Rectification of a Disclosure Letter

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05 August, 2019

The nature of a disclosure letter is in its name, to disclose relevant points of interest to a buyer prior to the conclusion of a sale, which may be inconsistent with warranties provided by a seller in a sale agreement. As a crucial document in any acquisition, it is in the seller's interest that the information contained in the disclosure letter is sufficiently accurate and reflective in its depiction of the target business, as much as it is for the buyer's benefit. This is because adequate disclosures prevent the seller from facing potential breach of warranty claims and assist with successfully defending such claims should they arise; whilst also providing transparency to allow buyers to make fully informed decisions, when deciding on how to proceed with a purchase.

A buyer is always advised to review a disclosure letter carefully to allow it to determine whether or not it wishes to continue with a sale. Despite this fact, parties often dedicate far greater time to the negotiation of warranties over consideration of the disclosure letter. Both, warranties and disclosures must be considered together. In the event that a warranted fact is discovered to be untrue, the buyer has a potential claim for breach of contract, regardless of whether the particular warranty was relied upon by the buyer. However, such a claim against the seller cannot succeed if the facts which give rise to the breach were properly disclosed within the disclosure letter.

Following completion of a transaction, where there is a mistake within a document or if a document does not reflect the correct position of the parties, the courts may be willing to order rectification of such document. Rectification is an equitable remedy which involves the court modifying a document by substituting the whole or part of the original text with corrected wording to give effect to the parties' true intentions at the time of entering in to the document. In rectifying a document the court aims to put the parties in the position they would have been in had the mistake or oversight not occurred.

Due to a recent case heard in the Court of Appeal, rectification was sought in order to correct the accuracy of a disclosure letter to reflect the contractual intention of the parties at the point of agreement. However, this decision cannot change reality. Rather, it is putting that in to writing which was already understood. The matter of Persimmon Homes Ltd v Hillier [2019] EWCA Civ 800 upheld the finding by the High Court that a disclosure letter accompanying a share purchase agreement could in fact be rectified in circumstances where it did not give effect to the parties' intentions.

Facts

The appellants in this case were Mr Hillier and Mr Creed, the owners of the Hillreed group of companies, through which they operated their housebuilding and property development enterprise. The respondent to the appeal and claimant in the action was Persimmon Homes Limited (Persimmon), a major housebuilding company and developer that holds significant amounts of land with future development potential, including land without planning consent yet granted. Mr Hillier and Mr Creed, through their companies, owned six parcels of land making up a development site which Persimmon sought to acquire by entering into a share purchase agreement (SPA), in respect of the shares in two of the companies in the group. One of those companies had a subsidiary which held options to purchase four of the parcels of land. The other two parcels, "the Felbridge Freeholds", which happened to be necessary for access to the rest of the site, were owned by a subsidiary of another company in the group.

Warranties contained within the agreement stated that the two companies had good title to the land, however individual parcels were not identified. A disclosure letter sent by Mr Hillier and Mr Creed as part of a "data package" during the negotiations qualified the warranties by stating that they did not own the Felbridge Freeholds. Persimmon realised after completion of the SPA that rather than indirectly acquiring the whole site, it had only acquired a part of it and that such site was subject to a ransom strip, as the purchased areas could only be accessed through the parcels that were not contained in the agreement. Persimmon therefore sought rectification of the agreement and the disclosure letter so as to include the Felbridge Freeholds.

In the court at first instance, the Judge ordered the rectification of the SPA and the disclosure letter, and declared the appellants to be in breach of warranties given by them in the agreement, as so rectified, and liable to pay damages.

The Claim

Upon reaching the Court of Appeal, two grounds were heard. Firstly, that the Judge had erred in ordering rectification because it was not supported by the evidence before him. Secondly, that the disclosure letter was a unilateral document notifying particular facts and therefore, it was incapable of rectification as a matter of law.

Judgment

In the judgment given, importance was placed on the fact that the parties' common intention, as demonstrated by the ongoing communications between them up to completion of the SPA, was that the Felbridge Freeholds would be and were owned by the company being, and would therefore indirectly pass to Persimmon upon completion. Furthermore, despite it being found that the heads of terms agreed between the parties were contrary to the inclusion of the Felbridge Freeholds in the deal, the Judge held that Mr Hillier and Mr Creed's communications clearly suggested that they controlled the entire development site, and that if the claimant bought the shares in the company, it would acquire control of the interests in the Felbridge Freeholds. The Judge therefore found that it was the parties' common intention that the purchased company should be warranted to be the owner of those freeholds.

Further, in relation to the second ground of appeal the court decided that the fact that the disclosure letter is a unilateral document is no bar, as unilateral documents may be rectified if they do not give effect to the intention of the maker. The disclosure letter did not give effect to the intention of the appellants, nor of Persimmon. Hence, the position is the same as if the agreement itself had qualified the warranties by a statement that the sold company did not own the freeholds; such a provision would clearly be capable of rectification and there is no basis for a different treatment of the disclosure letter.

By dismissing the appeal, the court found that on the evidence, the Judge had been entitled to conclude that the SPA and disclosure letter did not record the agreed terms between the parties, and that the requirements for rectification had therefore been met accordingly.

Comment

The affirmation given by the Court of Appeal in this case demonstrates the importance of ensuring that what is intended by each of the parties in relation to the acquisition agreement is clear and properly recorded in the accompanying documents of the transaction. Buyers and sellers alike should therefore take measures to be certain of the precision of the terms within agreements and related warranties and disclosures to avoid the need for rectification post completion.

For more information contact Rebecca McCann in our Corporate department via email or phone on 0333 207 1140. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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