Caveat Emptor - let the buyer beware

What is the caveat emptor rule?

The caveat emptor rule exists as one of the cornerstones of the principles of freedom of contract in English law. Historically, the courts have taken the view that their function was not to protect an individual from making a bad bargain or from doing something that they later regret. They have seen their function as providing a ‘level playing field’ which would enable individuals and corporations to carry out their business dealings. The rule is a creation of the common law courts and like many other things in the modern it is now circumscribed by statutory provisions, such as the Unfair Contract Terms Regulations created for our betterment and protection by Parliament.

The rule is really quite straightforward, anyone entering into a contract has to make sure that they know everything they need to know about the subject matter of the contract. Hence the English translation - buyer beware.

Impact of the rule on landlords and agents

What are the likely impacts of the caveat emptor rule for agents, landlords and their tenants?  A number of examples help illustrate the issues.  Some developers of new properties are offering enticements to buy-to-let investors.  They are offering guaranteed rental returns of between 5-6% when the actual return on the open market would only be about 4%.  Perhaps more significantly, if all the properties in the development were to be marketed at the same time at the end of the guarantee period, the effect on rental levels and speed of renting will have an impact on the soundness of such an investment.  There was no requirement for the developer to provide any information not requested by the purchaser.

In a similar vein, I was asked recently by an agent whether he was required to tell prospective tenants of the difficulties that the previous tenants had had with the neighbours.  The answer was that there was no requirement to volunteer the information but if the prospective tenant asked them you would have to tell them. In a recent case in the High Court purchasers of a property successfully sued the vendors who had deliberately omitted any reference to the on-going disputes that they had had with the neighbours. Indeed as agents and landlords will have continuing contact with the tenants it might be wiser to be upfront about any such difficulties.

A gruesome murder provided an illustration of the problem
In a recent case involving a gruesome murder, the issue of how much information a vendor, or indeed a tenant, is entitled to receive was raised.  In the early 1980's a doctor killed a 13-year-old girl that he and his wife had kept as a house slave.  Initially he had buried her in the garden of the house but later he dismembered the body and hid the small pieces in different parts of the house.  His attempts at concealment failed and in due course he was convicted of murder and imprisoned.

But what happened to the house in which this murder took place?  It was sold and lived peacefully until the late summer of 1998 when the defendants purchased it.  They were completely unaware of the house's history until they received an anonymous letter. Their reaction was to sell the house but, after taking legal advice on the issue, they did not tell the purchasers.  All might have passed off quietly but for a television documentary on the murder. They left the property and had to sell it at a discount, which they claimed was £25,000.  This brought the matter to court and eventually to the Court of Appeal. To quote one of the judges Lord Justice Peter Gibson:
"I feel a good deal of sympathy for the appellants.  I can well understand their horrified reaction to learning that their recently purchased house had been the scene of so gruesome a murder, made all the more vivid by the details given in the documentary shown on television and with the possibility that parts of the victim's body might still lie undiscovered in their house.  I can well understand their indignation that although the value of the house has fallen so sharply in the light of its history once revealed, the respondents might not be liable to them to make good that loss.
However, the question for this court is a dry question of law as to whether the respondents incurred a liability to the appellants in answering question 13 of the Seller's Property Information Form in the negative.  The answer to that question cannot be affected by my sympathy for the appellants.
Because the caveat emptor rule can work harshly on purchasers, whose knowledge of material facts affecting the property they are purchasing is almost certain to be considerably less than that of the vendors, the practice of sending pre-contract enquiries has become standard and the scope of the enquiries has been extended over a period of time.  It is for the buyer to decide what enquiries to raise and in what form.  It cannot be doubted that a more specific and less subjective question going to the value of the property or to the ability of the purchaser to enjoy the property could have been asked.  Unhappily, question 13 in the Law Society's form at that time (we are told that it is no longer in use) did allow the answer to be given in a way which only required, in my view, the vendor to answer the question honestly( 1)."

As the answer to question 13 of that form was at the heart of that appeal, the form has at its head the words "IMPORTANT NOTE TO SELLERS".  It included the following words:

* It is very important that your answers are correct because the buyer will rely on them in deciding whether to go ahead. Incorrect information given to the buyer through your solicitor, or mentioned to the buyer in conversation between you, may mean that the buyer can claim compensation from you or even refuse to complete the purchase.

* It does not matter if you do not know the answer to any question so long as you say so.

Question 13 was headed "general". It was in these terms:
"Is there any other information which you think the buyer may have a right to know?"
That was answered "no".

Impact of the caveat emptor rule

The effect of the maxim caveat emptor is that a person has no duty to disclose problems voluntarily.  Thus, if one person is labouring under a misapprehension, there is no duty on the other person to correct it.  However, there are three fundamental exceptions to this rule:

• The representor must not misleadingly tell only part of the truth.  Thus, a statement that does not present the whole truth may be regarded as a misrepresentation.
• Where a statement was true when made out but due to a change of circumstances has become false by the time it is acted upon, there is a duty to disclose the truth.
• Contracts uberrimae fidei (contracts of the utmost good faith) impose a duty of disclosure of all material facts because one party is in a strong position to know the truth. Examples would include contracts of insurance and family settlements. A material fact is something which would influence a reasonable person in making the contract.  If one party fails to do this, the contract may be avoided. Where there is a fiduciary relationship between the parties to a contract, a duty of disclosure will arise, for example, solicitor and client, bank manager and client, trustee and beneficiary, and inter-family agreements.

Caveat emptor and misrepresentation

In many cases there may be a fine line between caveat emptor and misrepresentation particularly as over the last 30 years there has been increasing statutory intervention.  Misrepresentation is a false statement of existing fact, which is made by a person or their agent, which induces another to enter into a contract. From the Misrepresentation Act 1967 to the amendments to the Sale of Goods Act in 1994 and the Unfair Terms in Consumer Contract Regulations 1994, the doctrine of caveat emptor has gradually been weakened and, as far as consumers are concerned, replaced with caveat venditor.  As one of the leading legal authorities Professor Atiyah has noted 'it is now unrealistic to treat the basic principle of law as caveat emptor rather than caveat venditor.'  Moreover, the European Union has consistently taken a pro-consumer stance and more legislation in this vein is planned.

Misrepresentation is defined in the dictionary as the act of representing wrongly or inaccurately but it is defined in the Act as "where a person has entered into a contract after a misrepresentation has been made to him by another party thereto(2)."  Further, the section states that the person making the misrepresentation will be liable "unless he proves that he had reasonable ground to believe and did believe up to the time that the contract was made that the facts represented were true."  The Act also gives the court the power to award damages even where the misrepresentation was entirely innocent and no contractual undertaking was given as to its accuracy.

Conclusion

Whilst legislation both from Westminster and Brussels has and will continue to chip away at the edges of the caveat emptor rule it will remain a basic concept and the 'buyer beware' premise should not be forgotten, even in our highly regulated world.


References
1.   Sykes v Taylor-Rose [2004] EWCA Civ 299
2.  Section 2(1) Misrepresentation Act 1967