Misrepresentation in Property Transactions

As property prices wilted during the financial crisis, buyers sought to extract themselves from contractual commitments in a myriad of ways. One of the routes that many considered was to make a claim for misrepresentation against the seller.

The Misrepresentation Act 1967 and the Standard Conditions of Sale

Generally claims for misrepresentation are governed by the Misrepresentation Act 1967. A person claiming misrepresentation must be able to prove that a misrepresentation has taken place before a contract was entered into, that there was reliance by them on that misrepresentation and that reliance caused some kind of damage or loss.

Property transactions are usually also subject to the Standard Conditions of Sale (or their commercial equivalent) which only allow rescission of contracts where an error of omission is made through fraud or recklessness. In other cases of misrepresentation the remedy is limited to damages.

Misrepresentation in Property Transactions – Replies to Buyer’s Enquiries

Buyers’ enquiries are normally made as soon as initial documentation is received from a seller and create the greatest risk of misrepresentation.

Replies to the buyer’s enquiries, which are made before the contract is entered into, can be a significant source of untrue statements. For example, failure by a vendor to mention any defects such as previous problems with the property may be regarded as misrepresentation.

Sellers must therefore be careful in making replies to buyers’ enquiries, paying special attention to the wording. Facts, opinions and statements of intention can all lead to misrepresentation and give rise to liability.

Misrepresentation in Property Transactions – The Contract

If an untrue statement subsequently forms part of a contract and its wording, it becomes a misdescription. If a claim for misdescription is successful, the seller will be in breach of contract and unable to enforce its terms. A claim for rescission is only likely to be successful if a misdescription is substantial, i.e. if ‘but for’ for the misdescription the purchaser would never have entered into the contract.

Where the misdescription is not substantial, the buyer is only likely to receive compensation for the reduction in value of the property.

Conclusion

Misrepresentation does not provide a reliable escape route for buyers attempting to exit property deals that are no longer attractive. However, sellers should still take care to avoid potential claims for misrepresentation by responding carefully to enquiries, properly defining the property in question and ensuring that the contract fully reflects the expectations of the parties.

For more information please contact us on 0207 611 4848.