Sale of land – Warranty – Rectification – Respondent purchasing appellants’ house building business by share purchase agreement – Respondent claiming appellants in breach of warranty – Court ordering rectification of agreement – Appellants appealing – Whether judge wrong to order rectification of agreement and disclosure letter – Whether disclosure letter capable of being rectified – Appeal dismissed
The respondent was a major housebuilding company which held significant amounts of land for future development, including land for which planning consent had not been granted but which it considered to have development potential. The appellants owned a successful Kent and Sussex house building business which operated through a group of companies.
In October 2012, the respondent acquired a development site from the appellants by entering into a share purchase agreement for the shares in two of the companies in the group (Holdings and Developments). A subsidiary of Developments held options to purchase four of the parcels of land included in the site. The other two parcels (the Felbridge freeholds), which were necessary for access to the site, were owned by another group subsidiary. The share purchase agreement contained warranties that the two companies had good title to the land but did not identify the individual parcels. A disclosure letter sent by the appellants as part of a data package in the course of negotiations stated that Developments did not own the Felbridge freeholds.
After completion of the sale, the respondent discovered that it had no access to the Felbridge site which it had an option to purchase as part of the sale. It also discovered that the freehold to a plot, that would have given it access to the larger plot, had been moved to another company in the group prior to the sale and was not part of the acquisition.
The respondent brought proceedings against the appellants claiming damages for breach of warranty, saying it had acquired a landlocked site, with a ransom strip running through the middle of it. The judge ordered the rectification of the share purchase agreement, and the related disclosure letter, and declared the appellants to be in breach of warranties given in the agreement and liable to pay damages: see [2018] EWHC 221 (Ch).
The appellants appealed contending that the judge was wrong, on the evidence before him, to order rectification of the agreement and the disclosure letter. In any event, the disclosure letter was, as a matter of law, incapable of being rectified and the judge was therefore wrong to order its rectification.
Held: The appeal was dismissed.
(1) The judge had been fully entitled on the evidence before him to conclude that the share sale and purchase agreement, and the associated disclosure letter, did not accurately record the terms agreed between the parties and that the requirements for rectification of those documents had been met. The judge had to have regard to the discussions and documents passing between the parties to determine the agreed terms and their continuing common intention. The evidence was overwhelming that they agreed that the entire Felbridge site would be included in the sale of Developments and there was no basis in the evidence, other than the terms of the executed agreements and (perhaps) the terms of the heads of terms, to suggest that there was any change in that agreement and common intention. Unlike the executed agreement, the heads did not contain any detail as to the properties that were to be owned by Developments on completion. The common intention of the parties had been that Developments would be the corporate vehicle for the sale of the strategic landholdings. A simple reference to a sale of Developments in the heads did not therefore necessarily import any inconsistency with the parties’ common intention. The mechanics for including the freeholds in the sale were a matter for the appellants who, as the controlling shareholders of Developments and the subsidiaries, could without difficulty ensure that the freeholds were owned by Developments by the time of completion.
(2) As to whether, as a matter of law, the disclosure letter was a document that could be the subject of an order for rectification, it was important to start with the judge’s finding that the parties’ common intention, as demonstrated by the communications between them and continuing up to the execution of the share sale and purchase agreement, was that the Felbridge freeholds would be and were owned by Developments on the date of the agreement, which was also the contractual completion date, and would therefore indirectly pass to the respondent on the sale of Developments. It followed that neither the warranties in the agreement nor the statements in the disclosure letter that Developments did not own the freeholds gave effect to the continuing common intention of the parties as to the transaction between them.
The disclosure letter, as much as the sale and purchase agreement, was prepared and signed in order to give effect to the parties’ intended transaction. Drafts of the disclosure letter passed between the parties’ solicitors and its terms were agreed between them. The disclosure letter was defined in the agreement and its contents, by the terms of the agreement, qualified the warranties given by the sellers. It was an integral part of the suite of documents designed to give effect to the parties’ intended transaction. If, as the judge found, it did not give effect to the terms of the transaction, there was no reason why it should not be as much capable of rectification as the agreement itself. The fact that it was, in form, unilateral was no bar. Unilateral documents might be rectified if they did not give effect to the intention of the maker. The disclosure letter did not give effect to the intention of the appellants, as well as of the respondent. Likewise, rectification of the disclosure letter gave effect to the common intention that Developments should be warranted as being the owner of the Felbridge freeholds. The position was the same as if the agreement itself had qualified the warranties by a statement that Developments did not own the freeholds. Such a provision would clearly be capable of rectification and there was no basis for a different treatment of the disclosure letter: Re Butlin’s Settlement Trust [1976] Ch 251 and Lee v Lee [2018] EWHC 149 (Ch) applied.
Timothy C Dutton QC (instructed by Whitehead Monckton Ltd, of Maidstone) appeared for the appellants; Michael Fealy QC (instructed by Walker Morris LLP, of Leeds) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Persimmon Homes Ltd v Hillier and another
