Commercial Property Newsletter - December 2019 Company directors can be personally liable for failing to disclose relevant information during due diligence Written by David Fitchett - Partner (Property) A recent Court of Appeal decision, Sullivan v Wellsford Properties Limited, has held that the director of a vendor company can be held personally liable if that director fails to disclose material information in the course of the purchaser’s due diligence investigations. Background The case concerned the sale of a commercial property comprising a service station and an adjoining food court. The parties entered into a modified ADLS sale and purchase agreement which included a fairly standard due diligence condition. During the course of their due diligence investigations the purchaser asked about the extent to which outgoings were recovered from the tenants. In response, the Vendor disclosed that they had not managed to recover 100% of the outgoings from the tenants, and the parties subsequently agreed to reduce the purchase price. The purchaser confirmed the agreement as unconditional on this basis. However, prior to settlement the purchaser became aware that the service station tenant had in fact challenged the Vendor’s previous outgoings invoice. Settlement was still completed in full, and following settlement the purchaser agreed with the service station tenant that they would pay less outgoings going forward. It became clear that the vendor had been aware of the tenant’s challenge for some time, including during the initial price negotiations, but had failed to disclose this to the purchaser. The purchaser subsequently brought a claim against the vendor, citing that the vendor’s failure to disclose the potential reduction in the property’s earnings had resulted in the purchaser paying an inflated price for the property. The decision of the courts The High Court initially held that the purchaser had failed to ask the right questions, and therefore the vendor was never obligated to volunteer information about the outgoings dispute. The High Court also held that in any case the director would not be personally liable, as the relevant representations had been made by the vendor company, rather than the director personally. The Court of Appeal overturned the High Court’s decision, holding that the vendor was liable for misleading and deceptive conduct under the Fair Trading Act for failing to disclose the outgoings dispute. The Court of Appeal also found the director of the vendor company was personally liable for his role in failing to disclose the outgoings issue. The Court of Appeal was able to come to this decision as the director was the sole shareholder and director of the vendor company. Furthermore he had personally been closely involved in the correspondence with the tenant about the outgoings dispute, and then failed to disclose this correspondence to the purchaser. The Court of Appeal awarded damages of $424,000, being the capitalisation of the reduction in the net earnings caused by the reduction in outgoings that could be recovered going forward. What does this mean for vendors and purchasers of commercial property? This is a reminder for purchasers of the importance of including a robust due diligence clause in an agreement for sale and purchase. The clause should allow the purchaser to request, and require the vendor to provide, information about the property. Vendors need to be aware that where a due diligence clause is included in an agreement for sale and purchase, a vendor’s disclosure obligations are to be determined by an objective assessment of what a vendor, acting reasonably and having regard to the subject matter of the purchaser’s due diligence inquiries, would determine was relevant to those inquiries. Any information provided by a vendor must be true complete and accurate in all material aspects, and not materially misleading. Where a purchaser’s due diligence focuses on a particular issue then a vendor has a duty to disclose any information relevant to those inquiries. A decision to not disclose relevant information can be just as misleading and deceptive as a decision to provide false information. A vendor cannot hide behind the doctrine of buyer beware on the basis that a purchaser has not asked specific enough questions. There are also important implications for directors and shareholders who could be held personally liable for misleading or deceptive conduct under the Fair Trading Act where they are directly and causally involved in their company’s misleading and deceptive conduct. Selling commercial property or rural property? - Beware of the risk of getting your GST status wrong! Written by Ann Maria Buckley - Senior Associate (Property) The importance of obtaining specific GST advice from an accountant prior to entering into any agreement to sell commercial or rural property has recently been highlighted in a transaction we were involved in, as well as the recently reported Court decision of YL Investment Ltd v Ling (2017) 28 NZTC. Recently a client of ours entered into Auckland District Law Society Agreement for Sale and Purchase (agreement) to acquire a commercial property where the vendor advised they were not registered for GST in respect of the transaction. The agreement noted that the purchase price was inclusive of GST. Our clients relied on this warranty by the vendor as it would mean that following settlement our clients would be able to claim GST back (3/23rds of the sale price). After the agreement was signed, we received a letter from the vendor’s lawyer advising that there had been a mistake and that in fact the vendor was registered for GST and could we vary the agreement. As this had the effect of making the deal significantly less attractive for our purchaser client it was not in their interest to agree to the variation. A recently reported case also dealt with this particular situation, this time on the sale of a rural property. In YL Investment Ltd v Ling (2017) 28 NZTC the vendor stated they were not GST registered for GST in relation to the transaction and circled “no” to the GST question on the front page of the agreement. The purchase price was inclusive of GST. It turned out that in fact they were deemed to be GST registered. When the purchaser came to claim the GST the IRD checked the GST status of the vendor. In their view even though the agreement stated that the vendor was not GST registered they were deemed to be GST registered, as they were conducting a taxable activity. This meant that the agreement would have to be zero rated at the price stated in the agreement. The Court considered that the question relating to the vendor status relates not only to whether the vendor is registered but also whether the vendor is liable to be registered. This was, of course, unfair to the purchaser as they were expecting to be able to claim the GST deduction. In this instance, the Court agreed and allowed the purchaser to claim from the vendor the amount they would have received had the agreement been correct and the vendor not been GST registered, and the purchaser was able to claim a GST input tax deduction. You can imagine the surprise the vendor in that case where they were required to pay to the purchaser 3/23rds of the sale price. The message is clear therefore if you are a vendor or looking after a vendor completing an agreement and considering whether to tick “yes” or “no” to the GST question on the front page, it is imperative that you obtain advice from your accountant and/or lawyer to confirm the GST status of the vendor to ensure they are either not registered and not liable to be registered before answering in the negative. Making an assumption and getting it wrong could be disastrous to you as a vendor or to your vendor client. David Fitchett - Partner (Property) David specialises in property law, and acts for a broad range of commercial, residential and industrial clients. His particular area of expertise is in the area of commercial leasing where he acts for international, national and local landlords and tenants. David works with his clients and their agents to ensure their lease documents are tailored to their individual circumstances from the outset.
Ann Maria Buckley - Senior Associate (Property) Ann-Maria acts in a broad range of legal matters with an emphasis on commercial property transactions. Her practice includes a broad range of commercial/property matters including the sale and purchase of commercial properties, acquisitions and sale of businesses, commercial leasing and refinancing. She has also developed expertise and has a special interest in land developments including subdivisions and cross lease corrections and conversions. |