Can a Disclosure Letter be rectified?

“Rectification” is the process by which documents are changed by the Court to correctly reflect the intentions of the parties at the date on which the agreement set out in the document was reached.

The question arose as to whether or not a “Disclosure Letter”  (a letter produced by the seller during the course of a sale of the shares of a company telling the buyer about things which are wrong with the company and which have therefore been taken into account in setting the price paid) could also be “rectified” notwithstanding the fact that it is, theoretically at least, simply a unilateral notification (i.e. a document from one party telling the other party of particular facts existing at the time of the letter).

Anthony Hillier and Colin Creed ran a housebuilding business through a group of companies which included:

  1. Hillreed Holdings Limited (Holdings); and
  2. Hillreed Developments Limited (Developments).

Through their companies, Hillier and Creed had managed to assemble a development plot of land in Crawley Down Road (CDR), Felbridge (‘the Felbridge Plot’).  The Felbridge Plot consisted of:

  1. The benefit of Options to acquire the rear gardens of 1, 5, 7 and 11 CDR (‘the Options’); and
  2. The freeholds of the garden of 3 CDR (the property between 1 CDR and 5 CDR) and an access strip – 11A CDR (‘the Freeholds’).

(9 CDR did not have a rear garden.)

Hillier and Colin entered into negotiation with Persimmon Homes Limited (‘Persimmon’) for the purchase of the Felbridge Plot which led to two share purchase agreements (SPAs):

  1. An SPA for the purchase of Holdings (the Holdings SPA); and
  2. An SPA for the purchase of Developments (the Developments SPA).

(together ‘the SPAs’)

The Developments SPA defined “the Properties” to be the properties as listed in Schedule 6.  Schedule 6 then referred to:

“Land Lying to the South of Crawley Down Road, Felbridge (four option agreements in total)” (‘the Schedule 6 Land’)

The warranties in the Developments SPA included warranties that Developments either had good and marketable title to the Properties or an enforceable contractual right to acquire the Properties on the terms as contained in the data room for the transaction (‘the Project Condor data room’).

As is usual the Developments SPA also excluded liability for breaches of warranty where those breaches had been “fairly disclosed” in a disclosure letter (‘the Disclosure Letter’).  The Disclosure Letter then contained various entries of potential relevance to the above warranty including:

  1. Specific disclosure that Developments was not the freehold owner of listed properties (including the Schedule 6 Land) but held options for their acquisition which if exercised would require payments; and
  2. General disclosure of all matters contained or referred to in the CD Rom labelled “Project Condor data room” accompanying the Disclosure Letter (which, presumably, would have included current Land Registry Entries for all properties making up the Felbridge Plot).

Following completion of the SPAs, Persimmon ‘discovered’ that whilst they had, somewhat fortuitously it would seem, acquired the benefit of the Options (which – although not vested in Developments – were, in fact, vested in Hillreed Homes Limited – Homes – a subsidiary of Holdings) they had not acquired the Freeholds.  These were not, in fact, vested in Developments but, rather, in Hillreed Investments Limited (Investments), another company belonging to Hillier and Reed but not a subsidiary of Developments or Holdings.

This left Persimmon with, in their own words “a land locked plot with a ransom strip through the middle of it.”

Persimmon issued Court proceedings to seek:

  1. Rectification of the Developments SPA to clearly include a warranty as to ownership of the Freeholds; and
  2. Rectification of the Disclosure Letter – which could otherwise be argued to negate the effect of any warranty which may be obtained through rectification of the Develoments SPA.

The judge at first instance (Mr John Martin QC – Persimmon Homes Limited v Anthony John Hillier and others [2018] EWHC 221 (Ch)) found in favour of Persimmon on both issues finding that:

  1. There was strong evidence to show a mutual intention on the part of both parties that the sale of Developments should include the benefit of the whole of the Felbridge Plot not just the Options (given that the Freeholds were also – through Investments – under the control of Hillier and Creed there was nothing to prevent them being included in the sale) and the Developments SPA did not reflect this agreement. It should therefore be rectified; and
  2. As rectification of the Developments SPA in this way gave rise to conflict with certain of the provisions of the Disclosure Letter (this Letter having been found, on construction, to state, at various points, that Developments did not own freeholds making up the Felbridge Plot) the Disclosure Letter should be amended to restrict that disclosure so as not to refer to 11a CDR and the garden of 3 CDR (‘the Freeholds’).

John Martin QC also declared Hillier and Creed to be in breach of warranty and ordered them to pay damages.

Hillier and Creed appealed the judgement. The grounds of appeal were:

  1. That the judge was wrong, on the evidence before him, to order rectification of the Developments SPA and the Disclosure Letter; and
  2. In any event the Disclosure Letter – being a unilateral document (specifically a notification by the sellers to the buyers of particular facts existing at the date of the letter) – was, as a matter of law, incapable of being rectified.

Sitting in the Court of Appeal ([2019] EWCA Civ 800) Lord Justice David Richards found that:

  1. The judge was fully entitled on the evidence before him to conclude that the requirements for rectification of both documents had been met; and
  2. The Disclosure Letter is an integral part of the suite of documents, designed to give effect to the intended transaction of the parties, and there is, thus, no reason why it should not be as much capable of rectification as the SPA itself.

Hillier and Creed’s appeal was rejected and they were left having to pay damages and, no doubt, a hefty legal bill.

What can we learn from the above?

  1. That the wording of warranties and disclosure letters in company/share sales needs to be carefully considered and accurate.  Based on the above, bigger does not necessarily mean better in this regard.  I do not know the identity of the solicitors (or possibly accountants) between whom the various iterations of the warranties in the Developments SPA and of the Disclosure Letter in the above scenario passed but have little doubt that Persimmon (and, indeed, Hillier and Creed) had some choice words to say to them when the above difficulties emerged.
  2. That it is critically important when hoping to tie up a favourable deal with large companies, such as Persimmon, to ensure that there is as little room as possible for confusion in the transaction documents.  Large companies will not simply sit back and accept an outcome which has turned out to be less favorable than they expected and will generally have both the resources and the will to contest matters at length (even when, on first impressions, matters seem to be stacked against them).

The Property & Commercial Team at Barrett & Co will be happy to help with your business or asset sale (or purchase). Please contact them on 0118 958 9711.  

 

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