An information memorandum prepared by Centro shopping centres for the sale of its CBD Launceston mall – together with documents made available in its “data room” – gave incorrect data on the turnover rent a prospective buyer could recover from the anchor tenant.
So claimed the buyer’s owner in his company’s $700k compensation lawsuit, even though the rent discrepancy was apparent from a 2 page variation document discovered by titles office search that his solicitor failed to pass on.
The variation to Kmart’s 12 year lease – entered into in December 2009 but not part of the documents handed over for due diligence – effected a change to the gross sales “breakeven” threshold for the tenant’s obligation to pay 2% percentage rent.
The IM was erroneous in that it quoted a breakeven figure of $21 million, when the correct figure calculated by the new formula specified in the lease variation, was $24.3 million.
Following its “data room” due diligence and its experts pouring over the figures and rent formulae (minus the altered “breakeven” formula in the unseen variation document), the buyer’s Chris Burgess decided to proceed.
The sale settled uneventfully but when the variation and its consequences to revenue were discovered soon after, buyer Merost Pty Ltd immediately went for the seller.
Merost’s case was that had it known the correct breakeven, it – naturally enough – would not have paid the same price.
Centro was liable to it for misleading and deceptive conduct under the Australian Consumer Law, so it claimed, for the resulting $700k loss of revenue for the balance of the lease term, contending that all it had to prove to the court was that Centro’s conduct was one cause of its loss.
Among the obstacles that the buyer had to overcome in its Federal Court proceedings were the ubiquitous disclaimers in the IM and the contract that reminded potential buyers to rely on their own enquiries and that nothing “contained in this report can constitute any representation or offer by the Vendor or the agent”.
Centro agreed the disclaimers could not operate to defeat the claims under ACL s 18, but asserted that the very purpose of the due diligence exercise was to allow Merost to confirm the breakeven figure in the IM.
It also argued the variation was discoverable on the public register in the titles office and thus it was afforded a complete defence. Ignoring such information was akin to recklessness, it argued.
Burgess testified however that he had instructed solicitors to not do anything connected with the leases because “we had the expertise to do that ourselves”. “Don’t bother reading the leases or the information memorandum, we will do that ourselves,” he swore he notified Melbourne lawyers Sam Abrahams and Andrew Norman.
The solicitors’ job was to simply negotiate contract terms and handle the conveyance and thus the law firm had no duty to notify of the lease variation entry that appeared on the titles search they obtained for other purposes.
On this basis the court found Centro principally liable for the loss in anticipated rental income but Burgess’ company was nevertheless held partly at fault for its own misfortune to the order of 20%.
Centro’s glib assertion that there was material in the data room which could have enabled Burgess to determine the correct breakeven figure, did not take sufficient account, so held the court, of “the degree of difficulty in identifying the information which could be used to calculate the [correct] breakeven figure”. Likewise their claim that the solicitors were “concurrent wrongdoers” was dismissed for the reasons referred to above.
Damages were assessed at $325k but with the 20% reduction, judgment was entered in February against Centro for $260k.