Key points

  • The seller must disclose any latent defects in title
  • A general condition which purports to exclude the seller's ordinary obligation to give good title may not always be effective

In the March 2010 edition of Property Update we looked at the case of Weir v Area Estates Ltd. The Court of Appeal has now upheld the decision of the High Court. However, it is worth considering the Court of Appeal's decision, as it contains a useful analysis of the extent to which a seller is able to transfer risk for title matters to a buyer.

Facts

A contract for the sale and purchase of a property provided that a lease referred to on the registered title had been determined by operation of law, and the buyer was not entitled to raise any requisition in relation to it.

It transpired that the surrender had not been valid because a bankruptcy petition had been made against the tenant and noted on the register prior to the surrender. This meant that the lease could not be surrendered without the consent of the court. The buyer sought to rescind the contract and get his deposit back.

The court had to decide two issues:

Issue 1: Did the special condition in the contract prevent the buyer rescinding the contract because of the continued existence of the lease?

The seller argued that it was entitled to protect itself against the possible uncertainty of the title, particularly the inevitable uncertainty surrounding the concept of surrender by operation of law. It contended that the special condition in the contract meant that the risk of this uncertainty was transferred to the buyer.

The court pointed out that a seller is ordinarily obliged to give good title. It held that a seller cannot rely on a general exclusion in the contract to cover a latent defect in title which it knew about, or which it ought to have known about.

However, in this case, the exclusion was not a general one, but specifically related to the lease. Did this make a difference?

The court thought not. While the special condition did draw the buyer's attention to the problem of the lease, it also contained an unqualified assertion that the problem had ceased to exist. The seller (through his solicitors) should have known that the purported surrender was ineffective and that the statement was therefore untrue. The seller had impliedly represented that it had taken reasonable steps to confirm the accuracy of the statement it had made in the contract.

Issue 2: Should the existence of the lease be treated as a "technical conveyancing defect", which would not be sufficient to justify rescission?

The Court of Appeal agreed with the High Court that the existence of the lease could not be construed as a "technical conveyancing defect". The test is whether the buyer will be at risk of a third party successfully claiming an encumbrance. In this case the seller could not show as, at the completion date, that there was no risk of the trustee in bankruptcy claiming that the lease still subsisted.

Things to consider

It is still the case following Weir v Area Estates that a seller can, through clear drafting, compel a buyer to accept the title offered. However, the seller must act in good faith, and disclose any defects which he knows about. Knowledge which the seller's solicitor should have had, and which the seller would have had if properly advised, will be treated as actual knowledge.