18/03/2019

Non-reliance clauses – can they be relied on?

A non-reliance clause is one of the commonest clauses included in property contracts; they are designed to limit reliance on written or oral representations made by or on behalf of the landlord or seller.  But how effective is this type of clause in the situation where the landlord or seller has not been entirely truthful?  Can they use a non-reliance clause to effectively wriggle out of any statements made by them?

The effectiveness of non-reliance clauses in this situation came under scrutiny in the Court of Appeal decision in First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018] EWCA Civ 1396.

Facts

In 2015, CDS (Superstores International) Ltd (CDS) negotiated leases of four large loading bays from First Tower Trustees Limited (FTT).  In the replies to enquiries raised by CDS, FTT stated that that it was not aware of any circumstances which might give rise to a breach of environmental law.  Subsequently, FTT received a report that the property was contaminated with asbestos (to the extent that the premises were dangerous to enter), but failed to inform CDS of this fact.

CDS completed a lease of three bays and entered into an agreement for lease of the fourth bay with both documents containing a non-reliance clause.  Almost immediately after completion CDS discovered the asbestos; the cost of carrying out the remedial works was nearly £500,000, plus CDS had to pay for alternative premises whilst the works were being carried out.  CDS brought a claim against FTT for misrepresentation in the replies to enquiries and terminated the agreement for lease.

The High Court held that FTT had misrepresented the condition of the premises in the replies to enquiries and that this misrepresentation had been relied upon.  The court further held that the non-reliance clause was of no effect as it failed to satisfy the requirement for reasonableness in section 3 of the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977.  CDS was awarded £1.4 million plus interest.  FTT appealed.

The Court of Appeal unanimously upheld the High Court's decision that there had been a misrepresentation by FTT and that the non-reliance clauses were not reasonable in the circumstances.

Comment

The ruling in this case was sensible; it would made a mockery of raising enquiries in any property transaction if they could not be relied upon.  There is a difference between using a non-reliance clause to exclude random comments made by over enthusiastic sellers or their agents and using the clause to avoid telling the truth in formal replies to enquiries.

This case also contains a number of useful reminders:

  • Sellers should ensure that replies to pre-contract enquiries are accurate and not misleading, not only at the date they are given but right up until the point that a binding agreement for sale or lease is entered into. It is important that sellers are reminded that any changes in their replies are notified to the buyer.
  • Sellers should make reasonable efforts to check their records when giving replies and, where an organisation is selling or leasing, that would include asking its appropriate employees for information.
  • A non-reliance clause which purports to limit the effect of a misrepresentation in pre-contract enquiries will not protect a seller or landlord unless they can prove that the clause is reasonable.
  • A buyer or tenant should not agree to the inclusion of a non-reliance clause unless it is amended, for example, to allow reliance on written replies given by the seller’s solicitors to the enquiries raised by the buyer’s solicitors.

Bevan Brittan’s property team have considerable experience in drafting all types of property documents, particularly where expertise is required in tricky drafting scenarios.  Reminding clients of their ongoing obligations is something we routinely do, although reminding a client to tell the truth has to be done with some diplomacy!