C Convenience Stores Pty Ltd v Wayville Plaza Retirement Pty Ltd
[2012] SASC 14
•8 February 2012
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
C CONVENIENCE STORES PTY LTD v WAYVILLE PLAZA RETIREMENT PTY LTD & ORS
[2012] SASC 14
Judgment of The Honourable Justice White
8 February 2012
TRADE AND COMMERCE - OTHER REGULATION OF TRADE OR COMMERCE - RESTRAINTS OF TRADE - WHAT CONSTITUTES COVENANT IN RESTRAINT OF TRADE
TRADE AND COMMERCE - OTHER REGULATION OF TRADE OR COMMERCE - RESTRAINTS OF TRADE - SEVERANCE
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - ILLEGAL AND VOID CONTRACTS - EFFECT OF ILLEGALITY OR INVALIDITY - IN GENERAL
REAL PROPERTY - VALUATION OF LAND - METHODS OF VALUATION
By the exercise of an option, the first defendant (WPR) agreed to purchase the property of the plaintiff (C Convenience) on Goodwood Road, Wayville, on which it conducted a fuel selling business - the second, third and fourth defendants guaranteed the performance of WPR's obligations - WPR failed to settle - C Convenience retained the property and sought damages for breach of contract, as well as enforcement of the guarantees given by the second, third and fourth defendants.
The defendants contended that the contract and associated deeds contained unlawful covenants in restraint of trade which could not be severed - they contended that the contract was accordingly unenforceable and sought repayment of the option fee and deposit .
Whether the provisions in the contract and associated deeds imposing restrictions on the use of the property and adjacent land were subject to the rules regarding unlawful restraints of trade; whether the covenants constituted an unlawful restraint of trade; whether it was open to C Convenience to lead evidence bearing on the reasonableness of the restraints, having not pleaded this as a special defence; whether the restraints were reasonable; whether the offending clauses should be severed, with the effect that the remaining provisions of the contract and associated documents were enforceable; whether C Convenience could claim loss of bargain damages for the "lawful" part of the contract, ie, whether this would involve it obtaining damages arising from the repudiation by WPR of a "different" contract resulting from the severance of objectionable parts; whether even if the contract was wholly unenforceable, C Convenience was still entitled to enforce the guarantees given by the individual defendants; how should the damages to which C Convenience was entitled be assessed?
Held: the convenants in restraint of trade were contrary to public policy and unenforceable in their entirety; the defendants' objections to C Convenience's evidence as to the reasonableness of the restraints should be upheld; however, the evidence adduced by C Convenience was insufficient in any event to establish that the restrictive covenants were reasonable as between the parties; the restraints went further than was reasonably necessary to protect the legitimate interests of C Convenience .
The offending clauses should be severed, and the remainder of the contract enforced - the associated documents containing restrictive covenants were entirely unenforceable - the contract addressed in detail the prospect that some provisions may be unenforceable, providing for severance of the unenforceable provisions and for the validity of the remainder - the unenforceable provisions were for the exclusive benefit to the plaintiff - there was no requirement that the consideration for the severed provisions be divisible.
C Convenience is entitled to loss of bargain damages.
If the contract had been wholly unenforceable, then C Convenience would not have been entitled to enforce the guarantees.
The damages of C Convenience were assessed having regard to the evidence of three valuers.
Real Property Act 1886 (SA) s 77; Law of Property Act 1936 (SA) s 34; Development Act 1993 (SA) s 35, s 46; Supreme Court Civil Rules 2006 (SA) r 100, referred to.
Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432, distinguished.
Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] 1 AC 535; Peters American Delicacy Company Ltd v Patricia's Chocolates & Candies Pty Ltd (1947) 77 CLR 574; SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516; Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; Amoco Australia Ltd v Rocca Bros Motor Engineering Co Ltd (1973) 133 CLR 288; Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260; Lindner v Murdock's Garage (1950) 83 CLR 628; Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269; Tulk v Moxhay (1948) 41 ER 1143; Clem Smith Nominees Pty Ltd v Farrelly & Ors (1978) 20 SASR 227; Forestview Nominees Pty Limited & Anor v Perpetual Trustees WA Limited (1998) 193 CLR 154; Marquess of Zetland v Driver [1939] 1 Ch 1; Pirie v The Registrar-General (1963) 109 CLR 619; Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390; Re Mack and the Conveyancing Act [1975] 2 NSWLR 623; Newton Abbott Co-operative Society Ltd v Williamson of Treadgold Ltd [1952] Ch 286; Jones v Dunkel (1959) 101 CLR 298; Specialist Diagnostic Services Pty Ltd v Healthscope Ltd [2010] VSC 443; ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640; McFarlane v Daniell (1938) 38 SR NSW 337; Thomas Brown & Sons Ltd v Fazal Deen (1962) 108 CLR 391; Carney v Herbert [1985] 1 AC 301; Humphries v The Properietors "Surfers Palms North" Group Titles Plan 1955 (1994) 179 CLR 597; Electric Acceptance Pty Ltd v Doug Thorley Caravans (Aust) Pty Ltd [1981] VR 799; Firmin v Gray & Co Pty Ltd [1985] 1 Qd R 160; Horton v Jones (1935) 53 CLR 475; Collin v Holden [1989] CR 510; Hodgson v Johnson [1858] EL BL & EL 685; Whitlock v Brew (1968) 118 CLR 445; Brew v Whitlock (No 2) [1967] VR 803; Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60; Rentokil Pty Ltd v Lee (1995) 66 SASR 301; Codelfa Contruction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; Byrnes v Kendle (2011) 85 ALJR 798; Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1; Aberdeen Varieties Ltd v James F Donald (Aberdeen Cinemas) Ltd [1939] SC 788; Malec v Hutton Pty Ltd (1990) 169 CLR 638; Sellars v Adelaide Petroleum NL (1992) 179 CLR 332, considered.
C CONVENIENCE STORES PTY LTD v WAYVILLE PLAZA RETIREMENT PTY LTD & ORS
[2012] SASC 14Civil
WHITE J. The plaintiff (C Convenience) is the owner of the property at 51A Goodwood Road, Wayville (the Property). Since 2000 a related company, Shahin Enterprises Pty Ltd, has conducted a fuel selling business on the Property.
The first defendant, Wayville Plaza Retirement Pty Ltd (WPR), wished to purchase the property. As the result of the exercise of an option by the second defendant (Luigi De Rosa) on 19 December 2008, WPR contracted to buy the property for $6,881,000 plus GST.
Settlement was due on 19 June 2009. However, WPR did not settle at that time. C Convenience then delivered a notice to complete, requiring settlement on 10 July 2009. WPR did not settle at that time either. It seems that by mid 2009 the economic decline known as the Global Financial Crisis (GFC) had affected WPR’s ability or willingness to conclude the sale.
