Lies and ignorance – dangerous bedfellows

Every prudent prospective buyer or prospective tenant of commercial premises will insist that the seller or landlord completes the relevant standard commercial property enquiries.

These provide the buyer with further information which would not be available from a physical inspection; nor, necessarily, from any other searches or enquiries the buyer may make. Evidently, therefore, they are a useful tool which every buyer should engage.

A concern, however, has always been the effort sellers go to when answering the enquiries. This can be a long and arduous process which confers little benefit to the party completing them.

Responses such as “The buyer is advised to rely on his own enquiries” are often seen; reflecting the lack of knowledge some investor landlords have about the precise running of their portfolio, or perhaps even a lack of interest at that stage of the transaction.

Despite the CPSEs’ themselves requiring the party responding to “supply all details relevant to the replies, whether or not specifically requested to do so” there has always been a concern that the information provided may not always be full or accurate.

A recent case (Greenridge Luton One Ltd and another v Kempton Investments Ltd) has clarified and cemented the rights available to the party requesting responses, especially where inaccurate and misleading information is given. This should serve as some comfort to buyers; but as a stark warning to sellers.

In a nutshell, the case determined that where a misrepresentation is made by Party A which is relied upon by Party B (to Party B’s detriment), Party B is entitled to rescind the contract and claim damages.

In that case, the seller was the owner of a number of buildings let to one tenant. In January 2013, the tenant had expressed concerns regarding the service charge, managed by an agent employed by the seller – and as a result the tenant withheld payment of the service charge in June and September 2013.

In the preceding March, whilst preparing draft replies to CPSEs in contemplation of a sale (but without there being a buyer in the wings at that stage) the replies were prepared on the basis there were no ongoing disputes with any tenants. For example, when asked about any monies owing; the seller replied “There are no arrears. The tenants pay regularly and the landlord has never had to take any action for recovery”.

In August 2013, once a buyer had been found, the CPSEs were sent to the prospective buyer; and subsequently in September 2013, contracts were exchanged on the basis the property was to be sold “free from incumbrances apart from matters disclosed”.

However, the valuers instructed by the buyer’s lender learned of the service charge dispute, and that payments had been withheld – and accordingly advised their lender client not to release the loan monies until the matter had been satisfactorily resolved. As a result, the buyer did not complete resulting in the service of a Notice to Complete and the seller seeking to forfeit the deposit (£812,500).

The buyer issued proceedings to recover both the deposit and damages, citing fraudulent misrepresentation as the grounds – and the Court determined the seller had fraudulently or recklessly made an untrue representation which had been relied upon by the buyer and which had resulted in the buyer’s loss. Accordingly, the buyer was entitled to both to reclaim his deposit and to damages which were assessed at £395,948.

Comment

Interestingly, it is difficult to know whether the misrepresentation was fraudulent or reckless – given the advance preparation of the CPSEs and given the Landlord employed a managing agent to deal with the service charge. It is not clear whether the seller “knew” there was a dispute and lied about it (fraudulent), or “should have known” there was a dispute but didn’t in fact know, and mentioned nothing (reckless). However, this case demonstrates that either scenario will be treated in the same way – and that ignorance is no defence.

It also shows that when preparing documents in advance, a prudent and proactive seller must always update them if new information is known. Sellers should treat the provision of information as an ongoing duty; and this should be borne in mind.

What this means for you

As a Landlord/Seller – dealings with your surgery premises are governed by this principle – and whether you are transferring a share to an incoming partner, selling the entirety of the property to a third party or transferring an interest under a lease, you have a duty to provide all information available to you; honestly, openly, and without contraction.

Don’t be afraid to say what you do not know; but never make assumptions. Remember: it is still possible to make a fraudulent misrepresentation where you have “recklessly” made a statement. If you don’t know it for certain, don’t state it as a fact.

Furthermore, where third parties are involved, the duty of disclosure should be considered as applying to information they hold too. Don’t be afraid to make enquiries of relevant parties such as NHS England/NHS PS/LIFT/a third party landlord who may hold vital information about service charges; facilities management etc. If they don’t respond to you, advise the buyer that they should make enquiries of these organisations themselves.

As a Tenant/Buyer – don’t be afraid to push back on vague responses. Where the Landlord/ Seller advises you to rely on your own enquiries, ensure that you obtain a definitive response first: does the Landlord/Seller, to the best of his knowledge, have any information about that point? Don’t move on until you have received a firm response!

And if it later transpires that the response was inaccurate or misleading, and this has caused you to suffer loss, you can contact us to discuss how we can help to resolve the matter.

Articles from the Newsbrief: Five Year Forward View – next steps for primary care, GP Practice Mergers, Updated GMC Guidance on Confidentiality 2017 – what you need to know, Lease repairs for surgery premises – tackling and managing the risks, Retirement of a GP – checklist,  Lease overheads in GP Practices – reducing service charge liabilities.

Click here to read the spring edition of Hempsons’ Practitioners Newsbrief in full.