This case provided a scathing comment on the negotiating tactics and omissions of fact used to induce entry into a contract which resulted in a successful claim for misleading and deceptive conduct and damages of almost $3 million.
His Honour Justice Digby examined the conduct of William Derek McNee (the representative of the first and second defendants (Vendor)) and a number of real estate agents, in negotiating and obtaining Thi Huong Nguyen’s entry into a contract to purchase a commercial property at 255 Chapel Street, Prahran, Melbourne, Victoria (Property).
The contract for sale (Contract) was signed by Nguyen, who later nominated P Value Pty Ltd (P Value) under the Contract (for land tax purposes). Nguyen was the Director of P Value. On 15 January 2009 P Value, completed the purchase of the Property from the Vendors. It was later discovered P Value had paid a price about $2 million above the market price at the time of purchase.
Sometime later P Value commenced proceedings for misleading and deceptive conduct pursuant to both the Trade Practices Act 1974 (Cth) (TPA) and the Fair Trading Act 1999 (Vic) (FTA).
Background
The Property was to be auctioned by the Vendors at midday on 5 September 2008. In the late morning of 5 September 2008 Nguyen was taken by a real estate agent (the fifth defendant, Richard Thomas) to an office of the fourth defendant (Rodney Morley Persichetti Pty Ltd (TBM Sales)) which was located in the same street and opposite to the Property. Present at the TBM Sales office, were at least four real estate agents involved in, or associated with, the Vendors' campaign to sell the Property including McNee and Fred Nucara (the seventh defendant, a real estate agent and Director of Wellara Holdings Pty Ltd).
In the late morning of 5 September 2008 negotiations and discussions took place between McNee, the real estate agents and Nguyen. These negotiations and discussions principally involved Nguyen, McNee, Nucara and Thomas, although others were at times in attendance.
Representations made in relation to the “other offer”
At the meeting and before the auction was due to commence, Nucara told Nguyen that the Vendors had an offer of $5,920,000 for the Property and as a result the auction had been cancelled. Neither McNee nor Nucara told Nguyen that the "offer of $5,920,000" said to have been made to the Vendors by another potential buyer was in fact an offer for $5,568,800 and had, under its own terms, "terminated" at 10.00pm the day before, and that the "offer" had also been expressly rejected by McNee on 4 September 2008.
Representations made in relation to rent
Two Five Five Pty Ltd (255) was a tenant of level 1 of the Property held under a lease with the Vendors which appeared to oblige it to pay $200,000 rental per annum (Lease).
Nguyen stated to McNee and Nucara that she was concerned about the reliability and amount of the rental yield from the Property and in particular the ability of 255 to pay rent. Nucara told Nguyen that 255, the main tenant at the Property, was “a good tenant and good payer of rent”. McNee did not correct or qualify Nucara's statement about the tenant.
In the course of discussions and negotiations, McNee agreed to the inclusion of a Special Condition in the Contract, which stipulated for the provision of a $200,000 security deposit in respect of the Lease. Neither McNee nor any of the real estate agents present on 5 September 2008 told Nguyen that the Vendors had entered into a rent abatement agreement with 255, which permitted 255 to pay no rent while the Vendors owned the Property and granted 255 a rent free period of 12 months (Rent Abatement Agreement). Additionally, neither McNee nor any of the real estate agents present told Nguyen that as at 5 September 2008, 255 had paid no rent for its occupation of the Property to date.
The Vendor's statement for the Property, included in the Contract, detailed three leases with a combined total rent payable of $370,000 per annum. These leases were to:
Nguyen had also previously been provided with information by Thomas of TBM Sales in June and July 2008 about the $370,000 rent supposedly being paid by the three tenants of the Property, and had been advised that it was not necessary for 255 to provide a director's guarantee to secure its rent.
