Fraud Act 2006 - What it Means for the Property Sector

The Fraud Act – What It Does

The Fraud Act 2006 received Royal Assent on 8th November 2006.  The Act, which applies to England, Wales and Northern Ireland, introduces a new general criminal offence of fraud that can be committed in three different ways: 

19th December 2006

The Fraud Act – What It Does

The Fraud Act 2006 received Royal Assent on 8th November 2006.  The Act, which applies to England, Wales and Northern Ireland, introduces a new general criminal offence of fraud that can be committed in three different ways: 

  • Fraud by false representation 
  • Fraud by failing to disclose information 
  • Fraud by abuse of position

Both fraud by false representation and fraud by failing to disclose information will be of particular relevance for the property industry when buying and selling property, or when entering into leases, or financial transactions secured against property.  The new rules will potentially impact upon all elements of a transaction, from answering replies to pre-contract enquiries to giving warranties and disclosing against those warranties.  References in this article to sellers and buyers include landlords and tenants and borrowers and funders respectively.

Fraud and Pre-Contract Enquiries

Pre-contract enquiries are the questions that the buyer of property asks the seller as part of their pre-contract investigations into the property and the seller's title.  The Fraud Act has an impact on liability for replies to pre-contract enquiries, under two of the three headings outlined above.

Fraud by false representation - this type of fraud will be committed when a person dishonestly makes a false representation to another, to benefit himself or herself or another person.  To commit this crime, the person making the false representation, at the time of doing so, has to intend to make a gain, either for themselves or for another, or to cause a loss to another or expose them to a risk of such loss.

When it comes to pre-contract enquiries and contracts, a seller needs to beware: if the seller makes a false representation, which has the relevant intention attached to it, the seller may be guilty of fraud, even if the relevant contract (be that for sale, or to grant a lease or otherwise) has not yet been entered into.

Fraud by failing to disclose information - a person will be guilty of this offence if they dishonestly and intentionally fail to disclose information to another person when under a legal obligation to do so, and by so failing to disclose intend, either to make a gain for themselves or another person, or to cause loss to another or expose them to a greater element of risk.  A legal obligation to disclose information to another can arise from a number of different types of situation, including, by statute, where a good faith relationship exists, and through both the express and implied terms of a contract.

In the context of pre-contract enquiries, a seller may commit the offence in a number of different circumstances, such as when the contract refers to replies to enquiries and incorporates the replies as part of the contract, or where the contract states that the seller will supply replies to enquiries or will give certain warranties.  Failure to reply to a question in these situations may amount to a fraud.

Contracts Induced by Fraud

The well-known principle of common law, caveat emptor (let the buyer beware), means that a seller of property is not obliged to disclose anything about the state of the property being sold to the buyer, even if specifically asked to do so.  The obligation rests with the buyer of the property to find out all they want to know about the property before committing to buy.  There are a number of ways for a buyer to acquire this information, such as raising pre-contract enquiries and carrying out a physical inspection of the property.  However, the principle of caveat emptor has no application where the buyer has been induced to enter the contract by fraud.

An example of this principle at work can be seen in the case of Taylor v Hamer [2002] EWCA Civ 1130 , where the buyer had carried out a physical inspection of the property, in order to discover all that the buyer could about the property before committing to a purchase.  On inspecting the property the buyer noticed some old flagstone paving in the garden.  However, after the buyer had inspected the property, but before the exchange of contracts, the seller had the flagstones lifted and moved to a new property, recovering the area with grass seeds.  The court held that the seller could not rely on the principle of caveat emptor because she had intentionally made a material alteration to the property and then had attempted to conceal this alteration from the potential buyer of the property; the seller was also found to have lied about the flagstones being present at the property during some part of the transaction.

The principle of caveat emptor had no application in this case as the buyer had been induced to enter into the contract by fraud.  The seller was ordered to replace the flagstones at the property or pay to the buyer in damages a sum equivalent to the cost of doing so.

Conclusion

A seller of property, and the advisers on the sale or similar transaction, be they lawyers or agents, need to be very careful not intentionally to make a false representation to the buyer of property or to fail to disclose information that the seller has contracted to provide.  Breach of the new rules can lead not only to a contract for sale being set aside, and possibly damages being payable to the buyer, but even to the defaulting party being jailed for up to 10 years.

The full text of the Fraud Act 2006 is available from the OPSI website at: http://www.opsi.gov.uk/acts/acts2006/ukpga_20060035_en.pdf

In Scotland

With minor exceptions, the provisions of the Fraud Act do not extend to Scotland.  The effect of fraudulent conduct on the status of the consent of the parties to the contract has largely developed through case law. To establish fruad, there must have been some deliberate intention to deceive, and it should be distinguished from simple error.  A statement of fact or law which is false, but made in good faith is not fraud, unless it is so obviously incorrect that it would be clear from making even the slightest enquiry that it was wrong.

Fraudulent actings may prevent a contract being formed if the fraud causes an error in the essential components of an agreement such that there is no consensus in idem (agreement about the essentials of the contract) between the parties, although this is rare in practice. Often it will still be possible to show that there has been a valid offer and acceptance despite an error caused by the fraudulent conduct of one of the parties. Where fraudulent conduct has not prevented the contract from being formed, it may still allow the blameless party to annul or rescind the contract, so that it is regarded as having never existed, but until this is done, the contract will subsist.