Information Withheld Allows Contract to be Rescinded

03 February 2012

It is surprising indeed when a standard and widely used contract term is held to be unreasonable, but that is precisely what happened recently when the particular facts of a case meant that the contract for a property sale took it ‘out of the general run’ of such contracts.

The term in question was a clause in the Standard Conditions of Sale (4th edition), which have been used in thousands of property contracts.

The contract stated (in essence) that the seller had to inform the prospective buyer of a property ‘on becoming aware of anything’ that might make replies to enquiries raised by the purchaser’s solicitors incorrect. However, clause 7.1.3 of the Standard Conditions of Sale states that an error or omission only entitles the buyer to rescind the contract where it results from fraud or recklessness, or where the property differs substantially ‘in quantity, quality or tenure’ from what the error or omission led them to expect.

The vendors owned land which a developer wished to purchase for a property development. Unbeknown to the property developer (who was acting through a third party), a doctor also wished to buy the property to build a surgery and had applied for planning permission to do so.

An oral agreement was made to sell the property to the person acting for the developer. Two days after responding to the standard enquiries about the property, the owners discovered, but did not disclose, the fact that a planning application had been made by the doctor. This changed the ‘risk landscape’ of the property, the value of which was dependent on its development potential.

Contracts for sale of the property were exchanged between the owners and the agent for the developer. The doctor could not be persuaded to withdraw his planning application and, before completion was due, the prospective purchaser claimed a rescission of the contract on the ground that the owner had made a misrepresentation. The prospective purchaser asked for their deposit back.

The Court of Appeal upheld the decision of the lower court that the contract could be rescinded on the basis that the failure to disclose the planning application once the vendor became aware of it was a misrepresentation and the contract was therefore contrary to the Unfair Contract Terms Act 1977 because it ‘failed to satisfy the requirement of reasonableness’ as described in the Misrepresentation Act 1967.

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