The principle of caveat emptor, or ‘buyer beware’, is the cornerstone of property transactions. It places the onus on the buyer to do its homework before entering into the contract, rather than on the seller to give free and full disclosure.
However, the claimants in Smith and Stevens v Flynn (2019), a potential landmark case, are attempting to define the seller’s duty to disclose disputes. They are suing their seller for failing to disclose problems with an aggressive neighbour. Here, the buyers had been abused and their property damaged within hours of moving into their new home. The police advised them to vacate the property.
The seller had stated in replies to pre-contract enquiries that he had “not complained or had cause to complain” about any neighbour. The buyers discovered that he had in fact obtained a restraining order against the neighbour. In his defence, the seller argued that the restraining order was 18 months old, and so his responses were accurate.
While the court is yet to make a decision, the case highlights that a seller has legal obligations when answering pre-contract enquiries. These principles apply equally to the selling – and indeed letting or charging – of commercial or industrial property.
A seller is not obliged to answer pre-contract enquiries, other than where they relate to latent title defects or fraud, but refusing may deter buyers. Sellers usually answer questions about items such as boundaries, third-party rights, planning issues and any disputes. These enquiries are mostly in a standard form, with specific additional queries depending on the property.
If anything changes after the replies have been given, the seller must also update the buyer.
Answers will often be black and white, or the seller will say that the buyer must rely on its own searches. But these searches will not reveal a dispute, where there can be many shades of grey. Sellers therefore need to consider any disputes carefully to see whether they are disclosable.
If questions are not answered accurately, the buyer may try later to abort the transaction or unwind a completed transaction, and may also claim substantial damages. The resulting litigation could be time consuming and costly.
If the claimants in this case are successful, it will give some guidance on the extent to which the knowledge of the seller and the history of the dispute affect obligations when answering enquiries. In the meantime, sellers should keep careful records and seek legal advice on which items should be disclosed.
Jill Carey is director at Freeths