C Convenience now seeks damages from WPR for breach of contract. It also seeks to enforce the guarantees of WPR’s obligations given to it by Luigi De Rosa and the third and fourth defendants, Salvatore Sgherza and Stephen De Rosa.
Each of the defendants denies liability. They do not contest the underlying circumstances which give rise to C Convenience’s claim but contend that the contract and associated documents on which it relies are unenforceable because they contain covenants which are unlawful restraints of trade. The defendants also contend that if they are liable to C Convenience, the amount which it seeks by way of damages and indemnity is excessive. By counterclaim, they seek repayment of the $100,000 paid in consideration of the option and of the $400,000 deposit.
C Convenience denies that the restrictive covenants in the contract and the associated documents amount to unlawful restraints of trade. It contends, in the alternative, that such covenants are severable, and should be severed, leaving the remainder of the contract intact and enforceable.
At the heart of the case is the issue of whether the contract with the restrictive covenants was enforceable and, if not, whether those covenants are severable.
Background Circumstances
Most of the background was either admitted by the defendants or was not contentious.
C Convenience is a member of the Peregrine Group of companies, which is controlled by the Shahin family. The Peregrine Group, amongst other things, conducts fuel selling businesses on a number of sites in metropolitan Adelaide under the name “On the Run”. Usually these businesses are integrated with convenience stores, car washes and other commercial activities.
Mr Yasser Shahin, a director of several of the companies forming the Peregrine Group, gave evidence of the practice in the Group for one corporate member to own the land on which an On the Run business is conducted, and for that member to lease the land to Shahin Enterprises Pty Ltd. This company operates all the businesses conducted under the name “On the Run”. In this way the conduct of the “On the Run” businesses is separated from the ownership of the land on which those businesses are conducted.
51A Goodwood Road is at the corner of Goodwood Road and Le Hunte Street, Wayville. It is a regular shaped block with a frontage to Goodwood Road of 30.48m and a frontage to Le Hunte Street of 123.37m.
In 2008 and 2009, companies associated with the individual defendants owned the properties to the immediate north of the Property, each of which also has a frontage to Goodwood Road. Wayville Lifestyle Pty Ltd owned the land at 51 Goodwood Road; Ocean Pier Pty Ltd owned the land at 49 Goodwood Road; and Wayville Plaza Pty Ltd owned the land at 43 Goodwood Road. The parties referred to these properties collectively as “the Adjacent Land” and to their owners as “the Adjacent Owners”. I will do likewise.
The defendants and the Adjacent Owners wished to carry out a major development on the Adjacent Land and the Property. For that purpose, Luigi De Rosa entered into an option to purchase the Property for $6,881,000 plus GST. He and C Convenience were the parties to the Option Deed, but the Deed provided that the option could be exercised by a nominee of Luigi De Rosa.
It is very evident that the defendants and Adjacent Owners were in the position of “special purchasers”, ie, persons who were prepared to pay more than the market value in order to make a strategic acquisition of the Property.
The Option was open until 19 December 2008, and prescribed in detail the manner by which it was to be exercised. This included the delivery of an executed contract by the purchaser, an executed deed by the Adjacent Owners, and guarantees executed by each of Luigi and Stephen De Rosa and Mr Sgherza.
Luigi De Rosa did exercise the Option on 19 December 2008 by delivering to C Convenience a deposit of $400,000 as well as the requisite documents, but he did not include any notice nominating a purchaser other than himself, nor the required documents associated with such a nomination. However, in the execution clause in the contract (the Contract) and in certain he other documents, Luigi De Rosa included opposite his own name the words “or nominee”.
This gave rise to some dispute at the time as to whether the Contract had been executed by a nominee of Luigi De Rosa. This dispute was resolved on 6 March 2009 when C Convenience accepted the nomination of WPR. Thereafter WPR was treated for all purposes as the purchaser. In effect, C Convenience accepted that WPR was, on 19 December 2008, an undisclosed principal, and accepted that it was entitled to intervene in the Contract, even though Luigi De Rosa had not complied strictly with the requirements for such a nomination when he exercised the Option.
One effect of C Convenience’s acceptance of the nomination was that Luigi De Rosa guaranteed to C Convenience the due and punctual performance by WPR of its obligations as purchaser under the Option Deed and the Contract (Option Deed cl 5 and Contract Special Condition cl 22).
By cl 4.1 of the Option Deed, each of WPR as purchaser and C Convenience as vendor became bound from the date of the exercise of the Option to buy and sell the Property on the terms of the Contract contained in Sch 2 to the Deed. That Contract was deemed to have been made on the date of the exercise of the Option, namely, 19 December 2008.
C Convenience was bound by cl 9 of the Contract to give vacant possession of the Property at settlement. Presumably this would have required it to terminate its lease to Shahin Enterprises. The evidence did not disclose how that termination was to be effected.
Clause 21 of the Contract provided for the consequences of default by one party at settlement. It was common ground that C Convenience had followed the procedures contemplated by cl 21 in consequence of WPR’s default and that it had determined the Contract by written notice delivered to WPR and Luigi De Rosa on 10 July 2009.
Clauses 23 and 24 provided for the effect of the determination of the Contract by C Convenience. Clause 23 provided (relevantly):
23 (1) If this Agreement is determined by the Vendor under clause 20 or clause 21:
(a) all monies paid or payable by the Purchaser under this Agreement by way of deposit shall be forfeited to the Vendor absolutely; and
(b) the Vendor, at the Vendor’s option may either:
(i)retain the Land and sue the Purchaser for damages for breach of contract; or
(ii)resell the Land, together or in lots, either by public auction or private contract, and the deficiency, if any, in price upon the resale together with all charges and expenses of and incidental to the resale, any attempted resale and the Purchaser’s default shall immediately after the resale be made good by the Purchaser under this Agreement; and
…
Thus, C Convenience was entitled to retain both the deposit and the Property and to recover damages for breach of contract from WPR.
Clause 24 stipulated that the remedies which the Contract provided were “in addition to and without prejudice to any other rights or remedies that the parties may have by reason of any default”.
C Convenience has retained the property. In 2010 it carried out a major upgrade and redevelopment on the Property. Since June 2010, Shahin Enterprises has, in addition to fuel selling, also conducted a small supermarket, a Subway restaurant business and a car washing facility on the Property.
In the present action therefore, C Convenience is proceeding under cl 23(1)(b)(i). It seeks to recover from the defendants the difference between the agreed purchase price and the value of the Property as at 10 July 2009.
Restrictive Covenants by WPR
The Contract contained a number of special conditions, two of which are in the nature of restrictive covenants. One (cl 11) contained covenants by WPR restricting the uses to which it could put the Property. The other (cl 12) contained covenants restricting the uses which the Adjacent Owners could make of the Adjacent Land. The defendants contend that these clauses are an unlawful restraint of trade with the effect that the Contract is unenforceable.
