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23 March 2016

Replying to pre-contract enquiries: the cost of inaccuracies

On a sale of both commercial and residential property the seller is usually required to provide the buyer with replies to standard pre-contract enquiries (CPSEs). The recent case of Greenridge Luton One Ltd v Kempton Investments Ltd (2016) (the "Greenridge Case") demonstrates that due care and attention must be given by the seller to ensure the replies to enquiries are accurate and truthful. This case also highlights the importance for the seller to alert its solicitor if anything changes or affects the replies given.

The Greenridge case

During the course of the sale of offices at a site in Luton, the seller gave replies to standard enquiries which stated there were no arrears of service charge payments and no disputes outstanding.

Contracts were exchanged for the sale of the offices at a purchase price of £16.25 million. The buyer paid a deposit on exchange of £812,500. The valuation provided to the buyer's funder after contracts had been exchanged revealed substantial arrears of service charge and a dispute with the tenants.

The buyer attempted to rescind the contract (effectively cancelling the contract) and claimed the return of the deposit it had paid along with damages arising from what it alleged was the fraudulent misrepresentation in the CPSEs.

In court the judge agreed with the buyer. It was held that:

  • the replies to the CPSEs provided to the buyer were not accurate and contained misrepresentations by stating that there were no service charge arrears, when in fact there were arrears;
  • as both the managing agent and the seller knew that there were arrears, the relevant replies had been made recklessly or fraudulently with the intention that the buyer would rely on such statements; and
  • the buyer relied on this statement which induced them to enter into the contract.

The buyer was entitled to the return of its deposit and damages for deceit of £395,948.

Key action points

The Greenridge case confirms the principle that if a buyer shows it has relied on a seller's false statement, the seller must prove that it had good reason to believe the statement to be true. If the seller cannot prove this, the buyer will be entitled to recover any losses caused by the misstatement, whether foreseeable or not, including professional fees incurred, charges associated with raising finance or even losses due to fluctuation in the market.

It is therefore essential that sellers give adequate time and attention to the preparation of accurate replies to enquiries rather than glossing over them in the run up to exchange.

Although draft responses are often initially provided by the seller's solicitor to assist the seller, there is an obligation on the seller to put proper effort into ensuring that the replies to CPSEs are correct and to alert their solicitor if anything changes. Buyers must be kept up-to-date and any request for information or further supporting documentation should be complied with. The potential penalty for being lazy or less than truthful can be a costly one.