In a recent case a company (OHL) entered into an agreement to purchase a commercial property from another company (Premier) for a sum of $3.5 million. The property comprised of a basement tenancy.  Representations were made about that tenancy that were incorrect.

A dispute arose shortly after settlement regarding the basement tenancy which was in considerable rent arrears. The vendor (Premier) had agreed to a series of reduced rent agreements and a temporary waiver of the tenant’s rent arrears, but still represented the property to OHL as at full occupancy.

OHL claimed that the situation surrounding the tenancy should have been disclosed, particularly the rent arrears, and that the failure to disclose this amounted to a breach of vendor warranties and other warranties under the Fair Trading Act.

OHL claimed compensation of $692,000 plus GST. On settlement this sum was retained in a solicitor’s trust account from the sale price, pending the outcome of the dispute.

At the High Court

In the High Court it was found that Premier’s description of the unit in the information memorandum regarding the annual rent return figure was misleading and deceptive.

But this failure to disclose did not amount to an issue with the property’s valuation, but rather alluded to the existence of a cashflow disadvantage for OHL on the rent owing.

The High Court found no breach of the Fair Trading Act. It also noted that Premier, as the vendor, had offered to underwrite the rental shortfall which was declined by OHL.   

The High Court ordered OHL to release the retention monies held on trust.

On Appeal

The Court of Appeal disagreed with the High Court’s finding on Fair Trading Act breaches, citing that it satisfied the standard of a reasonable person, who would have been misled by the representations Premier made, as vendor, about the basement tenancy in place.

The Court pointed to a number of representations which supported this, namely:

• the Information Memorandum circulated which stated per annum figures of rent allegedly being received;
• partial and incorrect disclosures in email and verbal communications from the listing agent to OHL; and
• Premier’s failure to inform OHL that the tenant was not paying rent at all.

With this in mind, the Court of Appeal agreed with the High Court that there was a breach of vendor warranties relating to the disclosure of unpaid rent. The Court established that these misleading representations were an effective cause of the loss OHL faced.

Premier had argued that OHL’s conduct was also an operative cause, namely its refusal to conduct further due diligence and appropriately assess the risk.

The Court of Appeal agreed that OHL was on notice regarding the tenant facing difficulties, but it could not be held that OHL was aware that the tenant was not paying rent at all.

It further said that due to the nature of Premier asserting a ‘cash unconditional’ offer, it did not enable OHL to carry out proper due diligence.

Furthermore, it found it reasonable for OHL to decline the offer of the rental underwrite by Premier, given that it would not have been most suitable for the vendor to have the ability to arrange a third-party tenant, which is starkly different from purchasing a property with established tenancies.

The Court of Appeal said Premier had fundamentally breached its warranty and that entitled OHL to recover their consequential loss.

The Court decided that the correct measure of damages in such circumstances would be the difference between the value of the property at settlement (on the basis of the situation as represented to OHL), against the property’s true value in the circumstances being known.

In conducting this assessment, the Court adjusted the capitalisation rate of the property to reflect the present circumstances. The Court granted the appeal and made a judgment for $400,000 in damages in favour of OHL.

This is a timely reminder of the enforceability of vendor warranties in an Agreement for Sale and Purchase. It also confirms the importance of making the correct disclosures during the sale process.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Claire Tyler and Raiyan Azmi