When something goes wrong with a residential sale and purchase misrepresentation is often alleged.
What is misrepresentation in legal terms?
The most common form of misrepresentation occurs when one party makes a statement that later turns out to be untrue. This can be either innocent (if the party making the statement genuinely believes it to be true) or fraudulent (if they know it is untrue). In both cases, the statement must have influenced the other party’s decision to enter into a contract.
Section 35 of the Contract and Commercial Law Act 2017 (“CCLA”) governs the entitlement of a party to damages in cases of misrepresentation.
Recent case law – Watson v Zhou [2024] NZCA 417
The recent Court of Appeal case, Watson v Zhou [2024] NZCA 417 is interesting as it deals with misrepresentation, contractual mistake and breach of warranty in the context of the sale of a residential home by Mrs Watson to Mr Zhou and his wife Ms Zhang.
Mr Zhou and Ms Zhang viewed the property three times before purchasing. During one visit they brought a builder along to visually inspect the house. About a week after settlement, there was a period of sustained rainfall and Mr Zhou and Ms Zhang discovered that the house leaked. They claimed that Mrs Watson had misrepresented the property by telling them it had no leaks when asked.
High Court Findings
At the High Court, the judge found that, on the balance of probabilities, the claim for misrepresentation could not be proven. He ruled that Mr Zhou and Ms Zhang had not established, on the balance of probabilities, that Mrs Watson had made the untrue statement that the house had no leaks. Furthermore, the purchasers’ builder gave the house a favourable report following his visual inspection.
The High Court Judge did believe, however, that both parties had been mistaken as to the weather tightness of the house and so upheld the claim of common mistake under the CCLA. The Judge awarded $271,600 in damages to the purchasers Mr Zhou and Ms Zhang.
Court of Appeal Analysis
The Court of Appeal analysed the High Court’s decision and restated that the requirements for a common mistake to be found are:
1. Both parties made the same mistake, or a different mistake about the same matter of fact or law; and
2. The mistake influenced both parties in their decisions to enter the contract; and
3. The mistake(s) resulted in a substantially unequal exchange of values or disproportionate consideration.
The Court then found that there was no evidence that Mr Zhou and Ms Zhang nor Mrs Watson had turned their minds to the question of the weather tightness of the building at all. Accordingly, there could be no common mistake under the CCLA. Further, no conditions were inserted by Mr Zhou and Ms Zhang into the Sale and Purchase Agreement and the sale proceeded on a caveat emptor basis.
The Court of Appeal did find there had been a breach of warranty by Mrs Watson, but this was for unconsented building works on the property. She breached a standard warranty clause in the ADLS form of agreement used. The Court of Appeal sent the case back to the High Court to determine the appropriate value of damages for the breach of warranty.
Our Takeaway
For many people, purchasing residential property is one of the biggest decisions they will make in their lifetime. The key takeaway from this case is that, where a statement is made verbally to a purchaser about an important characteristic of the property, the statement should be recorded in writing between the parties (preferably in the agreement). This would provide evidence that can be relied upon later.
When buying or selling a property we recommend that you speak to one of our property experts before signing the Agreement for Sale and Purchase to ensure the contract accurately reflects the agreed terms between the parties.