P Value alleged that unbeknown to Nguyen in September 2008 when she signed the Contract, and unbeknown to Nguyen or P Value in January 2009 when P Value completed the Contract, 255 had paid no rent to the Vendors and had entered into the Rent Abatement Agreement with the Vendors not to pay rent whilst the Vendors owned the Property and for a period of 12 months from the sale of the Property.2
Valuation
After entering into the Contract, but prior to settlement in January 2009, Nguyen sought a valuation from a Certified Practicing Valuer. The Valuer informed Nguyen that she had paid about $2 million above market price for the Property.
Had the Defendants engaged in misleading and deceptive conduct?
His Honour Justice Digby accepted that Nguyen’s allegations had to be considered against the background of her capacity as a sophisticated, prospective purchaser of commercial real estate.1 Even so, Digby J rejected the suggestion that Nguyen should have pressed for more information about the tenants of the Property or obtained a valuation of the Property prior to executing the Contract.2 This was because in His Honour’s view, the team of real estate agents who were in the 5 September 2008 meeting, created a context in which it was reasonable for Nguyen to have felt there was a sense of urgency in securing the Property and it was therefore impractical to make further inquiries or undertake further investigations at that time. In making this finding, Digby J relied on the representation that had been made about the ‘other offer’.
His Honour found that the defendants had made or implied a number of misleading and deceptive statements in the course of trade and commerce which constituted misleading and deceptive conduct contrary to section 52 of the TPA, and or, section 9 of the FTA.3
In support of this finding was the fact that McNee, and Nucara in McNee’s presence, had made statements or implied facts inducing Nguyen to enter the Contract despite knowing that:
Digby J also found that implied representations which constituted misleading and deceptive conduct had been made in relation to the defendant’s8 failure to inform Nguyen about the Rent Abatement Agreement.9
Digby J made “very serious findings” in relation the conduct of McNee stating that the alleged statements were made “with no honest belief in the truth of those statements” and a failure to correct statements made by Nucara despite “knowing that the statements were not truthful or accurate”.10 McNee was found to have been directly and knowingly concerned with the contravention due to both his statements and his silence, because of the major role he played in the negotiations while knowing all of the facts, and therefore the falsity, of Nucara’s representations.11 McNee as the sole director of the second defendant and representative of the first defendant (which was a related company and co-Vendor) was found to be the controlling decision maker and representative of the Vendors, thereby making those entities also liable for the relevant conduct.12
His Honour accepted that Nguyen had been reassured by the wrongful representations and in turn relied upon each and all of them in deciding to make an offer of $5,925,000 which was immediately accepted by McNee.13
These findings resulted in His Honour being satisfied that P Value was entitled to recover loss and damage in the sum of $2,786,421.55 representing the difference between the price paid and the value of the Property, the excess stamp duty paid, the loss of rental income, expenses and legal costs incurred (including the legal costs incurred in attempting to enforce the 255 Lease).14
Lavan Legal comment
This case serves as a warning to sellers, and their agents, of the expensive consequences that may flow from misleading and deceptive representations made in the negotiations and discussions prior to contract, and any failures to correct statements made which are known to be false.
Even where a commercial transaction is between arms-length and sophisticated parties, a duty to disclose relevant facts may exist and silence may be construed as misleading and deceptive conduct.
A failure to correct the statements of another, where a person has no honest belief in the truth of those statements, may also constitute misleading and deceptive conduct if in the circumstances, such a duty is found to have existed.
Significantly, where such a duty exists, it will not be negated by the fact that inquiries could have been made that would have disclosed the true position, particularly where negotiations are occurring under time pressure.
This case serves as a timely reminder for buyers of commercial properties to conduct adequate due diligence with respect to the property they are considering buying. A thorough due diligence will often identify issues before they become a problem.
1 [127]
2 [128]
3 [231] – [237]
4 [227]
5 [227]
6 [227]
7 [227]
8 Digby J held Thomas and TBM Sales to not have an any knowledge of the true state of affairs and that Nguyen did not place any significant reliance on what Thomas said; [309] – [312]
9 [214]
10 [191] – [193]
11 [189]; [212]; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] 39 FCR 546
12 [189]
13 [222]
14 [297] – [299]
