A recent Court of Appeal decision highlights the need for anyone selling a property to be very careful about the statements they make to a potential purchaser.

In this particular case, Ridgeway Empire Limited v Grant, the vendor was held liable for statements made to a buyer, which he believed to be true, but that turned out to be incorrect. As a result, he had to pay $474,101 to the purchaser, plus general damages and legal costs for two court cases.

Background

The case involved the sale of a residential unit, which the vendor had owned, and lived in, for nearly four years. He then moved into an adjoining unit, while the other, which was being sold, was leased to tenants.

No land agent was involved in the sale – the vendor marketed the unit himself. He showed the purchaser through the property, speaking to her directly about it. Before entering into the purchase agreement, the buyer asked the vendor if the unit leaked, and whether the building was leaky. The vendor answered “no” on both counts.

However, although the vendor did not know this at the time, the unit was, in fact, leaking, and it was a leaky building. Because of latent defects, the unit had been leaking for some time, causing extensive damage that was not discovered until two years after the sale was finalised.

Court proceedings

The High Court judge considered that the vendor’s statement was an unqualified representation of facts which was false, although innocently made. The judge decided that the vendor’s statement of reassurance was intended to induce the buyer to enter into the agreement to purchase, and the purchaser reasonably relied on the vendor’s statement in doing so. As well as an award for the repair costs, the judge also ordered the vendor pay the purchaser $25,000 in general damages for stress and anxiety.

The vendor unsuccessfully appealed to the Court of Appeal, arguing he did not build the unit or have any expertise in the building industry, and that he had been merely expressing his opinion based on his experience of owning and living in the unit. It was never suggested the vendor knew that the unit leaked.

The Court of Appeal said that, in some cases, a vendor will not be liable for statements made to a purchaser, such as where it is obvious that a seller is not in a position to know the absolute correctness of their statement, even if it is expressed as an unqualified statement of fact.

The Court said that determining whether there has been a misrepresentation of facts depends not only on a consideration of the literal meaning of the words used, but also the context. A court will consider what a reasonable person would have understood from the words used in all the circumstances, together with other factors, including the nature of the transaction, the parties’ respective knowledge, and their relative positions.

Lessons

If a vendor with superior knowledge takes it upon himself/herself to make a representation of fact without qualifying it, they will likely have to accept the consequences of being wrong. In this case, the vendor did not qualify his statement by saying, for example, “I don’t believe it leaks”, or “As far as I know, it doesn’t leak”. What he said was expressed as a statement of fact, not opinion, and he did not reference his knowledge or experience.

The vendor also had superior knowledge about the unit because he had owned, and lived in it personally, for several years, and carried out significant renovations, as well. He also lived in the unit next door, and was carrying out renovations to that property at the time of the sale.

Further, the vendor did not disclose all material facts known to him. He did not tell the purchaser that there had been serious leaks in the past, leading to significant water ingress to the timber framing behind the walls and in the ceiling on the second floor, the area where the buyer later discovered leaks. On the contrary, the vendor provided the purchaser with a safe and sanitary report, which didn’t refer to the previous leaks. Providing the report without disclosing the leaks that had prompted the need for remediation was misleading. The vendor should have told the purchaser about the history of the leaks and simply stated that, as far as he was aware, the problem had been fixed.

Words matter. If you are a vendor, you must be very careful about any statements you make. Don’t make unqualified statements unless you are absolutely certain that they are true. If you are not sure, you should state that you are not sure, and emphasise that you are not qualified or do not have full knowledge, or advise that it is only your opinion.

Be sure, also, to record in writing to the purchaser any such qualifications to any statements made. And, if you are a purchaser, and you want to rely on a statement made by a vendor, you should include an appropriate clause in the contract making it clear that the vendor is giving a warranty which is essential to you.

Residential property Selling residential property