By cl 11.4, WPR covenanted not to use the Property, or to allow the Property to be used, for any of five kinds of business activity, namely fuel sales, vehicle washing, convenience stores, small supermarkets and Subway outlets (the proscribed activities). These are the business activities conducted by Shahin Enterprises at most of its On the Run sites. Clause 11.4 provided:
11.4 Restrictive Convenants
To the fullest extent permitted by law, the Purchaser covenants with the Vendor that the Purchaser will not use the Property, or allow the Property to be used, for each and all of the following purposes:
11.4.1 Service Station
...
11.4.2 Vehicle Washing
…
11.4.3 Convenience Store
The Purchaser must not use the Property or allow the Property to be used as a Convenience Store. In this SC 11, a “Convenience Store” means a Convenience Store, snack bar, delicatessen or similar place where beverages, confectionary, groceries and bakery products are generally offered for sale by retail for consumption off the Property (but does not include a café);
11.4.4Supermarket
The Purchaser will not use the Property or allow the Property to be used as a supermarket with a floor area of less than two thousand (2,000 sq m). …
11.4.5Subway ®
The Purchaser will not use the Property or allow the Property to be used as a Subway ® branded restaurant.
The effect of cl 11.4 would have been to preclude WPR from engaging in any of the proscribed activities, whether as part of a service station or as a stand alone business.
Clause 11.7 stipulated the period in which the restrictive Covenants were to be current. It did so in somewhat unusual terms.
11.7 Term
11.7.1This SC 11 binds the purchaser and its successors in title in respect of the Property for a period of twenty five (25) years starting on the Settlement Date (“the Initial Term”) plus the longest of:
(a)a period of forty-four (44) years starting on the last day of the Initial Term;
(b)a period of twenty-five (25) years starting on the last day of the Initial Term; and
(c) a period of five (5) years starting on the on the last day of the Initial Term.
11.7.2If for any reason the whole of SC 11.7.1 is declared by a Court of competent jurisdiction to be invalid, illegal or unenforceable, then this SC 11 binds the Purchaser and its successors in title in respect of the Property for a period of twenty-five (25) years starting on the Settlement Date;
11.7.3For the avoidance of any doubt, the provisions of SC 11.9 and SC 25 apply to the interpretation of this SC 11.7.[1]
[1] I will refer to Special Conditions 11.9 and 25 later in these reasons.
The effect of cl 11.7 was to fix a term of 69 years, but in the event that the provisions producing that term are found to be invalid, to fix instead a term of 25 years.
Clause 11.2 contained a statement of the consideration for the restrictive covenants in cl 11. It provided:
11.2 Restrictions on Use
In consideration of the Vendor agreeing to enter into the Option Deed and this Contract with the Purchaser and the payment by the Vendor to the Purchaser of the sum of $100 (payment of which is acknowledged by the Purchaser), and having regard to:
11.2.1the prior use of the Property as a petrol filling station, a fuel storage depot incorporating underground storage tanks, and a convenience store;
11.2.2the prior and continuing use of the Dominant Land as petrol filling stations and fuel storage depots incorporating underground storage tanks, car washes, convenience stores, supermarkets and Subway restaurants;
11.2.3the fact that the Dominant Land Owners are related entities of the Vendor that are ultimately owned and controlled by the same person;
11.2.4the fact that the Purchaser does not carry on business as a petrol filling station, or a fuel storage depot incorporating underground storage tanks, or a convenience store, or a supermarket or a Subway restaurant, and has no intention or wish to do so now or in the future; and
11.2.5the fact that the Purchaser may use the Property as a single development,
the Purchaser hereby agrees, undertakes and covenants with the Vendor to observe, comply with and be bound by the provisions of this SC 11.
Clause 11.3 contained an acknowledgement by WPR as follows:
11.3 Acknowledgment
The purchaser additionally acknowledges and agrees that the provisions set out in the SC 11:
11.3.1 are for the benefit of the Purchaser and its successors in title;
11.3.2 enhance the genuine amenity of the Property;
11.3.3are reasonably necessary and expedient to protect and benefit the trade carried on upon the Dominant Land and to preserve and enhance the value of the Dominant Land;
11.3.4confers benefits upon the Dominant Land and upon the Dominant Land Owners and their respective successors in title in respect of the Dominant Land and in their capacity as owners of the Dominant Land; and
11.3.5enhance the general amenity of the Dominant Land.
As can be seen, both cll 11.2 and 11.3 refer to the “Dominant Land” and “the Dominant Land Owners”.
The Dominant Land is defined to mean six properties owned (with one exception) by other members of the Peregrine Group on which On the Run businesses are conducted. The exception is the property at 714 Goodwood Road, Daw Park of which Caltex Oil (Australia) Pty Ltd (Caltex) is the registered proprietor. That property is vacant land.
Mr Shahin gave evidence that in 2006 Caltex had entered into a contract to sell 714 Goodwood Road and that the Peregrine Group had obtained the right to acquire it from the nominee of that purchaser. Settlement is not to occur on that contract until some site remediation work has been carried out. When that happens, the Peregrine Group proposes establishing an “On the Run” business on the site.
The remaining five properties comprising the Dominant Land are at 340 Goodwood Road, Clarence Park; 203 Main Road, Blackwood; 17 King William Road, Hyde Park; West Terrace in the City of Adelaide; and 1487 Main South Road, Darlington.
The Dominant Land Owners are the members of the Peregrine Group who are the registered proprietors of those sites. C Convenience is not one of the Dominant Land Owners.
It is to be noted that both cll 11.2 and 11.4 referred to WPR convenanting with C Convenience. None of the Dominant Land Owners was identified as a covenantee.
By cl 11.8, WPR bound itself to grant to C Convenience as “further security” for the covenants in cl 11.4, five separate encumbrances over the Property. The form of each encumbrance was set out in Annexures to the Contract. There was to be a separate encumbrance in favour of each of the six Dominant Land Owners in relation to each of the five proscribed activities. This meant that WPR was to grant 30 separate encumbrances. Each encumbrance was to be in registrable form and was to operate for the same term as is specified in cl 11.7. WPR was to deliver the executed encumbrances at least five days before the Settlement Date.
It will be necessary to refer to other sub-clauses of cl 11 in due course.
For present purposes, the effect of cl 11 is clear. C Convenience wished to preclude WPR from carrying out on the Property any business of the kind forming part of the On the Run businesses carried on (in the case of 714 Goodwood Road, proposed to be carried on) by Shahin Enterprises Pty Ltd on the Dominant Land. The restrictive covenants were of no apparent benefit to C Convenience itself as its only tangible asset was the Property. It did not own any other land in the vicinity of the Property. The covenants could benefit Shahin Enterprises as it was the operator of the businesses on the Dominant Land, but the restrictive covenants made no reference to it.
