A major housebuilding company, Persimmon Homes Limited ('Buyer') entered into negotiations to purchase a development site of 6 plots of land from developers based in Kent and Sussex ('Sellers').
The Buyer entered into agreements with the Sellers to acquire the shares of two of their companies – 'Developments' and 'Holdings'. Through its purchase of Holdings, the Buyer acquired options over 4 of the 6 plots. However, the freehold title to the other 2 plots ('Felbridge freeholds'), including the plot which contained access to the whole site, was held by another company controlled by the Sellers but not included within the sale of Developments / Holdings as it fell under a different chain of ownership.
Therefore, the Buyer only obtained ownership of four of the plots (the 'acquired plots') but not the Felbridge freeholds, which due to their access, were critical to any development of the site as a whole.
The share purchase agreement to sell Developments (the 'SPA') contained a definition of the 'Properties' held by Developments. The definition described the location but did not refer to the individual plots of land. This created uncertainty as to the exact properties which Developments owned.
This was relevant as the SPA contained a warranty given by the Seller to the Buyer that Developments had 'good and marketable title to the Properties'.
In addition, the accompanying disclosure letter specifically qualified the above warranty by disclosing that Developments did not own the Felbridge freeholds.
The Buyer applied to the High Court and argued that the course of its negotiations with the Sellers demonstrated a common intention that the Buyer would acquire the whole development site, including the Felbridge freeholds.
The High Court considered the intentions of the parties and the true nature of the commercial deal and accepted the Buyer's claim that the intention was that the Felbridge freeholds would be owned by Developments on the date of completion of the sale.
The High Court judge, therefore, ordered that (a) the SPA be rectified such that the 'Properties' warranted as being owned by Developments included the Felbridge freeholds; and (b) the disclosure letter be rectified to remove the disclosure that the Felbridge freeholds were not owned by Developments.
Consequently, the judge declared that the Sellers were in breach of the warranties given by them in the SPA (as so rectified). Whilst this didn't entitle the Buyer to acquire the Felbridge freeholds, it meant that the Sellers were liable to pay damages to the Buyer.
The Sellers appealed to the Court of Appeal on two grounds:
(1) The High Court judge was wrong to order recertification as it was not supported by the evidence presented to him.
(2) A disclosure letter could not be rectified by a court as a matter of law as it was a unilateral document notifying the Sellers of particular set of facts existing at the date of the letter. They argued it would be improper to rectify it so as to re-write history and delete what was at the time a correct statement of fact.
The Court of Appeal dismissed the Sellers' appeal and upheld the Buyers' original claim.
On the first ground, considering the evidence presented to the High Court judge, the court found that he had been entitled to conclude that the SPA and disclosure letter did not accurately record the terms agreed between the parties, and that the requirements for rectification had been met accordingly.
On the second ground, the court found that the disclosure letter is an integral part of the suite of documents governing the share sales. It was, as much as the SPA, prepared and signed in order to give effect to the parties' intended transaction.
The court noted that drafts of the disclosure letter passed between the parties' solicitors and its terms agreed between them. It also noted that the disclosure letter was defined in the SPA and its contents, by the terms of the SPA, qualified the warranties given by the Sellers. Therefore, if the terms of the disclosure letter failed to give effect to the parties' intended transaction, then it was as much capable of rectification as the SPA itself.
The court concluded that it did not matter that the disclosure letter was a unilateral document and that rectifying it would not, as the Sellers argued, re-write history but would simply give effect to the parties' common intention that Developments should be warranted as owning the Felbridge freeholds.
Whilst the Buyer was successful here, the case does illustrate the importance of undertaking a thorough due diligence exercise to be sure of what you are buying. It also highlights the value of instructing experienced advisors to carefully draft and review the sale documentation to ensure it reflects the intentions of the parties.
Furthermore, it highlights that equal importance must be attached to a seller's disclosure letter as the main sale agreement itself. Sometimes sellers might decide to prepare the disclosure letter themselves, rather than involving their solicitor, so it is important that buyers and sellers involve their advisors with disclosure to ensure nothing is inconsistent with the intended transaction.
Original case: Persimmon Homes Ltd v Hillier (Court of Appeal Decision).
Warranty - A statement made by the seller which an assurance of promise on which the buyer relies. If a warranty is breached the buyer may have a claim in damages against the seller.
Disclosure Letter - A key transaction document in the sale or purchase of a business (applying to both assets or shares). This will be prepared by the seller and sets out general and specific disclosures against the warranties in an acquisition agreement (usually a share purchase agreement or asset purchase agreement).