Seller Beware!

The principle of caveat emptor or ‘buyer beware’ is a principle that is familiar to many, although sometimes misunderstood. A recent appeal case has provided a reminder of how the Court will apply this principle.

Within the context of property purchases, the principle puts an obligation on the buyer to carry out its own investigations and to make its own enquiries prior to purchasing property.  The buyer can then decide whether to proceed with the purchase based on the results of those investigations, and does so at its own risk.

There is however a duty on the seller to disclose any defects in title and any encumbrances of which the seller is aware.  If the seller fails to do so, the buyer can rescind the contract.  

What does this mean in practical terms? 

The recent appeal case of SPS Groundworks and Building Limited v Mahil put this question in the spotlight. 

Ms Mahil was an experienced property developer who contracted to purchase land from SPS Groundworks at auction.  The land was described in the auction catalogue with the usual excitable sales hyperbole and also stated that:-

“There is excellent scope for development, subject to any required planning permission, making a superb investment opportunity.” 

The auction pack contained a copy of the Land Registry title and also a copy of an overage deed. The inclusion of that overage deed turned out to be the focus of the dispute.

The overage deed provided that 50% of any increase in value resulting from the grant of planning permission for the land was to be paid to the Cooperative Group Limited. 

Had Ms Mahil read through the auction pack, she would have seen this overage deed, and she would have understood its implications – ie the development potential of the land had a significant catch, namely the obligation to pay a large chunk of money to the Cooperative Group Limited.

Ms Mahil did not read through the auction pack. And that was rather silly one might argue, and in fact some did argue in this case.

The issue here was that although a copy of the overage deed was contained in the auction pack, there was no reference to the overage deed in the auction catalogue nor was any reference made to the overage agreement during the auction itself.

So the question here was whether enclosing a copy of the overage deed in the auction pack (the overage agreement being an encumbrance that the seller was required to disclose) was sufficient or whether the buyer could justifiably argue that burying this important document in the auction pack was unreasonable and that there needed to be a much clearer and more explicit reference to that overage agreement, either in the auction catalogue or during the auction itself.

Put simply, had the seller been clear enough with its disclosure?

Upon learning of the overage deed after the exchange of contracts, the buyer refused to complete the purchase.  In response, the seller forfeited the buyer’s deposit and re‑sold the land to a third party for a lower price.  The seller then brought a claim against the buyer seeking the difference between the original price and the price achieved at the ultimate sale. 

The buyer argued that the seller had included the overage deed in the depths of  the auction pack and that this was too hidden away to constitute proper disclosure.

The seller argued that had the buyer bothered to read the auction pack, she would have discovered the overage deed. It was her decision not to read the pack.

The Court agreed with the seller and ruled that including the overage deed in the auction pack was sufficient and that the overage deed was clearly “there to be seen”. 

And this was where the case took a funny turn.

The buyer appealed the Court’s decision and insisted that it was, in a sense, unreasonable to expect the buyer to read the auction pack before the auction and to expect the buyer to discover this important overage deed in the depths of that auction pack.

For reasons  that have led many to scratch their heads and quietly mutter with despair, the appeal Court agreed with the buyer and granted the appeal. The appeal Court held that the encumbrance should have been more specifically and clearly disclosed by the seller. The Court’s view was that such an important document as the overage deed should have been disclosed more clearly and openly.

The general consensus is that Ms Mahil got lucky.  She admitted in the proceedings that she had not looked at the auction pack.  She knew that the auction pack was important but she nevertheless proceeded to buy the land ‘blind’.  It was only after exchanging contracts that she downloaded the legal pack and discovered the overage agreement.

The appeal Judge was clearly in a highly sympathetic mood as he declared that whether Ms Mahil had read the auction pack or not, a seller’s duty was to give full, frank and fair information about any encumbrance.  The Judge’s view was that the overage deed had to be specifically brought to the buyer’s attention by a clear description in the sales particulars or by a specific reference made by the auctioneer.  Since that had not happened, the seller had failed to comply with its duty of disclosure.

A surprising and rather unsatisfactory decision but whingeing about the decision gets one nowhere; there are lessons to be learnt.  These include the following:-

1. Notwithstanding the caveat emptor rule, a seller still has a duty to disclose defects in title and encumbrances affecting the property.  A seller cannot simply sit back, say nothing, and assume that the caveat emptor principle permits zero disclosure.
2. The fact that a buyer could have made enquiries and discovered a particular defect or encumbrance does not absolve the seller of his duty to specifically and clearly disclose those defects and encumbrances. 
3. Signposting or giving the buyer a chance to see the defects or encumbrances is not sufficient.  Those defects and encumbrances need to be specifically referred to and highlighted.

If you have any queries in relation to matters raised in this blog, please contact Andrew Turner on 01242 586 841 or at aet@hughes-paddison.co.uk