A recent court decision in Singapore shows one of the biggest pitfalls in buying property for a business — what to do with due diligence.

Brief facts of the case#

On its surface, a F&B operator sues a property developer for misrepresentation after buying a premises. The operator intended to build a zichar restaurant in a mixed development, so the restaurant would be situated on the ground floor with residential units above. zichar restaurants are lively places, with alcohol and lots of cooking.

A zichar restaurant is a great place to be at, but not a fun place to live near to. It turns out that increasing and unexpected environmental regulations resulted in a “broken dream” for the F&B operator. The operator alleged that the developer represented that having a zichar restaurant there was “bo dun dui” (no problem) and sued on it.

Take note that these parties are no babe in the woods. Experience in the industry aside, they got separate lawyers to represent them in the sale and purchase of the property. The SPA stated that the use of the area was a “shop” and not a restaurant. The operator, through their lawyers, raised a concern and reminded the developer about the representation. The developer’s lawyers stated expressly there was no such representation. The developer and the operator met separately, and the developer allegedly told the operator that the documents were just administrative. The operator then signed the SPA as it is and went straight to work.

Turns out, “the misrepresentation was dispelled by the express terms of the contract”. Among other things, the operator also failed to exhaust all its options in making the venture work (these measures included other approvals and rectifications would have been very expensive anyway). In conclusion, the operator lost its case.

Due diligence in important!#

The developer’s lawyers formal rejection of the representation should have been a big red flag for the operator. One lesson of this case is that the formal documents should always reflect the intention of the parties. If a term was so important, it should have been written into the contract. As most contracts contain “entire agreement” clauses, the force of any discussions or representations before signing are removed from the contract.

The operator probably disregarded the importance of the contract document and chose to believe the developer instead. This happens often in industries which are less formal and business rely on relationship to succeed. It’s a false choice in my view. The contract should reflect the relationship. If the business partner is evasive about putting the relationship in writing, that is a red flag.

Here’s another way to put it: if you choose to rely on your partner rather than your contracts, you should not expect the courts to assist you in enforcing your contract.

If I am allowed to speculate, there seemed to be a great rush to get things done with this deal. More than the legal aspects which I described above, the biggest mistake in due diligence was not exploring comprehensively how to make the business feasible. Parties would have realised that government approval was required to operate a restaurant in a mixed development, and the costs and time taken would have come out if they studied it properly.

I imagine that the operators and developers thought of themselves as practical men. Even if they honestly thought that the contracts were just paperwork, the feasibility of the business must have been important to them.

Conclusion#

Regulations can be very complex nowadays, especially in Singapore where several agencies may be involved. It pays to be clear on what the steps are to be taken to make the business work, and to ensure that the documentation properly reflects. Due diligence is important!