The risks of purchasing property portfolios through company acquisitions

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Purchasing a portfolio of properties through a company acquisition, such as a share purchase agreement, has its advantages, but make sure that the company you are acquiring actually owns all the properties you want to buy.

A common way of purchasing land is for the buyer to purchase the company or companies that own the land, rather than the land itself. This is particularly useful when a buyer is acquiring a number of land interests held by one or two companies within the same group.

This method of acquisition is not without its risks, however, as is shown by a recent Court of Appeal decision involving a national housebuilder (Persimmon Homes Limited –v- Anthony John Hillier and Colin Michael Creed)

The intended purchase

The national housebuilder wished to purchase a number of landholdings in the south-east from a regional housebuilder. There were a number of landholdings included in the proposed sale, including land to the rear of Crawley Down Road in Felbridge, East Sussex. The Crawley Down Road land included numbers 11a and 3 (the Key Properties). These provided, amongst other things, an access to the proposed development to be built on the property.

The regional housebuilder that was selling the properties was made up of a number of companies that included one company known as “Holdings” and another known as “Developments”. The bulk of the properties to be sold were owned by these two companies.

The national housebuilder purchased Holdings and Developments pursuant to a share purchase agreement (the SPA), which was accompanied by a disclosure letter.

An unfortunate mistake

Following completion of the purchase, it transpired that the Key Properties were not, in fact, owned by either Holdings or Developments, but a third company, Investments. Therefore, on a strict interpretation of the SPA and the disclosure letter, the national housebuilder did not acquire the Key Properties, despite the fact that it thought that they were part of the deal.

Two options are open to a party in these circumstances. The first is to argue that the document should be interpreted - so that it includes what the party thought it should include. The second option is to seek rectification of the document, so that it is ‘rectified’ to accord with what the parties thought it meant.

Evidence of what the parties actually intended the contract to mean is not admissible when interpreting a document. The court will only look at what the parties intended from an objective, such as an outsider’s point of view.

However, evidence of what the parties actually intended is admissible when seeking rectification of a document, as long as it can be shown that the parties shared a common continuing intention in respect of what the document should mean, and that intention continued up to the time of execution of the document.

Rectification of the disclosure letter

Here, there was a considerable amount of contemporaneous correspondence which appeared to show that both parties intended to include the Key Properties in the transaction. Accordingly, the national housebuilder made an application for rectification of the disclosure letter so that it would include the Key Properties.

The Court of Appeal found that the disclosure letter should be rectified so that it includes the Key Properties, despite the fact that the company which actually owned the Key Properties was not a party to the SPA or the disclosure letter. The Court decided this on the basis that there was a clear common intention on the part of both parties, demonstrated in correspondence, that the Key Properties would be part of the transaction.

The regional housebuilder argued that it was up to the buyer to check whether all of the land was actually owned by the two companies being sold. This would seem to be a fair point, but the Court of Appeal took the view that the parties’ common intention trumped this and that, since all the companies were controlled by the same people, it was up to the seller to ensure that all the properties were held by the two companies being sold.

What to consider when acquiring land through SPAs

Although the buyer was ultimately successful in obtaining rectification, the process of pursuing its rectification claim to the Court of Appeal must have been lengthy and expensive.

The lesson is therefore clear, when acquiring land through SPA's, it is ever more important to double-check that the companies being purchased actually own all of the land which the buyer wishes to acquire.

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