A party to negotiation must disclose to the counterparty material information even if the counterparty represented to have made the required research

July 19, 2020

A lessee demanded to terminate a lease agreement for a petrol and gas station after the lessor did not disclose the fact that there may be legal difficulties in obtaining a business permit for the purpose of the lease due to lack of a building permit for one of the leased gas facilities.
The Supreme Court held that the lease agreement is revocable due to defects that occurred at the time of its inception, including mistake or fraud. The lessor of a property is obliged to disclose the material facts concerning the suitability of the leased property for the intended use. Breach of the duty of disclosure at the stage of contractual negotiation may lead to an error and even fraud in the inception that grant a right of revoking the agreement. An obligation of the lessee to carry out inspections on its behalf does not exempt the lessor from its duty to disclose basic facts within its knowledge. Here, it is a commercial lease that clarified the uses that the lessee intended to make, including the operation of a gas refueling facility. Even though the lessee stated in the lease agreement that it performed all necessary research regarding the possibility of obtaining the necessary licenses to operate the gas station, it later encountered difficulties in obtaining the permanent business license. The lessor had relevant information regarding the leased property and it knew that a building permit had not been issued for the gas facility and therefore it is likely that the lessee would encounter difficulties in obtaining a business permit. Therefore, the lease agreement may be revoked due to misrepresentation or alternatively, due to a “common mistake”.