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Investigating the property: pre-contract enquiries

Introduction

Part of the process of investigating a commercial property involves raising pre-contract enquiries about the property to be acquired. These may be raised in any situation where a party is acquiring an interest in land, including in the following situations:

 

·                 By the buyer, of the seller, in respect of freehold or leasehold land that the buyer is to purchase.

·                 By the proposed tenant of the proposed landlord, in respect of freehold or leasehold land over which the proposed landlord is going to grant a lease.

·                 By the landlord of the tenant, in respect of a proposed surrender of a lease.

·                 By the lender of the owner of property over which the lender is to take a mortgage or charge as security for a loan.

Any reference in this Practice note to:

 

·                 The buyer, means the party raising pre-contract enquiries.

·                 The seller, means the party replying to pre-contract enquiries.

The enquiries may be a combination of general questions that would be appropriate to raise about every property, and specific questions about the particular property being acquired.

 

The process of replying to pre-contract enquiries can be time-consuming, which can lead to replies being drafted quickly and not being particularly helpful. To make the process more manageable, it may be preferable for the questions asked to be confined to:

 

·                 Those which are relevant to the property and the transaction.

·                 Those to which it would be difficult or impossible to get answers by any other means (for example, from an inspection of the title deeds or from official searches). 

Form of enquiries

There is no prescribed form for pre-contract enquiries in relation to commercial properties. However, the Commercial Property Standard Enquiries (CPSE) are now the industry-standard for commercial transactions. The CPSE are a suite of documents prepared by the London Property Lawyers Support Group and endorsed by the British Property Federation.

 

More rarely, some practitioners may use one of the printed forms of enquiries (for example, Oyez Form of Enquiries (Con 29 Long), although not drafted specifically for commercial property) or their own standard set of enquiries. 

Process of raising enquiries

Usually the buyer's solicitor sends the seller's solicitor either:

 

·                 A hard copy of the enquiries, in duplicate.

·                 Form RQ indicating the CPSE to which replies are requested.

The enquiries should be sent as soon as possible at the start of the transaction. The seller should reply to them through its solicitor as soon as possible.

 

Sellers commonly anticipate the enquiries and supply replies to a standard form of enquiries (usually CPSE) as part of the pre-contract package of papers. This approach was recommended by the Investment Property Forum.

The main benefit of a seller preparing replies in advance is speed. The replies can be prepared even before the property is marketed and the buyer has the information immediately. The effectiveness of this approach may be reduced if the seller uses enquiries which are less wide ranging than the CPSE. 

Liability for replies

Generally, the seller's liability will be for misrepresentation. However, under theFraud Act 2006, a general offence of fraud can be committed in three different ways:

 

·                 Fraud by false representation (section 2, FA 2006).

·                 Fraud by failing to disclose information (section 3, FA 2006).

·                 Fraud by abuse of position (section 4, FA 2006).

If the requisite criteria are satisfied for fraud by false representation or fraud by failing to disclose information, the seller may be guilty of the criminal offence of fraud in addition to the civil offence of misrepresentation

Misrepresentation

A seller may be liable in misrepresentation for an incorrect reply if each of the following apply:

 

·                 The reply amounted to an untrue statement of fact.

·                 The buyer entered into the contract to buy in reliance on that statement.

·                 The buyer suffered loss as a result.

Depending on whether the misrepresentation was fraudulent, negligent, careless or innocent, and depending on the terms of the contract, the remedies available are rescission and/or damages.

There can also be liability in misrepresentation for an untrue statement of law, following the High Court decision in Pankhania v London Borough of Hackney [2002] EWHC 2441.

If the seller expresses an opinion

A mere statement of opinion by the seller, rather than fact or law, which proves to be unfounded, will not be treated as a misrepresentation unless the opinion amounts to a statement of fact and it can be proved that the seller did not hold it, or could not reasonably have held it.

Duty to correct a reply

Once a statement is made, there is a duty to correct it if it subsequently becomes untrue. For this reason the seller should take care to correct any replies if circumstances change.

Liability of seller's solicitor

Where a misrepresentation is made as a result of the seller's solicitor's negligence, the seller will still be liable to the buyer, but can claim damages from its solicitor for negligence (Cemp Properties v Dentsply [1989] 37 EG 133).

 

The buyer may also be able to claim against the seller's solicitor if a duty of care can be established under the principles established in Hedley Byrne & Co. Ltd v Heller and Partners Ltd [1964] A.C. 465.

Solicitor's knowledge is imputed to the seller

Knowledge acquired by the solicitor while acting on the seller's behalf, is imputed to the seller, irrespective of whether the seller had actual knowledge. A seller may therefore be liable in misrepresentation to the buyer for a statement made by its solicitor without its knowledge. The seller may be able to claim against the solicitor in these circumstances (Strover v Harrington [1988] Ch.390).

Excluding liability

The replies may be accompanied by a statement purporting to exclude or minimise liability for misrepresentation. There is no guarantee, however, that this will be effective to protect the seller. The statement must be reasonable in the light of all the circumstances known to the parties at the time ((section 11 and Schedule 2, Unfair Contract Terms Act 1977). This makes it impossible to predict accurately how a court might regard any exclusion statement.

Qualified replies

A seller may qualify a reply with the words "not so far as the seller is aware". This may, however, be taken to amount to a warranty that the seller has made reasonable enquires relating to the enquiry.

 

This may be difficult to comply with if the seller is a corporate body, especially if the seller has owned the property for a long period of time. Files and records may no longer be in the possession of the company and the relevant employees may have left the company. In some cases, the sale of the property may be confidential making it impossible to consult the relevant employees.

 

If there is an issue of the corporate awareness of the seller, the seller should state what it means by "so far as the seller is aware" when replying to the enquiries.

 

“Practical Law PLC January 2010

 





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