Seller Beware!: SPS Groundworks v Mahil
Our Senior Analyst Joshua Riffkin has broken down this interesting case that saw an unusual decision granted by the courts.
Summary
In SPS Groundworks & Buildings Ltd vs Mahil, the High Court ruled that a buyer was not obliged to complete on an auction purchase as there was no explicit disclosure to an overage clause which made a materially negative impact on the land.
Background Knowledge
– In property, there is a well-known common law principle called “Caveat Emptor” (aka. “Buyer Beware”) which places the onus on the buyer to investigate the details of the item they’re purchasing.
– There’s also a common law principle in property requiring the seller to disclose any defects in the title.
– When purchasing a property at auction, the contract for the sale is entered into (aka. “Exchanged”) on the fall of the hammer. Consequently, it is exceptionally rare to find a case when an auction winner can break away from a purchase without sanction.
– An Overage Agreement (or Overage Clause) is a promise to pay a third party a portion of an increase in value attributable to obtaining planning. Hence, when purchasing land for development, it would be best for the developer if there was no overage clause in the title requiring the developer to give up a portion of their added value.
Case Context
– A property was sold at auction and described as having “excellent scope for development”
– The seller failed to mention in the brochure that there was an Overage Clause promising to pay a third party in the event of an increase in value from obtaining planning permission
– The Deed containing the Overage Clause WAS however included in the Auction’s online legal pack
– The buyer went to see the property in person but did not read the legal pack and hence missed the details of the Overage Agreement
– After winning the auction, the buyer downloaded the legal pack and spotted the overage provision and refused to complete the purchase
– The seller late sold the property at a second auction for a lower price and brought the original buyer to court to pay for the shortfall
The Outcome
The original court outcome at the County Court ruled in favour of the seller, however, on appeal, the high court reversed the judgement ruling in favour of the buyer. The Sellers accepted the High court’s rule without challenge, acknowledging the fact that the Overage Deed was materially defective to the title, would reduce the value of the underlying assert significantly, and should have been pointed out in the brochure.
The judgement preceded on the reasonable notion that if no material defects are specifically disclosed in the listing then the buyer may assume that there would be no unusual defects to be revealed in the legal pack which would significantly affect the value of the property. This duty for the seller to disclose material defects cannot be circumvented by any contractual condition for the buyer to “have made the necessary searches and enquiries”
Industry Implications
This judgement lays precedent to increased responsibilities on behalf of the seller in a property transaction. We have already seen many increases in disclosure regulations over the years (and rightfully so!) and this odd situation adds to the seller’s duties and obligations to ensure that their buyer is as informed as possible as to the details of the asset they are acquiring
This does however pose a bit of an issue: Are sellers starting to become over-regulated? Do these regulatory hurdles provide an incentive for vendors to retain a property rather than sell it? Do these regulations encourage buyers to become less informed? To be perfectly candid, it seems unlikely that this ruling in and of itself will have any material impact across the industry but it does add another kilogram to the already heavy regulatory burden developers and landlords are quaking under.
Solutions and Opportunities
Simply put, all that will be required going forward is a little more care and attention on the sellers behalf to disclose any material defects in title.
For us at the Castelnau Group, this presents an interesting situation: our sister company My Auction Ltd has been cautious from the beginning to disclose any material title defects as per the long-established common law that presides over the UK’s property industry, but needless to say this ruling has motivated the My Auction team to implement an increased level of vigilance to ensure a fair sales to their vendors and fair purchases for their buyers.
As for our development arm, Live Above frequently structures overage agreements with vendors to ensure that existing freeholders reap the benefits of further development on their land. Whilst SPS Groundworks vs Mahil presents overage in a somewhat damning light, we at the Castelnau Group remain firmly convicted that freehold vendors should have a fair say in the disposal of their freeholds. Despite the potentially damaging effects of overage deeds for an end disposal, Live Above will never rule out the option and will work creatively with vendors to ensure the satisfaction of all parties involved in any transaction.
We’d love to hear your feedback on the this case! If you’ve had an similar situations or have questions about where to get started selling a piece of land or development opportunity, then please get in touch with us.
E: info@castelnau.com
DD: 0208 878 9111