Restrictive Covenants by Adjacent Owners
As noted earlier, the delivery by the Purchaser of the executed Adjacent Owners’ Deed[2] was required as part of the exercise of the Option. Luigi De Rosa did deliver such a deed on 19 December 2008.
[2] The various contractual documents contain some inconsistency as to whether the parties contemplated a single Adjacent Owners’ Deed to be executed by all three Adjacent Owners, or a separate deed for each Adjacent Owner. The Contract refers to both kinds of deed. However, nothing turns on this inconsistency in the present case. I will proceed on the basis that the parties contemplated a single deed to be executed by all the Adjacent Owners.
Clause 12.2 of the Special Conditions to the Contract also made performance by C Convenience of its obligations under the Contract conditional upon delivery by WPR of the Adjacent Owners’ Deed together with encumbrances in registrable form from each of the Adjacent Owners.
By cll 4 and 7 of the Adjacent Owners’ Deed, each of the three Adjacent Owners covenanted with C Convenience in respect of the land owned by them that, for the consideration of $100, they would not, during the same period as is specified in SC cl 11.7, engage in any of the proscribed activities. A separate encumbrance in relation to each proscribed activity was to be granted in relation to each of the properties comprising the Dominant Land. This meant that the Adjacent Owners were to provide, in total, 90 encumbrances.
Accordingly, the combined effect of the Special Conditions in the Contract and the Adjacent Owners’ Deed was to require a total of 120 separate encumbrances to be delivered to C Convenience.
Guarantees and Guarantors’ Restrictive Covenants
As a condition of the exercise of the Option, each of the three individual defendants executed and delivered to C Convenience a Deed of Undertaking and Guarantee. By their respective Deeds, the individual defendants, in consideration for the payment to them of $100, guaranteed to C Convenience and to the Dominant Land Owners the performance by WPR of its obligations under the Contract and under the encumbrances which it was providing. They also guaranteed the performance by the Adjacent Owners of their obligations under the Adjacent Owners’ Deed and under the encumbrances which they were providing.
In addition, as noted earlier, by cl 5 of the Option Deed and cl 22 of the Special Conditions in the Contract, Luigi De Rosa guaranteed to C Convenience the performance by WPR of its obligations under the Option Deed itself and under the Contract.
C Convenience seeks the enforcement of those guarantees.
Each of the individual Deeds of Guarantee contained restrictive covenants binding the individual defendants not to use, or permit to be used, any of the Adjacent Land for any of the proscribed activities. There was, however, no counterpart to SC cl 11.7 in the Deeds of Guarantee so that the restrictive covenants were to operate for an unlimited term. In fact, cl 11.4 of each Deed of Guarantee provided that the restrictive covenants could not be modified, surrendered, released or abandoned whether wholly or in part except with the written consent of C Convenience.
Restraint of Trade – General Principles
For the most part, the parties were in agreement as to the principles concerning the enforcement of contracts containing covenants in restraint of trade, but in disagreement as to their application.
The general rule is that covenants in restraint of trade are unenforceable.[3] This general rule reflects the resolution by the common law of a tension between two conflicting interests: the freedom of persons to contract on terms which suit themselves, on the one hand, and the public interest in promoting and maintaining freedom of trade, on the other. Dixon J referred to these competing interests in Peters American Delicacy Company Ltd v Patricia’s Chocolates & Candies Pty Ltd:[4]
The opposition [between freedom of contract and freedom of trade] has been resolved by the adoption of a clear rule making it necessary to justify all contracts in restraint of trade as reasonable in the interests of both parties and by applying the test of reasonableness according to the situation the parties occupy and so recognising the different considerations which affect employer and employee and independent traders or business men, particularly vendor and purchaser of the goodwill of a business.[5]
[3] Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] 1 AC 535 at 565.
[4] (1947) 77 CLR 574.
[5] Ibid at 590.
Ordinarily contracts containing unenforceable covenants in restraint of trade are not illegal. If the offending clauses can be read down or severed, the contract may still be enforced.[6]
[6] SST Consulting Services Pty Ltd v Rieson [2006] HCA 31 at [48]; (2006) 225 CLR 516 at 531-2.
Some forms of contractual restraint do not attract the operation of the common law doctrine of restraint of trade at all.[7] The common law has developed various tests, to which reference will be made later, by which the application of the doctrine is to be determined. Whichever test is applied, the question of whether a particular contractual restraint is within the doctrine is to be determined by reference to the practical working of the restraint, rather than its legal form.[8]
[7] Peters (WA) Ltd v Petersville Ltd [2001] HCA 45 at [15]; (2001) 205 CLR 126 at 135.
[8] Ibid at [14]; 134-5.
The fact that a restraint was the subject of free bargaining is not a sufficient reason for concluding that it is lawful – all contractual restraints have that character.[9] Gibbs J in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd[10] said:
The fact that the parties have bargained from a position of equality is therefore one of the circumstances to be considered in determining whether the covenants were reasonable, but it does not save from invalidity a covenant found to be unreasonable or contrary to the public interest …[11]
[9] Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70 at [56]; (2001) 210 CLR 181 at 203.
[10] (1973) 133 CLR 288.
[11] Ibid at 317. See also Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 at 268 (Walsh J).
Covenants in restraint of trade are enforceable in limited circumstances. In Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd,[12] Lord Macnaghten said:
[R]estraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable – reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.[13]
[12] [1894] 1 AC 535.
[13] Ibid at 565.
The onus of establishing that a restraint is no wider than is reasonably necessary to protect the covenantee’s lawful interests rests on the party seeking to justify it. On the other hand, the onus of establishing that the restraint is injurious to the public rests on the party alleging that fact.
The time at which the reasonableness of a restraint is to be assessed is the time of entry into the contract.[14]
[14] Lindner v Murdock’s Garage (1950) 83 CLR 628 at 653; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 318.
The reasonableness or otherwise of a restrictive covenant is to be assessed having regard to all the circumstances of the contract. The parties’ intentions, although relevant, are not conclusive of that question.[15]
[15] Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 308.
The Issues
Against this background, the issues in the case can now be stated:
1.Were the provisions in the Contract and the associated documents which imposed restrictions on the use of the Property and the Adjacent Land subject to the rules regarding unlawful restraints of trade? This involves three sub-issues:
(a) were the restrictive covenants in their practical working a restraint on trade?
(b) were the covenants of a Tulk v Moxhay kind?
(c) should the Court apply the “pre-existing freedom” test or the ‘trading society” test?
2.If the restraint of trade doctrine is applicable, did the covenants constitute an unlawful restraint of trade? This gives rise to three subsidiary issues:
(a) is it open to C Convenience, having regard to the content of its pleadings, to assert that the restraints were no wider than was reasonably necessary to protect its legitimate interests, ie, reasonable as between the parties?
