A tenant of part of a building had some concerns regarding the service charge. Due to these concerns, payment of the June 2013 and September 2013 service charge proportions were withheld by the tenant. During June 2013 and November 2013 there was correspondence between the tenant and the landlord’s managing agent’s solicitor regarding the service charge. The correspondence referred to the tenant’s concerns and that this had given rise to a service charge dispute on at least five occasions. In March 2013, in readiness for a sale of the property, draft replies to commercial property standard enquiries were prepared. Between 14 and 16 August 2013, a buyer was provided with these replies. The replies said that there were no disputes outstanding, likely or in the past and that there were no service charge arrears. The buyer’s solicitors asked for further information in relation to the service charge accounts and collection period. This information was not provided.
Contracts for the sale of the property were exchanged in September 2013 with a deposit of £812,500 paid by the buyer. The buyer’s prospective lenders were told by the valuers that there was a substantial service charge dispute between the tenant and the seller. Before drawdown of the loan to the buyer, the bank’s valuers advised that this was verified.
The buyer claimed material misrepresentation against the seller due to non-disclosure of the above service charge dispute. The buyer cancelled the sale contract, claimed return of the deposit and damages (see below). The seller noted that the buyer had cancelled the sale contract and therefore claimed that the £812,500 deposit had been forfeited by the buyer. Four months later, the seller sold the property to a third party.
The buyer issued proceedings against the seller to recover:
(i) the £812,500 deposit; and
(ii) damages for fraudulent misrepresentation.
The court decided that:
- misrepresentation was provided in relation to the service charge arrears – the replies to property enquiries given to the buyer were wrong. There had been a service charge in dispute between the seller and the tenant. There was an untrue representation made recklessly or fraudulently that were no service charge arrears or disputes; and
- the buyer had relied on the replies to the property enquiries and was induced to enter into the sale contract by the misrepresentation.
The buyer was entitled to terminate the sale contract, have the deposit of £812,500 returned to it and to receive damages for deceit of £395,948 (this included the buyer’s wasted professional costs of the transaction).
The case is a useful reminder for sellers, landlords and their advisers that the preparation of replies to enquiries should not be taken lightly or dismissed in an attempt to rush through a transaction or make a building more appealing to a buyer/tenant. Whilst working on replies can be time consuming and somewhat frustrating, full and updated disclosure should be made. So as to avoid a claim for fraudulent or reckless misrepresentation, it’s important to ensure that buyers/tenants are provided with up-to-date replies to enquiries and kept informed of any changes that will affect the accuracy of the replies.