When it comes to property sales, the legal principle of “caveat emptor”, or “buyer beware” applies subject to any warranties given by the vendor in the sale and purchase agreement. However, a recent Court of Appeal case confirms that this principle is also subject to the right of the purchaser not to be misled by the vendor or their agent.
A purchaser may bring an action against a vendor for misrepresentation if:
- The vendor makes a representation to the purchaser, which turns out to be false; and
- The purchaser relies on that representation to enter into a contract; and
- The purchaser suffers a loss.
Section 35(1) of the Contract and Commercial Law Act 2017 also states that “If a party to a contract (A) has been induced to enter into the contract by a misrepresentation, whether innocent or fraudulent, made to A by or on behalf of another party to that contract (B)…[then] A is entitled to damages from B in the same manner and to the same extent as if the representation were a term of the contract that has been breached.”
In the recent case of Grant v Ridgway Empire Ltd, Ms Grant purchased a residential unit in Auckland from Ridgway Empire Ltd. The director of the vendor company, Mr Ridgway, had lived in the property for a number of years before the sale to Ms Grant and had had weathertightness repair works done on the property some years before the sale.
Mr Ridgway marketed the property himself. He showed Ms Grant through the property and spoke to her directly about it. Before she signed an unconditional agreement to purchase the property, Ms Grant asked Mr Ridgway whether the unit leaked and whether it was a leaky building. Mr Ridgway replied to the effect “no, the unit does not leak and it is not a leaky building”.
Mr Ridgway also provided to Ms Grant a copy of a safe and sanitary report relating to unconsented works which had been carried out on the property but did not tell Ms Grant that these works were carried out as a result of a leak, which was also not mentioned in the report.
Although the Court was satisfied that Mr Ridgway believed that the weathertightness issues he had previously encountered with the unit had been rectified, as it turned out, the unit was in fact still leaking and had been for some time which caused extensive damage not discovered until several years after the sale to Ms Grant.
In the case which came before the High Court, the Judge found that (i) Mr Ridgway’s statement that the property was “not a leaky building” was an unqualified representation of fact which was false (although innocently made), (ii) Mr Ridgway’s assurance was intended to induce Ms Grant to enter into the agreement to purchase, and (iii) Ms Grant reasonably relied on it in doing so. The Judge awarded Ms Grant damages of $474,101.
Mr Ridgway brought the case to the Court of Appeal contending that the Judge had erred in his findings, but the appeal was dismissed. In particular, Mr Ridgway argued that Ms Grant should have asked follow up questions, asked for a specific warranty from the vendor in the contract, or obtained an independent building report.
The Judge responded to these lines of argument noting that the agreement did not specify that pre-contractual representations must not be relied on and that it was reasonable for the purchaser to rely on the statement made by the vendor because it was made as an unequivocal statement of fact from a vendor who held “superior knowledge”, noting the vendor’s previous occupation of the property and knowledge of past weathertightness issues.
The Court was satisfied that Ms Grant had made it clear to Mr Ridgway that the weathertightness of the building was an important issue to her, yet Mr Ridgway’s response was made with the intention of reassuring Ms Grant that the building was not leaking and, as a result, Ms Grant entered into the agreement.
While a vendor is not under an express duty to disclose all issues which may be of relevance to prospective purchasers, vendors must take care (particularly when marketing the property themselves) not to make statements which could be deemed to be representations on which a purchaser may rely. If there is any doubt as to whether a pre-contractual statement of such nature has been made, a vendor should seek to include a clause in their sale agreement, drafted by their solicitor, which makes it clear that the purchaser enters into the contract in reliance of its own investigations only and not in reliance of any representation made by the vendor.
This case highlights the importance of obtaining legal advice when purchasing or selling a property. Apparently innocent statements made in good faith can have significant consequences if not dealt with appropriately in the legal documentation. Our team of property law specialists have the knowledge and experience to help you manage the legal risks involved with all of your property transactions.
Published: 26 June 2019