
The land was subject to an overage provision which required 50% of any increase in value resulting from the grant of planning permission for the land to be paid to the Co-operative Group Limited. Whilst the overage deed was included in the legal pack, and there was a restriction on the register of title, there was no reference to the overage in the auction catalogue and the point was not mentioned by the auctioneer during the auction. The seller was fully aware of the overage provision.
Following exchange, the buyer refused to complete the purchase and the seller forfeited the deposit and re-sold the land at auction for a lower price. The seller brought an action against the buyer for its losses, ie the difference between the original price and the achieved price at the second auction. At first instance, the court held that the overage deed was in the legal pack and ‘there to be seen’, so that the principle of caveat emptor should apply.
On appeal, the High Court agreed with the appellant that:
- The established rule of equity is that a seller has a duty to disclose defects in title and that the buyer should have full, frank and fair information or a proper opportunity to gain such information about the defect
- Without specific reference to a defect, the buyer may assume that the entries on the title would be ‘the usual sort ... which would not significantly affect the value of the property’.
The judge agreed with the appellant that the defect should have been more specifically disclosed by the seller prior to contract.
Whilst a prudent buyer should always take legal advice prior to purchasing a property (at auction or otherwise) and due diligence should be carried out to identify any defects in title, the decision in the SPS Groundworks case highlights that sellers need to ensure that the known defects are fairly brought to the attention of potential buyers.
Since all the caselaw in this area (including the SPS Groundworks case) arises from auction scenarios, it is particularly important with auction sales to ensure that anything affecting value is specifically mentioned in the auction catalogue and also ideally mentioned by the auctioneer.
As a reminder, the standard pre-contract enquiries provide sellers the opportunity to disclose any defects and provide detail to a buyer to ensure the standard of fairness is achieved.