The Federal Court recently considered a matter involving the sale of a shopping centre by Centro. Central to the matter was whether Centro misled Merost, the purchaser, about the amount of rent payable by Kmart, the major tenant. Centro denied it engaged in misleading or deceptive conduct. Further, it denied that Merost relied on the representation regarding the rent payable in deciding to purchase the shopping centre and that Centro’s conduct was the cause of any loss or damage. There was also argument regarding damages, and how damages would be calculated if Centro was found to have misled Merost.
Since November 1999, Kmart had been the major tenant of the shopping centre, located in Launceston. Since that time, the rent had changed based on a formula set out in its Lease, which had base rent and percentage rent components. That formula took into account Kmart’s gross sales. In 2010 there was a variation to that formula. The significant effect of the variation was to increase the figure to be deducted from gross sales in the percentage rent equation from $21,032,000 to $24,311,569 (the break even figure).
In 2011, during the course of the sale process, an information memorandum was circulated to potential purchasers of the shopping centre. The information memorandum contained a break even figure of $21,032,000.
On 5 May 2011, Merost executed a confidentiality deed to access a data room containing documents relevant to the sale process, and proceeded to consider those documents. Those documents contained references to various figures, and the representatives for Merost incorporated those figures into their calculations with a break even figure of $21,032,000. However, there appeared to be an unresolved error with the amount of rent Kmart had been paying.
Expressions of interest closed on 26 May 2011. On 31 May 2011, Merost agreed to enter into Heads of Agreement with Centro, with a purchase price of $29.6 million. On 27 June 2011, a Contract for Sale was executed by the parties, with settlement scheduled for 31 August 2011.
On 24 August 2011, Merost learned of the lease variation for the first time, and the different break even figure. Prior to that date, the variation had not been placed in the data room. Nevertheless, Merost proceeded with settlement.
Misleading or deceptive conduct
In order to ascertain whether Centro’s conduct was misleading or deceptive pursuant to section 18 of the Australian Consumer Law, the Court was to have regard to all the circumstances surrounding the transaction. The Court concluded that the information memorandum was misleading in that it contained the incorrect break even figure. Further, the correct break even figure was not easily discoverable from the material in the data room, especially considering the terms of the lease lodged in the data room in May 2011.
Whilst Centro argued that there was no specific reliance on the break even figure as a basis in making the offer, the Court disagreed. In this respect the Court took into account that the purchaser had attempted to undertake calculations prior to making its offer, which included reference to the break even figure and checking of figures. Further, the Court noted that Kmart was the major tenant of the shopping centre accounting for about 60 percent of the rental income alone. In this respect, the rent payable by Kmart was an important issue.
Merost’s case was presented on the basis that it would not have entered into the purchase for $29.6 million if it had known the correct break even figure. Centro tried to argue that but for the representation of the break even figure, Merost would have sought to purchase the shopping centre for a lower price. However, given that Centro said it would not have accepted less than $29.6 million for the shopping centre, the Court dismissed Centro’s argument on that point.
Loss and Damage
Of particular interest in this matter is how the Court calculated Merost’s loss and damage. Merost claimed the real value of the shopping centre was $28.9 million (accounting for the lower rent), and as a result the loss to it was $700,000.
Centro claimed the real value of the shopping centre was between $29.25 million and $30.4 million. The latter figure was derived from an offer of $31.1 million made after close of expressions of interest. If it is assumed that the late offer was made without knowledge of the variation, it should be reduced from $31.1 million to $30.4 million (to account for the variation). If the real value of the shopping centre was $30.4 million, then it was argued by Centro that Merost had not suffered any loss as it had paid less than the real value. The Court, however, doubted the validity of this offer and figure.
Valuations were tendered during the hearing – one in effect gave a valuation of $29.3 million, another $29.25 million. The Court took the mid-point of these two calculations and assessed the value of the shopping centre at $29.275 million.
Given the purchase price paid by Merost, the loss to it was $325,000.
Role of Disclaimers
Disclaimers as to the accuracy of representations appeared on both Information Memorandum and in the confidentiality deed required to access the data room. It was accepted that there was abundant authority that it would be against public policy to allow such disclaimers to prevent statutory protections, like those relating to misleading or deceptive conduct, from being effective.
Centro attempted to argue that whilst disclaimers may be ineffective in that context, disclaimers also put a purchaser on notice to check information, undertake due diligence and take further action if a purchaser was confused about figures. Here, though, the Court found the purchasers were not confused. Rather, the purchaser was acting on the basis that the break even figure provided was correct and the purchaser was not otherwise able to ascertain that it was incorrect from the material supplied.
Contributory Negligence and Section 137B of the Competition and Consumer Act
If Merost suffered loss and damage, Centro claimed that it was caused or contributed to by Merost. Centro claimed that Merost ought to have taken reasonable care of its own interests and undertaken a title search which would have disclosed the existence of the lease variation. Merost also could have had its solicitors more involved in the process.
Nevertheless, the Court viewed the conduct of Centro was a considerable departure from the standard of care expected of a reasonable vendor, especially given the incorrect information in the information memorandum and the absence of the lease variation in the data room. In comparison, the degree of departure from the standard of a reasonable purchaser, Merost’s conduct, was relatively markedly less.
Having regard to the respective conduct of the parties, the Court determined that it was just and equitable to reduce the amount Merost was to recover from Centro by 20 per cent. Merost’s damages were therefore reduced from $325,000 to $260,000.
The decision reminds us that misleading or deceptive conduct cases are rarely straight forward, even when many of the facts are not in dispute. In this matter, the measures taken by the purchaser, the ability of the purchaser to verify the vendor’s figures and the role those figures had in determining whether the purchaser would make an offer were critical issues.
Moreover, the decision reinforces the notion that parties in the position of the purchaser should obtain valuations prior to making a decision to litigate, as it may be that a purchaser has not, in fact, suffered any loss. Here, Merost demonstrated that it had suffered loss but it could have easily been a different outcome.
A final relevant aspect of the decision is the role that contributory negligence has in damages claims for misleading or deceptive conduct. The Court found that whilst Centro was primarily culpable, Merost also contributed to its own loss.
This decision highlights the challenges and obligations that purchasers and vendors face with respect to the sale of commercial properties, and the importance of obtaining advice both before and during the sale process.