A recent NSW case has shed useful light on the judicial treatment of misrepresentations in advertising of properties for sale1.
In May 2007, the seller’s agent placed newspaper ads stating, in relation to a rural property being offered for sale:
- “Around 7,000 acres is available to farm” (out of a total of 9,154 acres), and
- “Cropping: overall about 7,500 acres can be farmed.”
Based on information from the seller, visual inspections and enquiries made to the agent about the price of comparable properties, the buyer calculated the value of the property to be $3.44 million.
Of relevance to this note, 3 separate contracts were entered for the various parcels that constituted the property.
On 8 June 2007 the buyer took early possession of the property and began to farm it.
The buyer subsequently calculated that the actual arable area of the property was 5,325 acres. The buyer finally confirmed its suspicions to this effect in February 2008 and sought a reduction in purchase price. The seller refused and served notice on the buyer to complete the land contracts.
On 10 March 2008, the buyer sued, arguing that seller misrepresented the area of the croppable land, relying mainly on the content of the ads. The buyer sought settlement of the contracts at a reduced price.
On 12 March 2008, the seller served notice of termination of the contracts.
At the final Court hearing, the buyer conceded it was not ready, willing and able to complete and sought a declaration that the contracts were void from their inception (under NSW Fair Trading legislation) due to the misrepresentations.
The Court found that the seller had engaged in misleading and deceptive conduct in breach of the Fair Trading legislation, being the misrepresentation in the ads that the croppable area was 7,000 acres, when in fact it was only 5,325 acres. However, the misrepresentation did not entitle the buyer to relief as the buyer had not relied on it.
The Court gave several reasons for arriving at that conclusion:
- the ads contained a disclaimer that included: “Interested parties should make and rely on their own enquiries in order to determine whether or not this information is in fact accurate”
- it was the information the buyer received in discussions with the seller and from the buyer’s own inspections that the buyer relied on when assessing the value of the property, not the ads. Because of the disclaimer, this later information superseded that in the ads
- The buyer knew, or ought to have known, it could not rely on pre-contractual representations because each contract contained both a provision that the contract constituted the whole agreement, as well as the following special condition:
- “The Purchaser has entered into this contract following his detailed inspection of the property and acknowledges that there shall be no reduction in price should it be found that the area of the property is less than that area set out in the description of property or in the .. plans attached to this contract.”
In summary, although the buyer believed the property had 7,000 croppable acres, there had been no reliance on the ads resulting in loss or damage. The Court held that the seller had validly terminated the contracts and was entitled to damages and to forfeit the deposits.
The case provides useful guidance on how the law of misrepresentation applies in a fact situation such as this. Some of the relevant points to be considered are as follows
- On becoming aware of the error a buyer must promptly bring the matter to the attention of the seller if the buyer is considering rescinding the contract on the basis of the misrepresentation.
- The buyer is unlikely to succeed in rescinding the contract if it affirms the contract after becoming aware of the error/misdescription. (In this case, the buyer went ahead and cropped the land after discovering the actual area available for that purpose).
- Even if the right to rescission is lost, the misrepresentation still entitles the buyer to seek damages or a reduction in the purchase price. (However, in this case the buyer put no evidence of the reduction in value arising from the misrepresentation before the Court and so could not prove any loss).
- If the buyer in the present case had been able to establish a valid rescission, then it would have been entitled to restitution for expenses wasted and perhaps even trading losses arising from it’s cropping of the land. (By affirming the contract – through the action of continued farming - after becoming aware of the misrepresentation, the buyer lost that right and had to bear the trading and other losses itself).
- The seller was, in the circumstances, entitled to retain the deposits in full. The buyer affirmed the contracts but failed to settle. It also failed to produce any evidence to the Court that it would have suffered any loss had it settled the contracts. So, it was not inequitable, according to the Court, to allow the seller to forfeit the deposits where the buyer had not settled the contracts in accordance with its obligations.
- Finally, for drafting purposes the case points up the importance, from a seller’s point of view, of:
- making sure the contract contains a “written contract is the whole agreement” clause
- drafting a special condition expressly requiring the buyer (through warranties or acknowledgement)to take responsibility for inspecting and satisfying itself about the characteristics of the property, including its area (even where that may be less than the figure shown in the description in the contract), and
- insisting that the selling agent includes a carefully worded disclaimer in any advertising of the property.
While none of the above factors is a “magic bullet” negativing the reliance element in a buyer’s action for misrepresentation, taken together they all strengthen the seller’s position if a misrepresentation challenge is brought.