How far does a seller need to go to fulfil their ‘duty of disclosure’? Coodes’ Commercial Property Executive Jo Counter explains more…
When you sell a property, there are duties on you to disclose any defects in the title. This duty can often be forgotten when collating documentation where sellers are looking for a quick sale, but this can leave you open to significant risk. A recent High Court Case involving an auction property highlighted how important fulfilling this duty is. In a less buoyant market we are seeing a marked increase in properties taken to auction as owners look to secure a quicker sale and disclosure is all important. Coodes’ Commercial Property Executive Jo Counter explains more…
What is the duty of disclosure?
When you buy property or land there is a well-known common law principle called “caveat emptor” which means “let the buyer beware”. This places the onus on the buyer to investigate the title to the property before purchasing it.
However, there is also a common law duty on the seller to disclose certain defects in the title.
What types of defects need to be disclosed?
The seller is required to disclose latent defects other than those of which the buyer is aware. Latent defects are matters which would not be apparent to a buyer on inspection and which could reduce the value of the land or property.
The following are all examples of latent defects which should be disclosed by a seller within the contract documentation:
1. Restrictive Covenants: This will be a binding condition within the title restricting the landowner from doing something.
2. Easements: An easement is a right enjoyed over land in the ownership of someone else i.e., a right of way.
3. Overage liabilities: Clawback or uplift as it can also be known is an agreement attached to the land that a payment is to be made when certain events occur.
4. Leases and tenancies: The property may be subject to these and the seller must provide details of these if they affect the property. If the property is a leasehold property, the seller must disclose any onerous or unusual covenants and these will be disclosed by providing a copy of the lease.
Example – High Court Case SPS Groundworks & Building Ltd v Mahil (2022)
An issue with ‘duty of disclosure’ was highlighted in a recent decision in the High Court, which involved a sale of land with development opportunity and an overage liability. Mrs Mahill (‘the buyer’) had purchased the land from SPS Groundworks & Building Ltd (‘the seller’) at auction. The land was described as having “excellent scope for development” and the buyer argued she was induced into the contract by misrepresentation.
However, there was an overage clause contained in a deed of covenant which meant that if planning permission was given to develop the land, 50% of the subsequent increase in value would be payable to the original owner. This meant that there was arguably not a lot of potential for profitable development of the land. The overage clause was not included in the auction materials or sale documents and the buyer had relied upon the description of the land in the auction catalogue.
What happened next?
The buyer refused to complete and the seller resold the land at a later auction, this time with the overage charge referred to in the property description. But the land sold for a lower price at this second auction, and the seller took legal action against the buyer to recover the shortfall through service of a notice to complete and a claim for repudiatory breach of contract.
However, the buyer claimed that the seller had not fulfilled its duty to disclose the existence of the covenant and brought a counterclaim for repayment of her deposit and buyer’s premium.
The High Court reached a decision in favour of the buyer. When doing so they looked at the extent of the duty to disclose, whether a reasonable person would believe and rely upon representations made.
What does this decision mean for you as a seller?
This shows that caution needs to be taken, that the ‘buyer beware’ rule does not apply in property transactions where there is a duty to disclose latent defects in title. Instead, the seller’s disclosure duty prevails and sellers must consider carefully the need to be upfront about any issues and limitations affecting the title. Latent defects include things like restrictive covenants, forfeiture notices, charges, easements and leases and tenancies.
This outcome is particularly significant in terms of auction sales. It would be sensible for a seller at auction to make sure that any significant title defects are clearly highlighted within the auction pack as well as made clear by the auctioneer or agent.
Our commercial property experts deal with auction packs on a regular basis and can help with sale and purchase, acquisition of land, landlord and tenant law and property ownership. To find out more, click here.
Separately our Commercial Disputes team regularly advise on contractual disputes for buyer and seller and can provide specialist advice in this area. If you are interested in finding out more, click here.