Attack on caveat emptor rule in consumer property context

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Summary

The implications of the Consumer Protection from Unfair Trading Regulations 2008 are disturbing and where a trader is selling or letting a property to a consumer, the protections of caveat emptor ("let the buyer beware") have been undermined.

Detail

We are very familiar with the age-old “caveat emptor” rule which means "let the buyer beware". The onus is on the buyer to find out everything it wants or needs to know about the property before buying it or becoming committed to buy it. So, for example, a seller is not required to tell an intending buyer that the property to be sold was the site of a murder. This is subject to limited exceptions in relation to a somewhat obscure duty to disclose latent defects in title and, separately, where the contract is induced by fraud.

So while the seller has some kind of duty to disclose certain defects in title, it would not extend to matters other than title, for example, the existence of adverse environmental reports. However, the Consumer Protection from Unfair Trading Regulations 2008 change the position in a consumer context and it is important to be aware of the extended duties of disclosure imposed by the regulations.

The regulations have been around for eight years, but only in recent times has there been a wider awareness in the real estate legal world about their impact on real estate.

The key impact of the regulations is to increase the extent of the duty of disclosure of the seller and persons acting on its behalf and thereby reduce the protection for the seller of caveat emptor. The regulations apply where the seller is a “trader” (i.e. acting for purposes relating to its business) and the buyer is an individual “consumer”. So they would catch a sale by a house builder to a member of the public (for the latter’s non-business purpose), but not a sale to a company. A consumer to consumer sale is unlikely to be caught. The regulations would appear to apply to a trader selling to a consumer, who is buying for private investment purposes.

The regulations provide that unfair commercial practices are prohibited. A “commercial practice” includes any representation by a trader, which is directly connected with the sale of a product to consumers, whether occurring before, during or after a commercial transaction (if any) in relation to a product. “Product” includes immoveable property. This catches representations such as replies to enquiries provided by the trader seller to a consumer buyer. It would also capture representations made by solicitors acting on the trader’s behalf to the consumer buyer.

A commercial practice is unfair if, in particular, it is a “misleading action” or a “misleading omission”.

It is a misleading action if it contains false information and is therefore untruthful in relation to certain matters (including the nature of the product i.e. the property, and the consumer’s rights or the risks he may face) or if it or its overall presentation in any way deceives or is likely to deceive the average consumer, even if the information is factually correct; and it causes or is likely to cause the average consumer to take a transactional decision he would not have taken otherwise.

A commercial practice is a misleading omission if, among other matters, it omits material information, or provides it in a manner which is unclear, unintelligible, ambiguous or untimely and as a result it causes or is likely to cause the average consumer to take a transactional decision he would not have taken otherwise. Material information includes the information which the average consumer needs, according to the context, to take an informed transactional decision.

A “transactional decision” means any decision taken by a consumer, whether it is to act or to refrain from acting, concerning whether, how and on what terms to purchase, make payment in whole or in part for, retain or dispose of a product; or whether, how and on what terms to exercise a contractual right in relation to a product.

A commercial practice is unfair if it contravenes the requirements of “professional diligence”; and materially distorts or is likely to materially distort the economic behaviour of the average consumer with regard to the product. Professional diligence means the standard of special skill and care which a trader may reasonably be expected to exercise towards consumers which is commensurate with either honest market practice in the trader's field of activity, or the general principle of good faith in the trader's field of activity.

It is a criminal offence to breach the regulations. Potential remedies under the regulations include a right to undo the contract and damages/fines.

So where is this likely to arise? A solicitor acting for a house builder is aware of an environmental report in relation to the property which the seller house builder does not want disclosed. Prior to the regulations, the seller may have been able not to disclose the report through the replies provided by its solicitors to the consumer – “rely on your own investigations” etc (although solicitors still have their duties under the SRA Code of Conduct). The regulations now require disclosure of the report (even if the consumer did not make an enquiry that would require disclosure) if not to disclose would be an unfair commercial practice as defined above.

Failure to disclose an unfavourable environmental report is (at least arguably) likely to cause the average consumer to take a transactional decision he would not have taken otherwise e.g. buy when he might otherwise have pulled out, or he may have sought a price chip if he had known about it. While an environmental report is mentioned, it could be other information and clearly this is much wider than the narrow duty of title disclosure as the exception to caveat emptor.

So the trader seller or the solicitor on its behalf (probably) has the duty to pass the report to the consumer. The implications of the regulations are disturbing and where a trader is selling to a consumer the protections of caveat emptor have been undermined. The regulations also apply to leases to be granted by traders to consumers.

The Law Society has produced a practice note on the topic which states that a solicitor should advise his client on the effects of the regulations. He should make his client aware (possibly in relevant terms of engagement) at the outset of a transaction with a consumer of his duties if he is a trader under the regulations and that neither the client nor the solicitor on his behalf must mislead the buyer, either by providing incorrect or ambiguous information, or by omitting to provide material information. The solicitor should strongly advise the client to disclose any known material information.

The regulations are something that solicitors and their clients need to consider where there is a trader/consumer sale or letting.