(b) if so, were the restraints reasonable as between C Convenience and WPR?
(c) were the restraints reasonable in the public interest?
3.If the restraints are unlawful, can they be read down or severed? This issue will also require a consideration of the materials to which the Court may have regard in construing the Contract.
4.Even if severance is necessary and possible, can C Convenience recover damages for breach by the defendants of a “different” contract? – see Brooks v Burns Philp Trustee Co Ltd.[16]
5.Are the guarantees given to C Convenience by the three individual defendants enforceable even if the restrictive covenants are an unlawful restraint of trade?
6.If C Convenience’s damages under cl 23(1)(b)(i) are to be assessed, what was the value of the Property as at 10 July 2009? This issue requires the Court’s consideration of the conflicting opinions of three expert valuers.
7.Are WPR and Luigi De Rosa entitled to recover the $100,000 paid in consideration of the Option, and the $400,000 deposit which C Convenience claims, under cl 23(1)(a) of the Contract, has been forfeited to it?
I will discuss each of these issues in turn.
[16] (1969) 121 CLR 432 at [463].
Issue One: The Application of the Restraint of Trade Doctrine
Lord Pearce observed in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd[17] that there must be a line between those contracts which are in restraint of trade and whose reasonableness can, therefore, be considered by the courts and those contracts which merely regulate the normal commercial relations between the parties and are, therefore, free from doctrine.[18] The cases show that it is not always easy to identify that line.
[17] Ibid at 327.
[18] [1968] AC 269.
It is convenient to address the application of the restraint of trade doctrine by reference in the first instance to the covenants provided by WPR in Special Condition cl 11.4.
Covenants a Restraint in their Practical Effect
It is plain that the restrictions on the activities of WPR imposed by cl 11.4 of the Special Conditions are restraints on the freedom of WPR and it successors to trade. By cl 11.4, WPR promises expressly not to use the Property, or to allow the Property to be used, for the proscribed activities, each of which is a form of trade. By cl 11.6, WPR covenanted that it would not complete any sale or transfer of the Property, or enter into any lease or licence without first obtaining from the purchaser, transferee, assignee, lessee or licensee (as the case may be) covenants in the same terms as were contained in SC cl 11.
It is also plain that the covenants in cl 11.4 were sought by C Convenience to protect the On the Run businesses carried on upon the sites comprising the Dominant Land. Clause 11.3.3 contains an express acknowledgement by WPR that the restrictive covenants set out in SC cl 11 “are reasonably necessary and expedient to protect and benefit trade carried on upon the Dominant Land and to preserve and enhance the value of the Dominant Land” (emphasis added).
It is not to the point on this issue that WPR acknowledged in cl 11.2.4 that it did not itself carry on any of the proscribed activities and that it had no intention or wish to do so. WPR’s own plans could have changed, as could those of its successors and assigns.
C Convenience did not submit that the restrictive covenants contained in cl 11.4 would not operate, in a practical sense, as restraints of trade.
Are the Covenants of a Tulk v Moxhay kind?
C Convenience contended that the restrictive covenants provided by WPR should be characterised as Tulk v Moxhay covenants with the effect that they are outside the scope of the restraint of trade doctrine. For this purpose it is necessary to consider the position on the hypothesis that the Contract had been performed.
In Tulk v Moxhay,[19] a purchaser of land covenanted for himself, his heirs and assigns, to maintain a vacant piece of land in Leicester Square in an open state and to allow the inhabitants of the Square, tenants of the plaintiff and the plaintiff himself, access to the garden on it. The defendant took a transfer of the land at several removes from the original covenantor but with notice of the covenant. The plaintiff obtained an injunction restraining the breach of covenant. Lord Cottenham LC held that a covenant between vendor and purchaser, on the sale of land, that the purchaser and his assigns shall use or abstain from using the land in a particular way, will be enforced in equity against all subsequent purchasers with notice, whether or not it be one which runs with the land so as to be binding upon subsequent purchasers at law. His Lordship held:
It is said that, the covenant being one which does not run with the land, this Court cannot enforce it; but the question is, not whether the covenant runs with the land, but whether a party shall be permitted to use the land in a manner inconsistent with the contract entered into by his vendor, and with notice of which he purchased. Of course, the price would be affected by the covenant, and nothing could be more inequitable than that the original purchaser should be able to sell the property the next day for a greater price, in consideration of the assignee being allowed to escape from the liability which he had himself undertaken.[20]
[19] (1848) 41 ER 1143.
[20] Ibid at 1144.
Although the covenant was originally understood to exist whenever a successor in title took a transfer with notice of a restrictive covenant, it is now accepted that a valid Tulk v Moxhay covenant must be for the benefit of some identified land. In Clem Smith Nominees Pty Ltd v Farrelly and Ors,[21] Bray CJ discussed both the history and nature of Tulk v Moxhay covenant and concluded:
In my view the law is now clear in Australia that the burden of restrictive covenants will only run with the land in equity against a subsequent holder of the land with notice of the covenant when the covenant is entered into for the benefit of some parcel of land, or possibly some interest in land. The burden of a covenant in gross will not so run; such a covenant only binds the original covenantor.[22]
[21] (1978) 20 SASR 227.
[22] Ibid at 235.
The pre‑requisites for a Tulk v Moxhay covenant have been variously stated. In Forestview Nominees Pty Ltd v Perpetual Trustees WA Ltd,[23] the High Court referred with apparent approval to the discussion of those pre-requisites in Marquess of Zetland v Driver[24] and by Kitto J in Pirie v The Registrar‑General.[25] In the former, the Court of Appeal identified the conditions for the covenant in the following passage:
Such covenants can only be validly imposed if they comply with certain conditions. Firstly, they must be negative covenants. No affirmative covenant requiring the expenditure of money or the doing of some act can ever be made to run with the land. Secondly, the covenant must be one that touches or concerns the land, by which is meant that it must be imposed for the benefit or to enhance the value of the land retained by the vendor or some part of it, and no such covenant can ever be imposed if the land comprises the whole of the vendor’s land. Further, the land retained by the vendor must be such as to be capable of being benefited by the covenant at the time when it is imposed. Thirdly, the land which is intended to be benefited must be so defined as to be easily ascertainable, and the fact that the covenant is imposed for the benefit of that particular land should be stated in the conveyance and the persons or the class of persons entitled to enforce it. The fact that the benefit of the covenant is not intended to pass to all persons into whose hands the unsold land may come is not objectionable so long as the class of persons intended to have the benefit of the covenant is clearly defined. Finally, it must be remembered that these covenants can only be enforced so long as the covenantee or his successor in title retains some part of the land for the benefit of which the covenant was imposed.[26]
(Emphasis added)
[23] [1998] HCA 15; (1998) 193 CLR 154.
