Failure to disclose material information during due diligence on sale of his Wellsford service station and adjoining food court cost Garry Hannam and his company $424,300. Operating expenditure invoiced to one tenant was in dispute.
Peter Sullivan fronted for a group of investors negotiating in 2014 to buy a Wellsford commercial property leased to seven tenants: a service station and food outlets. Negotiations resulted in sale at a price of $5.05 million; an implicit yield of 7.6 per cent. The contract included a due diligence period. Wellsford Properties Ltd was obliged to allow ‘full access to the property’ and provide any ‘relevant information’. With commercial property values determined by net rental income, purchasers’ enquiries zeroed in on operating expenses which could be charged back to tenants: rates and utility charges. Wellsford Properties was unwilling to hand over financial statements, but it undertook to provide certified details of rents and actual operating expenditures for the previous three years. It did not disclose that a Caltex service station on the site had challenged an invoice for some fifty per cent of power used across the seven tenancies; it was separately metered for power it said. Under-recovery of operating expenditure fed through to reduced net income from the tenancies. After their purchase, the new owners renegotiated Caltex’s lease obligations.
The Court of Appeal ruled purchasers were entitled to damages of $424,300 from Wellsford Properties, representing the reduced amount they would have paid if full disclosure had been made of net rental income paid. In addition, Mr Hannam was held personally liable under the Fair Trading Act. He was directly involved in the sale process and specifically involved in Wellsford Properties responses to requests for information about operating expenses.
Sullivan v. Wellsford Properties Ltd – Court of Appeal (20.05.19)
19.095