|August 14, 2014|
Previously published on August 11, 2014
The Court of Appeal dismissed a seller's appeal that VAT on the purchase price of a commercial property was payable by the buyer despite the inclusion of wording to this effect in the Standard Conditions. On the specific facts, there was evidence to suggest that, contrary to the express wording of the Standard Conditions, VAT was included in the sale price.
The facts are simple. The seller and the buyer entered into a contract that incorporated the Standard Conditions of Sale (Fourth Edition).
Condition 1.4.1 states that "any obligation to pay money includes an obligation to pay any value added tax chargeable in respect of that payment".
Condition 1.4.2 states that "all sums payable by the contract are exclusive of VAT".
There was also a special condition in the contract that, if the general conditions conflicted with the terms of the agreement, the terms of the agreement would prevail. The Purchase Price was also defined in the special conditions as being "£130,000". The contract was silent as to VAT.
The Court of Appeal held that the test was what a reasonable person with all the background knowledge reasonably available to the parties at the date of the contract would have understood the contracting parties to have meant. The Court concluded that the sale agreement should be construed so that VAT was to be treated as being included in the price. The evidence to support this included:
- the provision regarding conflicting terms in the Standard Conditions and the sale agreement whereby the terms of the agreement were to prevail;
- the buyer not being aware or having any reason to believe that the price was to be subject to VAT;
- the absence of any evidence indicating that the Purchase Price was intended to be more than £130,000 (including the absence of evidence as to discussions between the parties concerning VAT); and
- the Purchase Price not being expressed to be "exclusive of VAT".
Therefore, despite the clear wording in the Standard Conditions, the Court was able to reach a conclusion based on the agreement itself and evidence relevant to its interpretation that VAT was included within the defined Purchase Price.
The decision at first glance appears at odds with standard practice and the clear Standard Conditions in respect of VAT. However, on its own facts and in context it does make sense.
This case acts as a useful reminder to buyers and sellers alike to ensure that the treatment of VAT is properly discussed and understood and is expressly dealt with in a sale contract. In the absence of express agreement and where the contract incorporates a clause stating the agreement will prevail over the Standard Conditions, the Court will look to the intentions of the parties as well as the express terms of the agreement in order to assist with interpreting the agreement.
Whilst the sale in this case was of commercial property, the Standard Conditions were used. In the event that that the Commercial Property Conditions of Sale had been used, the position would have been clearer as the seller would have had to include a specific special condition had it intended for VAT to be charged.