[24] [1939] 1 Ch 1.
[25] (1963) 109 CLR 619.
[26] [1939] 1 Ch 1 at 8.
The requirement expressed in this passage that a Tulk v Moxhay covenant be for the benefit of other land of the vendor is also apparent in the judgment of Gibbs J (with whom Stephen and Mason JJ agreed) in Quadramain Pty Ltd v Sevastapol Investments Pty Ltd:[27]
The conclusion that the rules relating to restraint of trade do not apply to restrictive covenants given by a person purchasing or leasing land should be accepted as correct, at least as a general rule. The doctrine of restraint of trade is based on public policy. When a purchaser, with a view to obtaining a particular piece of land, which he could not otherwise acquire, or could acquire only on paying a greater price, freely gives to the vendor a covenant, for the benefit of other land of the vendor, that he will not use the land purchased for the purpose of trade generally or for the purpose of a particular trade, there is, speaking generally, no possible reason of public policy that would require such a covenant to be invalidated.[28]
(Emphasis added)
[27] (1976) 133 CLR 390.
[28] Ibid at 402.
In Pirie v The Registrar-General, Kitto J observed that it is “basic to the doctrine of Tulk v Moxhay that it applies only to a restriction created to preserve the value of other land, and that the restriction is not enforceable against derivative owners except for the protection of that other land”.[29]
[29] (1962) 109 CLR 619 at 628.
In Re Mack and the Conveyancing Act,[30] Wootten J said that there was “ample authority” indicating that “a vendor of land in respect of which he takes a restrictive covenant cannot, by the covenant, annex the restriction to land which he does not own, unless the covenant is given as part of a building scheme or development scheme”.[31]
[30] [1975] 2 NSWLR 623.
[31] Ibid at 626.
The requirement that the covenant be one imposed for the benefit of land retained by the vendor is fatal to the submission of C Convenience that the restrictive covenants in the present case are of the Tulk v Moxhay kind. It was disposing entirely of its interest in the Property and did not own any other land, let alone land adjacent to, or in the vicinity of, the Property. C Convenience disavowed any attempt to lift the corporate veil arising from the fact that both it and the owners of each of the sites comprising the Dominant Land (other than Caltex) were members of the Peregrine Group.
It was of course open to C Convenience to seek by the Contract to secure benefits for third parties, but its attempts to do so do not bring into existence a Tulk v Moxhay convenant.
Benefit to the Dominant Land?
Quite apart from the problem just identified, the evidence presented by C Convenience falls short of establishing any requisite benefit from the restrictive covenants to the six sites comprising the Dominant Land.
Two of these sites can be disregarded immediately. C Convenience acknowledged that the property at 203 Main Road, Blackwood had been included in the Dominant Land in error, and abandoned any claim that the restrictive covenants could have any beneficial effect on that site. As already noted C Convenience is not the registered proprietor of the Daw Park property – it is still owned by Caltex. Even if Mr Shahin’s evidence was sufficient to establish that the Peregrine Group had acquired an interest in the Daw Park property as at 19 December 2008, it was then vacant land so that there was no business being carried on on that property to be protected.
Both C Convenience and the defendants referred to Baramon Sales Pty Ltd v Goodman Fielder Mills Ltd[32] in which Finkelstein J, citing P & ASwift Investments v Combined English Stores Group Plc,[33] held that “the benefit of a covenant will run with the benefited land if the covenant affects the nature, quality, mode of use or value of that land”.[34] C Convenience did not contend that WPR’s restrictive covenants would affect the nature, quality or mode of use of any of the Dominant Land. Its submission was that the covenants did affect the value of those properties. The argument seemed to be along the following lines: if potential customers could not acquire fuel or goods from a business or businesses conducted on the Property, the prospect of them doing so at an On the Run business conducted on one of the sites comprising the Dominant Land was enhanced; the greater the trade generated on the Dominant Land, the greater the rental which could be charged for the use of that Land; and the greater that rental, the higher the value of the Land.
[32] [2001] FCA 1672.
[33] [1989] AC 632 at 642.
[34] [2001] FCA 1672 at [14].
At a level of generality, this reasoning cannot be gainsaid, but the evidence presented by C Convenience to support its application in the present case was limited.
Mr Shahin is the director within the Peregrine Group with primary responsibility for the conduct of the On the Run businesses. C Convenience sought to lead evidence from him regarding aspects of the trading of Shahin Enterprises at the Property both before and after July 2009. Counsel for the defendants objected to much of this evidence, contending that it went to issues not raised by C Convenience in its pleadings. I decided to receive the evidence subject to the objection, indicating to the parties that I would rule on its admissibility in these reasons. As will be seen later, I consider that the evidence is inadmissible but, for the purpose of addressing the potential effect of the restrictive covenants on the four remaining sites comprising the Dominant Land, I will consider the evidence on the basis which is most favourable to C Convenience.
Mr Shahin said that he was accustomed to reading and considering valuations of service station and fuel selling sites. This was an ordinary incident of his work. He considered such valuations in the context of decisions concerning purchase of service station sites and for the purposes of assessing or fixing rental payments. He said that in his experience, valuers invariably referred to the available trading figures for the businesses conducted on such sites in reaching their valuations.
Mr Shahin said that the facilities on the Dominant Land sites at Clarence Park, Hyde Park, West Terrace and at the Property had, at different times, been redeveloped and upgraded. In the case of the major upgrades which had occurred at Clarence Park, Hyde Park and at the Property, the businesses conducted on the sites had been closed for some months in order to allow the redevelopment to occur. The redevelopment on the Property had occurred over a period of nine months concluding in June 2010. During most of that nine month period, only limited business was conducted on the Property.
Mr Shahin said, over the objection of counsel for the defendants, that when the business on the Property had closed in late 2009 to allow the redevelopment, the On the Run business at Clarence Park had “experienced a significant and quick increase in its trading figures”.
Mr Shahin also said that it was typical when a store nearby was opened for there to be an impact on an existing business, and that it was customary for Shahin Enterprises to take steps to mitigate such impacts. It is reasonable to suppose that the competitors of Shahin Enterprises would also respond in a similar way.
In my opinion, limited weight should be given to Mr Shahin’s evidence concerning the impact of the closure of the business conducted on the Property on the Clarence Park On the Run business. Although I regarded Mr Shahin’s evidence as being generally reliable it became apparent that his evidence on this topic was in part of a hearsay kind, and in part secondary evidence of documents. C Convenience did not tender the primary documents on which Mr Shahin’s evidence was apparently based. Further C Convenience led no evidence to indicate whether or not that increase had been sustained throughout the period during which the business on the Property was closed or was a temporary phenomenon only.
