The Importance Of Being Honest

The contract provided for a delayed completion to allow the buyer to obtain planning permission for the development of a block of apartments. The seller had responded to Commercial Property Standard Enquiries that it was unaware of any planning applications in respect of the site, but later received notice of an application for planning permission for the development of a medical centre. Crucially, the seller did not disclose this application to the buyer, despite the duty to correct any incorrect replies to enquiries.

The buyer became aware of the planning application and, fearing that it would make the grant of permission for residential development less likely, sought to rescind the contract. The seller counterclaimed for specific performance of the contract or damages in lieu, arguing that the claim had been issued because of a dramatic fall in property prices since exchange of contracts. The county court judge found for the buyer because he had relied on the enquiry replies and would not have entered into the contract if the planning application had been disclosed.

The contract incorporated the Standard Conditions of Sale (fourth edition) including condition 7.1.3 (which is the same as condition 7.1.1 of the fifth edition and condition 9.1.3 of the Standard Commercial Property Conditions) (see box).

Standard Condition 7.1.3

"An error or omission only entitles the buyer to rescind the contract where it results from fraud or recklessness or where he would be obliged, to his prejudice, to accept property differing substantially (in quantity, quality or tenure) from what the error or omission had led him to expect". Failure to correct the replies to enquiries gave rise to an innocent misrepresentation, which, but for inclusion of this condition, would entitle a buyer to rescind the contract. However, section 11(1) of the Unfair Contract Terms Act 1977 provides that exclusion of liability for misrepresentation is only valid where the term is fair and reasonable in all the circumstances. The county court judge found that condition 7.1.3 was not fair and reasonable in the circumstances of...