One of the first steps in a commercial property transaction is for the buyer to raise pre-contract enquiries of the seller. The legal principle “caveat emptor” is a Latin principle meaning “let the buyer beware” and, in the context of a property sale, it requires the buyer to investigate the property it is buying to discover any issues before committing to buy it. This also applies to a tenant who will want to investigate the property it is proposing to lease. However, there are some exceptions to this principle and when responding to the buyer’s queries the seller must not underestimate the significance of any replies given.
What pre-contract enquiries are raised?
Although the buyer is free to raise its own specific enquiries it is usual for replies to Commercial Property Standard Enquiries (CPSEs) to be required. These are a standard suite of documents, used to gather relevant information, which a buyer will be interested to know before committing to the purchase. Additional questions may also be asked of the seller, which are specific to the transaction or the property. It is usual for enquiries and replies to be exchanged between the parties’ solicitors and the seller should avoid answering enquiries raised directly by the buyer.
Does a seller have to reply?
The seller is not obliged to respond to the pre-contract enquires but it does have a duty to declare any “latent defects in title”. This is one of the exceptions to the “buyer beware” principle mentioned above and requires the seller to disclose any title defects which the buyer could not have reasonably discovered by an inspection of the property. An example may be a right of way or an existing tenancy. In practice, refusing to reply to pre-contract enquiries may also deter the buyer from proceeding and could result in them withdrawing from the transaction. In responding to enquiries the seller should also be wary of qualifying its response by using phrases such as “not so far as the seller is aware” as this implies that the seller has no knowledge of the issue and has taken reasonable steps to investigate it. If the seller has not made any investigation it should say so.
Will the seller be liable if a reply is incorrect or inaccurate?
Some of the replies will be considered statements of fact and law which may form a representation which influences whether the buyer enters in to the contract. If such a statement is made, which is untrue at the time the contract is created, and is relied upon by the buyer and causes them loss; then the buyer can bring an action against the seller for misrepresentation. The remedy available to the buyer, if a successful claim is brought, will depend on the type of misrepresentation but it will either be able to rescind the contract (effectively “un-do” the contract) or claim damages. However, if a reply is simply a statement of opinion then the buyer cannot bring an action for misrepresentation unless the opinion was not genuinely held.
What if the seller’s initial reply changes during the course of the transaction?
The seller must ensure that the replies given remain correct, from the point they are provided to the buyer to the point of exchange of contracts, and if there are any changes the buyer must be informed. It is important that the seller advises their solicitor if any of the replies change during the course of the transaction so that they can update the buyer. If the seller becomes aware that an original reply has become inaccurate before exchange of contracts and does not inform the buyer it may be liable for misrepresentation.
Can the seller limit its liability?
It is common in sale contracts to include a clause which provides that the buyer can only rely on written replies to written enquiries which have been exchanged between the parties’ solicitors. This is to avoid the seller being potentially liable for statements it has made directly to the buyer, perhaps orally or during the negotiation period. Also, a contract may try and limit the seller’s liability in respect of misrepresentation but this will only be effective so far as it is reasonable. If the misrepresentation is fraudulent (i.e. the seller knowingly provides a false representation) then such limitation clauses in the contract will be ineffective.
There are often time pressures in commercial property transactions and it can be tempting for a seller to rush through the enquiries raised to provide responses quickly and keep the transaction moving. However, it is important that a seller gives proper consideration to any responses and ensures that any replies given are accurate. To do this our top tips are as follows:
• Spend time reading through the enquiries prior to responding;
• Check records for the property;
• Liaise with appropriate specialists such as accountants or tax advisers; and
• If appropriate ask company employees who may be better placed to provide the required information (if a corporate seller)