Exhibit P6 – Comparative Trading Figures
As part of its evidence on this topic, counsel for C Convenience tendered through Mr Shahin a book of documents which became Exhibit P6. The Exhibit comprised two parts. The first purported to be an analysis of the impact on the businesses at the Property, West Terrace, Clarence Park and Darlington of the temporary closure in 2008 of the service station at Hyde Park for redevelopment. The second part purported to be an analysis of the impact on the On the Run businesses at Clarence Park, Hyde Park, West Terrace and Darlington of the reopening in June 2010 of business at the Property. C Convenience contended that the Exhibit illustrated that over the two eight week periods after the respective closure and opening of the businesses on the two sites, there had been a significant effect on the trading at other sites and, in particular, that trading on the Property after June 2010 had had a significant effect on trading at the Hyde Park and Clarence Park sites.
The date of the documents relating to the impact of the closure of the Hyde Park site indicates that those documents had been prepared approximately 12 months after the closure of that site for redevelopment. The date of the documents comprising the second part indicated that they had been prepared some five months after the opening of the redeveloped business on the Property in June 2010. Even if prepared for the purposes of Shahin Enterprises business, they were not produced contemporaneously with the events to which they related.
C Convenience relied on Exhibit P6 as evidence of the effects which the covenants restricting the carrying on of the five specified business activities on the Property could have on the value of the remaining sites forming the Dominant Land.
In my opinion, both the oral evidence of Mr Shahin and Exhibit P6 are of limited evidential value in this respect.
First, Exhibit P6 contains figures which purport to compare the trade at the various sites during a limited period only, ie, during the eight weeks before, and the eight weeks after, the opening or closure of a business, as the case may be. This is a very short period. There was no evidence to indicate that the figures during these limited periods could be taken to be representative of trade over a longer period.
Secondly, C Convenience made no attempt to exclude the operation of other variables during the respective eight week periods which may have explained the impact which it said that Exhibit P6 revealed. For example, the trading behaviour of competitors; the trading behaviour of the On the Run businesses themselves; attempts made by Shahin Enterprises to exploit customer brand loyalty, for example, by offering inducements or incentives to customers to patronise another On the Run business rather than moving to a competitor; and variations in petrol pricing which, for example, may have made shopping at the On the Run businesses more or less attractive. Some of the figures in Exhibit P6 suggest that sales of some products were affected by seasonal factors. No evidence concerning the effect of such factors was adduced.
Thirdly, Exhibit P6 does not contain details of sales in dollar or volume terms. Instead, the figures in the comparative tables were said by Mr Shahin to be an index used internally by Shahin Enterprises. Thus, the respective tables reveal movements in an index relating to the sales of numerous categories of goods at each site. The basis of the index was not explained, nor was its manner of calculation. In particular, the base figures from which each index movement was calculated were not identified. Without knowing the base figures in respect of which the index figures show some movement, it is not possible to determine whether the movements shown in the respective tables were significant or of little consequence. Mr Shahin attempted to give some evidence on this topic but, with all respect to him, I am not satisfied that his understanding on these matters was complete.
Fourthly, C Convenience had not made disclosure to the defendants of any of the business records which must have underpinned Exhibit P6. In fact, the documents comprised in Exhibit P6 itself had been disclosed to the defendants for the first time on the morning of the first day of trial, ie, the same day C Convenience called Mr Shahin to give evidence. In this way, the defendants were precluded from making a detailed scrutiny of the information in Exhibit P6. By itself, this suggests that the Court should, given the other difficulties which I have identified, exercise caution about the use to which it puts Exhibit P6.
Fifthly, C Convenience did not call any expert evidence concerning the significance of the figures in Exhibit P6. It did not, for example call any evidence to indicate that the changes in trade indicated by the movements in the index were sufficient to have any effect on the value of any one of the sites comprising the Dominant Land. I consider that expert evidence of this kind is necessary. It is not self-evident, for example, that a petrol selling business on the Property could have an adverse effect on the value of another petrol selling business many kilometres away and on a different arterial road, as in the case of 1487 Main South Road, Darlington. That site is 10.3 kms distant from the Property by the most direct road route.
The Dominant Land sites at West Terrace, Hyde Park and Clarence Park are much closer to the Property. However, in my opinion, the limited evidence adduced by C Convenience does not permit a finding that the restrictive covenants would benefit the value of those sites, as opposed to benefitting, perhaps temporarily, the businesses conducted on them. A covenant of the latter kind is a Tulk v Moxhay covenant in limited circumstances only – see Newton Abbott Co-operative Society Ltd v Williamson of Treadgold Ltd.[35]
[35] [1952] Ch 286.
Finally, I note again that C Convenience did not present any evidence in the nature of financial or trading statements of the impact, if any, on the businesses at the other sites of Dominant Land of the closure in late 2009 of the existing service station business on the Property for the purposes of its redevelopment. The evidence showed that Shahin Enterprises had conducted a fuel selling business using the BP brand and a convenience store on the Property up until the time of that closure. Proper evidence of the effect of that closure, if available, may have been the most useful in the present context. No explanation was proffered to the Court for this evidence not being provided. It allows the inference that the evidence would not have assisted C Convenience’s claim.[36]
[36] Jones v Dunkel (1959) 101 CLR 298.
Summary on Tulk v Moxhay Covenants
For these reasons I conclude that the restrictive covenants are not of the Tulk v Moxhay kind so as to be outside the doctrine of restraint of trade.
C Convenience contended only faintly that the restrictive covenants required by SC cl 12 and by the Adjacent Owners’ Deed to be provided by the Adjacent Owners could be characterised as Tulk v Moxhay covenants. It also acknowledged the difficulty in those covenants being characterised in that way. The same may be said of the restrictive covenants contained in the Deeds of Guarantee provided by the individual defendants.
C Convenience submitted that if settlement had proceeded, WPR and the Adjacent Owners would have delivered the executed encumbrances, and these could have been registered on the respective titles relating to the Dominant Land.[37] Further, s 34 of the Law of Property Act 1936 (SA) provides that a person may take an interest in land or the benefit of any convenant although not named as a party to the covenant or other instrument. This meant, C Convenience submitted, that the fact that the Dominant Land and owners were not parties to the Contract was immaterial and that, in relation to the restrictive covenants, no distinction should be drawn between it and those owners.
[37] Real Property Act 1886 (SA) s 77.
It is not necessary to consider in any detail the effect of the Real Property Act and the Law of Property Act provisions to which C Convenience referred. It is plain that the provisions of those Acts do not convert into a Tulk v Moxhay convenant that which is not such a covenant. As was pointed out by Bray CJ in Clem Smith Nominees Pty Ltd v Farrelly,[38] the Torrens System imposes no more extensive burdens on subsequent registered proprietors of land under the System than existed under the general law.[39]
[38] (1978) 20 SASR 227.
[39] Ibid at 235. See also Hogarth J at 247.
