In brief – Purchaser successful in claim against seller of shopping centre
Recently the Federal Court of Australia found that a seller had misled and deceived a shopping centre buyer as to the terms of the lease of an anchor tenant.
Variation to Kmart's lease terms registered on title
The case Merost Pty Ltd v CPT Custodian Pty Ltd  FCA 97 concerned a shopping centre two kilometres from the CBD in Launceston, Tasmania. A lease to retailer Kmart at the centre accounted for approximately 60% of rental revenue for the centre. This lease commenced in 1999.
The lease was amended, with a variation document registered on title, in 2010. The lease referred to a figure important to a turnover rent calculation as approximately $21 million. The variation revised that figure to approximately $24 million.
Information memorandum in electronic data room gives wrong turnover rent figure
As is common for transactions of this scale, in mid-2011 the seller had a data room and information memorandum prepared for the sale of the centre. The memorandum referred to the lower turnover rent figure. A copy of the variation was not placed into the data room until after the buyer’s contract had become unconditional.
Price offered by buyer for centre was based on lower turnover rent figure
A rent review calculation document, referring to the higher turnover rent figure, was placed into the data room and accessed by the buyer. The court seemed to accept the buyers’ contention that the document was a proposal only and not a reference to what was in the lease.
While the buyer had also seen a letter from Kmart in 2010 that referred to the correct turnover rent figure, the court found that the letter did not correct the error in the information memorandum, which was confirmed by the terms of the lease in the electronic data room.
Buyer’s solicitor instructed not to assist with leases or information memorandum
The buyer instructed its solicitor to focus on negotiating the contract of sale and effecting the conveyance. The solicitor asked the buyer if the solicitor was to assist regarding the centre’s leases or the information memorandum. The buyer’s instructions were that the buyer would look at those issues and no assistance was required from the solicitor in that regard.
The buyer’s solicitor obtained a title search, which noted the variation (disclosing the higher turnover rent figure) as registered on title. The solicitor did not forward the search result to the buyer.
Error in information memorandum not corrected
The court found that the copy of the lease in the data room confirmed the lower turnover rent figure as set out in the information memorandum, and that this erroneous statement was not corrected by the calculation document or the 2010 letter.
Seller found to be liable to buyer for 80% of price difference
The seller was initially found to be liable for $325,000, being the difference between the price paid by the buyer and what the court found to be the market value of the property.
The court reduced this by 20% to $260,000, noting that the buyer should have coordinated its due diligence process better.
Buyer's solicitor not a concurrent wrongdoer and seller's liability not reduced
The court also noted that the solicitor was not a concurrent wrongdoer. This meant that the seller’s liability would not be reduced because the buyer’s solicitor had followed the buyers’ instructions to focus on negotiating the contract of sale and effecting settlement.
The solicitor was not required to forward the title search to the buyer or advise as to its contents.
Buyers should cross-check contents of dataroom against items registered on title
This case highlights the need to ensure that when utilising a dataroom for a significant property sale, care is taken to ensure that all relevant items (including all items registered on title) are uploaded to the dataroom. In this instance, had the seller’s solicitor cross-checked the contents of the dataroom against items registered on title, the oversight relating to the variation of Kmart’s lease (and this resulting litigation) could have been simply avoided.
Further, although the buyer signed a confidentiality deed before access to the dataroom was granted, and the deed contained disclaimers and noted the seller did not make any representations as to the completeness of the information in the dataroom, the court found this demonstrated to the buyer that the dataroom was not a complete repository of all the documents relevant to the transaction.