Property developer (T) brought Court action against the three defendants over events leading to the purchase of a commercial property. The judgment of the Court begins with the words: 'This litigation arises from an unfortunate series of events'. That is true.

T entered into an agreement with the 3rd defendant (R) to purchase a commercial property, subject to existing leases. T was told that the existing leases were for monthly tenancies, except for one long term lease that R had negotiated with the first defendant restaurant owner (G). During the lease negotiations, R and G had agreed that a 'demolition clause' would be included, giving the landlord the right to cancel the lease on giving six months' notice.

However, it was also agreed that the landlord would not be able to exercise that right within the first six years of the term. R gave a draft copy of this lease to T before T agreed to purchase the property. Unfortunately this draft omitted the important proviso that cancellation under the demolition clause could not be exercised for six years.

T then agreed to purchase the property. G discovered the error in the draft lease before T settled the purchase. G told R about the error, and R immediately notified T's lawyer. Unfortunately T's lawyer (the second defendant, C) did not tell T about the mistake. T then settled the purchase and set about undertaking its development proposals. However, its preferred proposal came to an end when T found it could not end G's lease within the first six years. T brought Court action against G, C and R.

T won against C for negligence (for not bringing the proviso to the demolition clause to T's attention before T settled the purchase), and against R for misrepresentation (because R gave T a copy of an incomplete draft lease that induced T to enter into the agreement to purchase the property). The Court's only remedy was to award damages to T. G was allowed to continue to occupy the restaurant premises under his lease.

This case illustrates the importance to vendors of providing accurate information to purchasers during negotiations. It also illustrates the importance to purchasers of sighting signed leases whenever possible.

This article is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this article.

Copyright Phillips Fox, December 2001

For further information please contact Michael Dewhirst
michael.dewhirst @phillipsfox.com

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