With the popularity of property auction programmes such as Homes under the Hammer, auctions are no longer seen as the preserve of seasoned investors or developers. However, in reality auctions carry substantial risk and require careful research. The maxim caveat emptor (buyer beware) applies, and the law rarely assists those who change their mind or cannot complete after the hammer falls. The buyer is expected to have done their due diligence, read the auction pack and taken legal advice or, indeed, as was the case with clients I was instructed by, bid without doing any of this and assumed the risk.
However, there is one exception to caveat emptor: defective title. The main, if only, obligation on the seller is to convey good title to the property. That obligation includes giving accurate information about it upfront. What happens where that information, which adversely affects value or title, is buried in the legal pack?
Background
Auctioneers usually list lots with an entry on their website and sometimes in their hardcopy brochure. Online listings provide access to various documents particularly, the legal pack. In-person auctions sometimes have the legal pack in hardcopy to either take or view. The legal pack usually includes the terms of sale, office copies of the registered title, relevant deeds or tenancies, leasehold packs etc. The prospective purchaser bids on the standard conditions of sale offered by the auction house together with any special conditions included by the vendor. At the fall of the hammer, the winning bidder pays the deposit, auction fee and exchanges contracts. The obligation to complete is usually 28 days later but set by the vendor.
What happens if the winning bidder fails to read the legal pack and then discovers that the property was encumbered or that its title was defective?
While misrepresentation may be an avenue, I will look at what obligation the law places on the seller to make disclosures about the property rather than the making of false statements.
Is there a duty of disclosure on the vendor?
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.
This rule is an exception to the caveat emptor principle.
In Re Marsh and Earl Granville (1883) 24 ChD 11, the court held that a vendor is under an obligation to disclose all defects in title and encumbrances of which he is aware. Mr Justice Fry put it thus: “he must tell the truth, and all the truth, which is relevant to the matter in hand.”
Can the buyer be deemed to know of the defects?
The conditions of sale usually include terms such as:
“any property is sold subject to any lease, covenant, restriction or other matter… the purchaser shall be deemed to purchase with full notice and knowledge of such matters whether or not he shall have availed himself of the opportunity of such inspection…”
These terms are designed to put the burden of inquiry on to the buyer. However, these terms assume that the duty of full disclosure as to title has been complied with.
In Nottingham Patent Brick & Tile Co v Butler (1885) 15 QBD 261, Willis J held:
“Such a condition, however, does not relieve the vendor from the necessity of disclosing any incumbrance or liability of which he is aware, but simply protects him if it should afterwards turn out that the property is subject to some burden or right in favour of a third person of which he is unaware…”
Similarly, in Farqui v English Real Estate [1978] WLR 963, the property was sold “subject to … (b) the entries on the registers of title.” The contract provided that copy entries were available for inspection at the vendor’s solicitor’s office but the purchaser was deemed to purchase with “full notice and knowledge” of them.
When the buyer’s solicitors saw the entries after the auction, it was discovered that the freehold was subject to various matters in the charges register. Mr Justice Walton found that despite this clause:
“It has for a long time been the view of equity that if there is a defect in the title and the vendor knows that there is a defect — and in the present case there can be no question but that the vendor knew there was a defect — then it is the duty of the vendor to disclose the same fully and frankly in the particulars or in the conditions, or at any rate in some place where the purchaser’s attention will be drawn to it.”
Such clauses may be effective for entries of “the usual sort” but not entries which impair value or title. The judge noted:
“Any purchaser reading these… conditions of sale would be entitled, I think, to assume that of course there were entries on the register but that those entries were only of what I may call the usual sort, which do not in any way affect the value of the property adversely. He would be most surprised to learn… that he was literally buying a pig in a poke because he was taking the property subject to the contents of a deed which could not even be produced.”
Rignall Developments Limited v Halil [1987] Ch 190 also concerned the winning bidder not having undertaken searches. After winning, he discovered that the property was subject to a local land charge in respect of repayment of an improvement grant. The vendor relied on general and special conditions which deemed any purchaser to have made local searches and to have knowledge of what they would disclose.
The vendor also relied on s98 of the Law of Property Act 1925 (through which the purchaser was deemed to have known of the existence of entries under the Land Charges Act 1925).
Millet J held that the vendor could not rely on these provisions “unless full and frank disclosure is made” of any defect in title or encumbrance of which he is aware. Further:
“To entitle [the vendor] to rely on the relevant conditions… it was incumbent on her to disclose the existence and nature of the entries to the plaintiff before contract… it is hardly necessary to add that the equitable principle cannot be circumvented by the inclusion in the contract of a condition deeming the purchaser to have searched the register and to know.”
What is a defect in title?
The cases above show that a defect in title or encumbrance which triggers the vendor’s duty to give “full and frank” disclosure include entries on the charges register which could adversely affect value. These include the property being subject to a deed which affects its value, including overage.
In SPS Groundworks v Mahil [2022] EWHC 371 (QB), the purchaser refused to complete on discovering that four fifths of the land could not be developed and the land was subject to an overage agreement.
The buyer made the winning bid on a parcel of land in the village of Stoughton. The land was described in the auctioneer’s catalogue as having “excellent scope for development, subject to any required planning permissions, making a superb investment opportunity.”
The buyer viewed the land and was taken with it. In a familiar tale, however, she failed to read the auction pack (claiming it would not download). She said that there was no hardcopy at auction (disputed by the auctioneer). She also did not read the terms and conditions of sale.
The legal pack contained a copy of the overage deed and office copies (which referred to the deed within a restriction on the title). The terms of sale included a provision that “the lot is sold subject to all matters contained or referred to in the documents” and “the particulars are based on information supplied by or on behalf of the seller. You need to check the information of the particulars is correct.”
Unknown to the buyer, the parish council had registered most of the land as a local green space, protecting it from development. The buyer learned of this after exchange when the council contacted. It was then her sons and husband each downloaded the legal pack and discovered the overage clause.
The trial judge held that the overage clause was a defect in title but the buyer had failed to make prudent inquiries or read the legal pack. He held that:
“Buyer beware. It is for the [Buyer] to have… 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.”
While that may be so, Cotter J reversed the judge on appeal. The judge, having reviewed the authorities held that:
“a purchaser’s imprudence in not making enquiries will not relieve the vendor of the duty of disclosure… 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.”
Critically, the judge held that referring to the legal pack was insufficient. Where there is a defect in title, the vendor was required to bring the overage clause to the attention of bidders in the description or particulars, addendum notices or by reference by the auctioneer (indeed when the lot was re-listed, this is what the vendor did).
The saving grace for the buyer was the seller’s failure to draw attention to the overage provision. The judge, on appeal, considered that there was a misrepresentation as to development potential but declined to reverse the trial judge’s finding that the buyer had not relied on it. This decision, although in favour of the buyer, illustrates how hard it can be to succeed in misrepresentation alone.
Conclusion
Vendors selling through auction, prospective buyers and their respective solicitors should bear in mind that there is an exception to the caveat emptor rule when it comes to auctions:
- It is a well-established rule of equity that a vendor 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 their duty.
- 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.
- 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.
This article reflects the law as of the date it was published. Whilst every effort has been taken to ensure that the law in this article is correct, it is intended to give a general overview of the law for educational and/or informational purposes. It is not intended to be a substitute for specific legal advice and should not be relied upon for this purpose. This article represents the opinion of the author and does not necessarily reflect the view of any other member of St Philips Chambers.
