Vendor's IM - Get it wrong, pay the damages bill

In brief

A recent Federal Court case has reinforced that if a vendor's information memoranda is inaccurate, disclaimers won't save the vendor and the contract can be terminated or a substantial damages judgment awarded. Partner Alister Fitzgerald and Senior Associate Jaelle Berkovits examine this important decision and its impact on commercial sales.

The facts

Merost Pty Ltd purchased a shopping centre from CPT Custodian Pty Ltd (Centro). Merost claimed, under section (18)(1) of the Australian Consumer Law, that Centro had mislead it about the rent payable by a major tenant (K-Mart) in the shopping centre.¹ As a result of the conduct, Merost claimed it had suffered loss and damage amounting to $700,000.

Centro denied the claim and maintained that if Merost had suffered loss or damage due to the alleged misleading and deceptive conduct, such loss or damage was caused or contributed to by Merost itself.

Timeline

The decision

The court had to consider the following issues:

• was the representation made by Centro in regard to the percentage rent trigger misleading or deceptive, or likely to mislead or deceive?;
• if the representation was misleading or deceptive, did Merost rely on the erroneous breakeven figure?;
• if Merost did rely on the figure, was the loss or damage Merost suffered caused by the misleading and deceptive conduct?; or
• did Merost by its own action/inaction, contribute to the loss?

The court held in Merost's favour on the first three points. The court held that critical to Merost being successful were the following:

• The information in the data room was designed to equip potential purchasers with material necessary to submit an EOI for the purchase of the shopping centre. The income from the shopping centre was an important element for the purchaser, especially because it represented 60 per cent of the rent revenue for the centre.
• The IM was stated to contain 'comprehensive due diligence material'. The due diligence material was prepared by professionals including Knight Frank (a leading agent in Tasmania), Centro (a very large shopping centre owner) and the electronic data room was administered by Freehills (a significant legal firm).
• Although there were very detailed disclaimers in the confidentiality agreement signed by Merost and in the IM, they were not determinative of the issue and could not overcome the statutory obligation not to mislead and deceive. In particular, the court said: 'There is abundant authority that it would be against public policy to allow a private agreement to prevent a statutory remedy designed to protect consumers from misleading and deceptive conduct.'
• Even though Merost was aware of the discrepancy in the calculation of the K-Mart rent, because when it cross-checked the calculation it did not agree with K-Mart's calculation, that did not prevent Merost having a successful claim.
• Merost's main representative (a Mr Burgess) was an impressive witness and the court held that his direct evidence that he relied on the figure in the IM should be accepted.
• Centro's contention that Merost was merely confused by the erroneous breakeven figure, and that mere confusion was not misleading and deceptive conduct, was not accepted. All the material supported the erroneous breakeven figure.
• The loss and damage suffered by Merost was clearly caused by the misleading and deceptive conduct. The court rejected the argument by Centro that it would not have sold the shopping centre for a price less than $29,600,000. The court held that the loss or damage suffered was $325,000 (compared to the claim of $700,000). It also held the Merost had contributed in part to the loss or damage to the extent of 20 per cent. Accordingly, Centro's liability was reduced to $260,000.

How does this affect you?

The case emphasises once again that information in IM's and electronic data rooms must be checked very carefully to ensure it is accurate. Disclaimers will not save vendors. We all know market pressures force vendors to move swiftly to put properties up for sale, but appropriate measures should always be adopted to prevent inaccurate information being published.