Persimmon Homes Ltd v (1) Anthony John Hillier (2) Colin Michael Creed  EWCA Civ 800
Persimmon Homes Limited (the "Buyer") is a major housebuilder which holds significant amounts of land for future development. Mr Hillier and Mr Creed (the "Sellers") had for many years run a successful housebuilding business operating mainly in Kent and Sussex. In October 2012, the Buyer sought to acquire from the Sellers six parcels of land making up a development site.
By way of a share purchase agreement dated 5 October 2012 (the "SPA"), the Buyer purchased all of the shares in two of the Sellers' companies (the "Targets"). Through its purchase of the Targets, the Buyer acquired options to purchase four of the six parcels of land. The other two parcels (the "Felbridge freeholds"), which were necessary for access to the entire development site, fell under a different chain of ownership outside of the Targets and as such were not transferred to the Buyer.
The SPA contained a definition of 'properties' held by the Targets which described the location of the land but stopped short of identifying any specific parcels. The SPA contained warranties that the Targets had good title to the properties. An accompanying disclosure letter sent by the Sellers during the negotiations qualified the warranties, by stating that the Targets did not own the Felbridge freeholds.
The Buyer applied to the High Court seeking rectification of the SPA and disclosure letter so as to reflect what it claimed was the common intention of the negotiated deal between the parties: that the transaction would result in the Buyer acquiring the entire development site (i.e. all six parcels of land).
The judge found that the heads of terms agreed between the parties were contrary to the inclusion of the Felbridge freeholds in the transaction. That being said, the judge held that the Sellers' communications indicated that they controlled the entire development site and that a consequence of acquiring the Targets would be that the Buyers gained the interests in the entire site, including the Felbridge freeholds. The judge found this to have been the common intention between the parties, and ordered that the SPA and disclosure letter be rectified to reflect that intention.
This resulted in the description of 'properties' owned by the Targets in the SPA being rectified to so as to include the Felbridge freeholds along with the other four parcels. The disclosure letter was rectified to remove the qualification that the Felbridge freeholds were not owned by the Targets. Consequently, the judge found that the Sellers were in breach of the warranties in the SPA and were liable to pay damages to the Buyer.
Court of Appeal
The Sellers appealed the High Court's decision on two grounds:
- Was the decision to order rectification supported by the evidence before the judge?
- Was a disclosure letter capable of being rectified as a matter of law?
On the first ground, the Court of Appeal found that the judge had been entitled to conclude that the SPA and disclosure letter did not accurately record the terms of the agreement between the parties and that the requirements for rectification had been satisfied.
The fact that the heads of terms reflected a different position to the SPA was not relevant, as the heads of terms did not have contractual force and were to be considered as part of the negotiations leading to the SPA, rather than as part of the agreement itself.
The court rejected the Sellers' argument that a sophisticated and commercially aware entity such as the Buyer would have known that if it acquired the Targets it would only acquire the assets owned by the Targets which did not include the Felbridge freeholds. It was held that the Sellers, as controlling shareholders of all of the companies owning the six parcels of land, were responsible for ensuring that the Felbridge freeholds were transferred into the ownership of the Targets before the completion of the transaction.
On the second ground, the Sellers argued that the disclosure letter was a unilateral document stating a particular set of facts existing at the time and it would therefore be improper to rectify it so as to re-write history. The court found that the disclosure letter was an integral part of the suite of documents designed to give effect to the parties' intended transaction. It did not fulfil this role, and there was accordingly no reason why it should not be capable of rectification, irrespective of it being a unilateral document. Rectification was not re-writing history but simply giving effect to the parties' intended transaction.
The Buyers' claim was therefore upheld, and the Sellers were liable to pay damages representing the difference between the development site's actual market value at the time of the transaction and the value it would have had had the intention of the parties been given effect to.
Although the Buyer was successful, this case illustrates the importance of undertaking a thorough due diligence exercise before completing on purchases of land. Buyers need to be sure of exactly what it is they will be purchasing.
The case also serves as a reminder of the importance of instructing experienced advisors to carefully draft and review the documents intended to give effect to the agreement, and to ensure the precise nature of the agreement is explicitly recorded.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.