Caveat emptor – does a buyer always need to beware?

The short answer is yes – but a recent High Court decision reminds sellers (and their advisers) that caveat emptor has its limitations and that a seller also has a duty of disclosure.

In SPS Groundworks and Building Ltd v Mahil [2022] EWHC 371 (QB) the appellant ("M") had purchased a piece of land at auction which was subject to overage provisions. The overage deed was included in the legal pack and the usual restriction was on the proprietorship register. There was however, no mention of the overage in the description of the auction lot and the auctioneer did not mention the overage during the auction. The usual terms and conditions were included such that the "lot was sold subject to all matters contained or referred to in the documents" and standard conditions were included such that "the buyer accepts the title of the seller to the lot as at the contract date".

M successfully bid for the lot with the hammer falling at £130,000+ VAT. M had not reviewed the legal pack prior to bidding and only became aware of the overage deed when family members downloaded the legal pack. Unsurprisingly M did not complete the purchase. The seller forfeited the deposit and re-sold the lot at auction (with buyers being notified of the overage in the description and by the auctioneer) for £75,000+ VAT. The seller then brought an action against M for losses being the difference in achieved sale price.

At first instance the court, in finding for the claimant, stated:

“Simply this Defendant should have studied the legal pack before bidding. The overage clause was in the legal pack. It was her failure to do what a prudent purchaser should have done that has resulted in her being unaware… The Claimant did reveal the overage clause. It is in the legal pack. It was there to be seen... , the opening sentence in Chitty is that the starting point is caveat emptor. Buyer beware. It is for the Defendant to have, in my judgment, looked at the title and satisfied herself. She did not. That, I am afraid, is the root of the difficulties for the Defendant in this case”. 

M was granted leave to appeal and appealed on six separate points of law the first being "the Judge was wrong in law to conclude that the Respondent had fulfilled its duty to disclose the defect in title by including it in the legal pack". The High Court agreed with the appellant and set out the following principles which can be distilled from the authorities:

• it is a well-established rule of equity that a vendor of property has a duty of disclosure in respect of defects to title. Specifically, the vendor is bound to give the purchaser full, frank and fair information, or a fair and proper opportunity to gain such information, about any defect;
• a purchaser's imprudence in not making enquiries will not relieve the vendor of the duty of disclosure;
• in the absence of specific reference to a defect a purchaser may assume that entries on a property register or within other relevant documentation would be the usual sort of entries which would not significantly affect the value of the property; and
• in the absence of proper disclosure contractual conditions cannot be relied on to save the vendor. The equitable principle of disclosure cannot be circumvented by the inclusion in the contract of a condition deeming the purchaser to have knowledge of the defect.

A sensible buyer would be well advised to take professional advice before purchasing property – whether at auction or otherwise. A full due diligence should almost invariably be carried out. However, SPS Groundworks is a timely reminder that sellers also have an equitable duty to advise buyers of any known defects in title. Sellers, agents and other stakeholders in the sale process should engage solicitors early on to set up a sales pack that contains all the relevant information. Sellers are not (and should not be) required to "red flag" defects to buyers and do not need to state "defective title" in the particulars or description. Sellers do though need to make sure that the known defects are fairly brought to the attention of potential buyers. How this is done will vary depending on the defect and the circumstances of the sale. Standard pre-contract enquiries will usually provide sellers with an opportunity to disclose defects and where necessary to detail how the defects have been mitigated. This will smooth the sale process and progress of the transactions.

SPS Groundworks was on its facts an auction purchase and it is arguable that sellers have a stronger duty of disclosure at auction due to the reasonably foreseeable risk of unrepresented buyers bidding on lots. Notwithstanding, even where both parties are professionally represented it is advisable to bring potential defects (and the mitigation) to the attention of the buyers. Attempting to bury defects would at the very least be contrary to the spirit of the law. A well advised buyer will usually identify any defects delaying and frustrating the transaction. It follows that a prudent seller should fairly disclose defects to avoid, in worst case scenarios, time consuming and costly litigation.

Sellers beware.