Shoosmiths' real estate experts explore commonly encountered issues and also tips and traps for providing and receiving replies to Commercial Property Standard Enquiries.
Replies to Commercial Property Standard Enquiries (“CPSEs”) are designed to provide practical information about the property to assist buyers and tenants with their due diligence. A well drafted set of replies should provide the other party with sufficient information to understand the property, although they may wish to raise additional enquiries regarding certain responses.
In practice, obtaining sufficient replies to CPSEs can be challenging if the property is newly acquired, subject to hands-off management or the individual providing the replies to CPSEs does not have sufficient “on the ground” knowledge of the property in order to supply accurate and complete responses.
In this article, we will explore commonly encountered issues and also tips and traps for providing and receiving replies to CPSEs. References to seller and buyer are equally applicable in the context of landlord and tenant.
Q: Is the seller under an obligation to provide replies to CPSEs?
The principal of caveat emptor (let the buyer beware) applies and it is the responsibility of the buyer to raise enquiries of the seller in order to form its own view of the Property. However, whilst there is no obligation to provide replies, it has become standard practice that they are provided and most buyers will expect to receive them as part of an initial title pack. Depending on the context of the transaction, it is usually in the seller’s interest to provide replies in order to reduce the number of further enquiries raised by the buyer and to enable the parties to spend more time focusing on the transactional documents.
Remember that even if replies are not being provided the seller is still under a common law duty to disclose latent defects at the property of which it is aware.
Q: Are the interpretation provisions important?
The interpretation provisions provide context for the replies. Assuming that the standard interpretations are included, they contain:
- an acknowledgement from the buyer that it is still expected to inspect the property, have the property surveyed, investigate title and make all appropriate searches and enquiries of third parties;
- an acknowledgement from the seller that in giving the replies it has provided the buyer with copies of all documents and correspondence, and details, that are relevant to the replies, whether or not specifically requested to do so; and
- confirmation from the seller that it will notify the buyer on becoming aware of anything which may cause any reply that it has given to be incorrect.
There is nothing to prevent the seller from including additional statements in the interpretation provisions which impact reliance on the replies given and it is therefore essential that the buyer reads these in full prior to reviewing the replies.
Clients should be made aware of the impact of these interpretation provisions and their respective obligations.
Q: If the seller doesn’t know the answer, should they take a best guess?
As discussed below, a misleading or untrue statement could give rise to a claim for misrepresentation. This means it is important that the seller responds accurately by:
- not implying it has more knowledge than it does; and
- only being categoric with ‘yes’ or ‘no’ answers when they are matters of fact.
It is common for sellers to respond “so far as the seller is aware …” (or similar language) in an attempt to limit their liability for statements made. However, such a statement does not remove the need for the seller to investigate matters properly before responding. This is of particular importance where the seller is a corporate entity, as any reply is deemed to have been made with corporate awareness (i.e. the person giving the replies has spoken with the relevant personnel involved, such as employees actually at the property or its finance team).
Where a change in personnel means that the relevant corporate awareness is not available (or where a property is newly purchased and so the information is not available) the seller should make this clear when providing replies, either in a covering e-mail or by adding a new statement to the interpretation provisions, and any such a statement should be flagged to the buyer
Q: What happens if the seller replies incorrectly? Will there be a misrepresentation?
On the face of it, a buyer has no remedy for incomplete or incorrect replies provided by the seller unless it can establish that there has been a misrepresentation. A misrepresentation occurs where the seller makes an untrue statement of fact, the buyer relies on it and enters into the contract and, as a result, the buyer suffers loss.
A claim for misrepresentation does not require an outright lie (known as “fraudulent misrepresentation”) and can arise where a statement has been made negligently (i.e., carelessly, or without reasonable ground for believing its truth) or innocently (i.e., where a statement turns out to be incorrect, even if the person making it had reasonable grounds to believe that it was true).
The statement relied on must be a statement of fact (or law) rather than simply giving an opinion on a state of affairs. “This is a great deal for you” is unlikely to constitute misrepresentation whereas telling a potential occupier that another company has already signed a lease in the same development (if this is not true), might give rise to a claim.
When assessing whether a misrepresentation was made, a court will be concerned with whether the statement materially influenced the other party to enter into the contract. This is a question of fact. The test is whether the buyer would have entered into the contract had the statement not been made, rather than what they would have done knowing the truth – a “but for” test.
Q: What are the consequences of a misrepresentation?
A: Damages or recission.
A victim of fraudulent misrepresentation can seek damages to recover all financial losses stemming from it having entered into the contract, even if such losses were not foreseeable. Alternatively it could seek recission of the contract (setting it aside and seeking to restore the position as if the contract had never been entered into).
A victim of negligent and or innocent misrepresentation can also seek recission, but this is at the discretion of the court. It is more usual that an award of damages will be made, to put the claimant into the position in which they would have been in if they had never entered into the contract.
Q: I’m a solicitor, not the actual seller, so presumably I have no liability?
It is common for solicitors to draft replies on behalf of their client, but responsibility for the replies ultimately lies with the seller.
However, where there is negligence on the part of the solicitor in preparing the replies or advising on them, the seller (having had a claim successfully made against it) may be able to claim damages against its solicitor for any losses it has suffered as a result.
Further, knowledge gained by a solicitor during the transaction is also deemed to be within the actual knowledge of the seller, whether or not the solicitor passed on the information. It is therefore important to keep a seller client updated as the transaction progresses and ensure that any change to replies previously provided is communicated to the buyer.
Q: Can you exclude liability for the replies? Are there any defences to misrepresentation?
In theory statements can be made to exclude a seller or seller’s solicitor from liability for the content of its replies but the buyer would need to accept any such carve out, which is unlikely. Furthermore there are no reported cases on this point and so it is impossible to know how a court might interpret such a provision. One can expect, however, that it would be unwilling to uphold all but the most express wording.
This article was first published by EG on 11 December 2023.