7 Sep 2016
Author: Stephen Breen
What are legal implications of a contract race?
If a number of buyers are interested in purchasing a property, a seller may decide – rather than accepting one particular offer – that they will exchange contracts with the first buyer that is ready to do so. This is known as a contract race.
Although there are certain things that the buyers, and their lawyers, can do to speed up the sale process – for example, exchanging correspondence by email – they will still need to make the same detailed enquiries as for a regular property purchase. The general principle of ‘caveat emptor’ – let the buyer beware – still applies, so buyers should not try to cut corners in order to win the race.
Caveat emptor – how it applies
The principle of caveat emptor means that a buyer accepts the property in the condition it is in on exchange of contracts. This historically has put the onus on the buyer to uncover potential problems with the property. However, the law has changed in recent years. The Property Misdescriptions Act 1991 – which made it a criminal offence for estate agents to make false or misleading statements about properties being offered for sale – was repealed on 1st October 2013. Since then, advertising, letting and sale of properties has come under the Consumer Protection from Unfair Trading Regulations 2008 and the Business Protection from Misleading Marketing Regulations 2008. These cover estate agents, letting agents and property managers.
The Consumer Protection Regulations require sellers to inform their estate agent and any potential buyers of any material information that may affect the average consumer’s decision to either view or buy a property.
Although responsibility has shifted to the seller to disclose anything they are aware of that could affect the buyer’s decision to view or purchase the property, buyers need to be aware that there may be issues the seller is not aware of. Further, buyers will not want to find themselves in a situation where they have to consider taking potentially lengthy and expensive legal action, having moved into a property and discovered a particular problem that was not brought to their attention. The same full and extensive enquiries should be made when purchasing a property in a contract race as those made for any other purchase.
Can the same solicitor act for more than one party?
In a contract race, different solicitors or lawyers should act for each of the buyers interested in purchasing the property. Solicitors are not permitted to act for two or more clients where there is a conflict of interest or a significant risk of a conflict of interest under Chapter 3 of the Solicitors Code of Conduct 2011. This was confirmed in the case of Nash v Phillips in 1974 in which a judge said it was “a gross dereliction” for a solicitor to act for more than one buyer.
What are the seller’s obligations in a contract race?
Sellers must keep the interested buyers fully informed of the developments in a contract race – including if one of the other buyers drops out. The seller’s solicitor must also inform each of the buyers that a contract race exists.
In the case of Goff v Gauthier 1991, a seller told a buyer he would withdraw a draft contract and exchange with another interested party if the buyer did not exchange immediately. The court found that this was a misrepresentation and the buyer was entitled both to avoid the contract and potentially to seek damages for any losses incurred.
Buyers should be aware of the risks involved in a contract race which include spending money on legal work, searches and surveys which may be lost.
Speak to our property team if you are considering running a contract race on your own property sale, or putting yourself forward to buy a property where a contract race exists.