More haste, less speed: rectification in the real estate space

Facts

Persimmon Homes Limited (the Buyer) was a housebuilding company. Mr Hillier and Mr Creed (the Sellers) ran a real estate business in Sussex and Kent whose core activities were housebuilding and the acquisition of property and options with development potential. They operated the business through various companies (the Hillreed Group).

The Buyer was interested in acquiring land owned by the Hillreed Group in the village of Felbridge on the West Sussex/Surrey border, which afforded a promising development opportunity.

It therefore entered into discussions to purchase the shares in two companies within the Hillreed Group, Hillreed Developments Limited (Developments) and Hillreed Holdings Limited (Holdings). The Buyer believed that this acquisition would offer indirect ownership of six plots of adjoining land in Felbridge. It purchased the shares in Holdings and Developments by way of two share purchase agreements dated 5 October 2012.

However, these two companies owned only four out of the six plots of land. The freehold title to the other two plots of land (the Felbridge Freeholds), one of which provided access to the entire development site, was held by a subsidiary of another company in the group, Hillreed Investments Limited. Unfortunately, its shares were not included in the sale.

After the share purchases had completed, the Buyer realised that it had acquired a landlocked site with a value that was far lower than anticipated.

The Buyer commenced proceedings in the High Court. Firstly, it attempted to persuade the Court that the definition of Properties in the share purchase agreement relating to Developments' shares (the Developments SPA) should be construed to refer to the whole site. Developments would then have warranted that it had 'good and marketable title' to the Felbridge Freeholds, giving the Buyer a right to damages for breach of warranty. This claim failed.

The Buyer therefore argued that the Developments SPA should be rectified, to include the Felbridge Freeholds within the definition of the Properties. Secondly, it sought rectification of the accompanying disclosure letter, to exclude the Felbridge Freeholds from the statements being made about the Felbridge site. Rectification on these terms would entitle the Buyer to seek damages for breach of warranties given by the Sellers.

Principles of rectification

Where rectification is sought on the basis of a common mistake, the party seeking rectification must demonstrate that:

• "the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified
• there was an outward expression of accord
• the intention continued at the time of the execution of the instrument sought to be rectified
• by mistake, the instrument did not reflect that common intention"

(Swainland Builders Ltd v Freehold Properties [2002] 2EGLK 71).

The 'common continuing intention' needs to be communicated. It follows that an inner belief is insufficient. The question is "what an objective observer would have thought the intention to be" (Daventry DC v Daventry and District Housing Ltd [2012] 1WLR 1333).

An 'entire agreement' clause is often included when drafting a sale agreement. However, this will not prevent a court from making an order for rectification. That is a different and more fundamental matter. Even if an 'entire agreement' clause has been included in the contract, a party can still successfully seek rectification on the basis that a document does not reflect what was actually agreed (see Surgicraft Ltd v Paradigm Biodevices Inc [2010] EWHC 1291).

High Court decision

The High Court considered the parties' pre-contractual negotiations and held that there was a common continuing intention at the time of the agreement that the Felbridge Freeholds would be included in the transaction and acquired by the Buyer, together with the other plots of land.

The High Court judge ruled that:

• the SPA should be rectified to include a warranty that Developments owned the whole development site
• the disclosure letter should be rectified to remove the statement that Developments did not own the Felbridge Freeholds.

Therefore, the Sellers were in breach of warranty, as Developments did not own the Felbridge Freeholds. The Buyer was entitled to damages, being the difference between the value of Developments as warranted and its actual value at the date of the Developments SPA. The Sellers appealed to the Court of Appeal.

Court of Appeal decision

The Court of Appeal dismissed the Sellers' appeal and held that the parties' common continuing intention was evidenced by the pre-contractual discussions; the High Court judge was entitled to hold that the SPA and disclosure letter did not reflect what had been agreed between the parties. The requirements for rectification had been satisfied.

The Sellers also argued that the disclosure letter was a unilateral notification; and that it dealt with factual issues. Therefore, it would be improper to rectify it to delete correct statements of fact. The Court of Appeal took a different view:

• the terms of the disclosure letter were negotiated between the parties in the same way as the Developments SPA. If one could rectify the latter, it followed that the former could also be rectified
• in any event, unilateral documents could be rectified if they did not give effect to the drafter's intention (Re Butlin's Settlement trust [1976] Ch 251 and Lee v Lee [2018] EWHC 149 (Ch) followed).

Comment

Although the Buyer was successful in the courts, its victory was somewhat muted. What it wanted on entering the deal was a lucrative development opportunity for the agreed price. Instead, it had to settle for a poor second – a permanently landlocked site and a risky, time-consuming and expensive battle in the courts pursuing a breach of warranty claim. From this case, it follows that:

• it is crucial to carry out a comprehensive due diligence exercise to be certain of what is being acquired
• transaction documents, including disclosure letters, should be carefully drafted and examined to ensure the detail of the drafting corresponds with the intended transaction
• a careful record of pre-contractual negotiations should always be kept.

Persimmon Homes Ltd v Hillier & Anor [2019] EWCA Civ 800

Chloe Szczerbiak
Trainee Solicitor