The Tests for the Application of the Restraint of Trade Doctrine
The circumstances in which the restraint of trade doctrine is applicable were considered by the House of Lords in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd.[40] Lords Reid, Morris and Hodson adopted a “fettering of pre‑existing freedom” test;[41] Lord Wilberforce a “trading society” test;[42] and Lord Pearce a “sterilisation of existing capacity” test.[43] The fettering of pre-existing freedom test appears in the following passage of Lord Reid’s speech:
It is true that it would be an innovation to hold that ordinary negative covenants preventing the use of a particular site for trading of all kinds or of a particular kind are within the scope of the doctrine of restraint of trade. I do not think they are. Restraint of trade appears to me to imply that a man contracts to give up some freedom which otherwise he would have had. A person buying or leasing land had no previous right to be there at all, let alone to trade there, and when he takes possession of that land subject to a negative restrictive covenant he gives up no right or freedom which he previously had.[44]
It is possible that the fettering of pre-existing freedom test provides in part a rationale for the Tulk v Moxhay covenant.
[40] [1968] AC 269.
[41] Ibid at 298, 309 and 316.
[42] Ibid at 332-3, 335.
[43] Ibid at 328.
[44] Ibid at 298.
Lord Wilberforce summarised the “trading society” test in the following passage:
One may express the exemption of these transactions from the doctrine of restraint of trade in terms of saying that they merely take land out of commerce and do not fetter the liberty to trade of individuals; but I think one can only truly explain them by saying that they have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society. If in any individual case one finds a deviation from accepted standards, some greater restriction of an individual’s right to “trade”, or some artificial use of an accepted legal technique, it is right that this should be examined in the light of public policy.[45]
Lord Pearce held that the restraint of trade doctrine:
[D]oes not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract, viewed as a whole, is directed towards the absorption of the parties’ services and not their sterilisation.[46]
It is not necessary to consider Lord Pearce’s test any further as the majority of the High Court in Peters (WA) Ltd v Petersville Ltd[47] held that it should not be accepted as part of the Australian common law.[48]
[45] Ibid at 335.
[46] Ibid at 328.
[47] [2001] HCA 45; (2001) 205 CLR 126.
[48] Ibid at [39]; 143.
Apart from rejecting the sterilisation of existing capacity test, the High Court has not yet authoritatively decided the basis upon which the application of the common law restraint of trade doctrine is to be determined. At present, the trading society test appears to be preferred.
In Queensland Cooperative Co – Operative Milling Association v Pamag Pty Ltd,[49] Walsh J said that he did not regard the fettering of pre-existing freedom test as a test of universal application.[50] Walsh J repeated those reservations in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd[51] saying:
I should be reluctant to accept that principle as a valid ground for treating the restraint of trade doctrine as necessarily inapplicable.[52]
Menzies J noted that in Pamag a covenant in restraint of trade governed by someone starting a new business in relation to future trading had not been regarded as outside the doctrine.[53]
[49] (1973) 133 CLR 260.
[50] Ibid at 267.
[51] (1973) 133 CLR 288.
[52] Ibid at 304.
[53] Ibid at 293.
However, in Quadramain Pty Ltd v Sevastapol Investments Pty Ltd[54] each of Barwick CJ and McTiernan J applied the fettering of pre-existing freedom test. Gibbs J, with whom Steven and Mason JJ agreed, observed that Lord Wilberforce’s “trading society” test was more flexible and may in time come to be preferred[55] but nevertheless held that the rules relating to restraint of trade did not apply to restrictive covenants given by a person purchasing or leasing land.[56] Gibbs J did not expressly rest that conclusion on the fettering of a pre-existing freedom test and his Honour may perhaps have been referring to covenants of the Tulk v Moxhay type. Jacobs J (with whom Murphy J agreed) expressed a preference for the trading society test.
[54] (1976) 133 CLR 390.
[55] Ibid at 401.
[56] Ibid at 402.
In Peters (WA) Ltd v Petersville,[57] the majority (Gleeson CJ, Gummow, Kirby and Hayne JJ) observed that, while the statements in Esso as to the inapplicability of the doctrine of restraint of trade to covenants restricting the use which may be made by a purchaser or lessee of land were dicta, the decision in Quadramain “appears to establish the same position with respect to the non‑applicability of the doctrine to purchases and leases of land” in Australia.[58] However, the majority noted criticisms of the pre‑existing freedom test and also noted the adoption by the Full Federal Court in Australian Capital Territory v Munday[59] of the trading society test. The majority refrained, however, from expressing a concluded view.
[57] [2001] HCA 45; (2001) 205 CLR 126.
[58] Ibid at [20]; 136-7.
[59] [2000] FCA 653; (2000) 99 FCR 72.
To the criticisms to which the High Court referred may be added that of Bray CJ in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd:[60]
Certainly it would appear at first sight odd if, when X, the owner of two adjoining plots of land, sells one to Y and retains the other and the parties make separate and independent covenants restraining the trade of each in identical terms, and to an extent which would render the covenants unenforceable if the doctrine applied, the covenant of the vendor should be unenforceable because it restrains him from a previous freedom to trade on the land retained while the covenant of the purchaser should be enforceable because he had no previous freedom to trade on the land sold …[61]
[60] (1972) 7 SASR 268.
[61] Ibid at 333.
The issue next came before the High Court in Maggbury Pty Ltd v Hafele Australia Pty Ltd.[62] Gleeson CJ, Gummow and Hayne JJ considered that the Court in Peters (WA) Ltd v Petersville Ltd had rejected the fettering of existing freedom test proposed by Lords Reid, Morris and Hodson in Esso as well as rejecting the sterilisation of existing capacity test proposed by Lord Pearce. Their Honours regarded Peters as having left open for further consideration Lord Wilberforce’s trading society test.
[62] [2001] HCA 70; (2001) 210 CLR 181.
In Australian Capital Territory v Munday,[63] Heerey J reviewed the authorities and concluded that, although there was no binding High Court authority mandating any one of the Esso tests, a distinct preference for the trading society test of Lord Wilberforce appears to be emerging. Heerey J expressed the view that the trading society test:
[S]eems to have attracted on balance the approval of the High Court. If one might respectfully say so, it accords more satisfactorily with common law methodology and with the need for the law to adapt to methods of doing business which are constantly changing.[64]
[63] [2000] FCA 653; (2000) 99 FCR 72.
[64] Ibid at [100]; 92.
In these circumstances I consider it appropriate to apply the trading society test in the present case. That does not mean that the fact that WPR had no prior interest in the land and was in a sense a volunteer is immaterial. On the contrary, it is a relevant consideration but it does not operate by itself to exclude the operation of the restraint of trade doctrine in this case.
The fettering of pre-existing freedom test is in any event satisfied in the case of the restraints provided by the Adjacent Owners and the individual defendants. I add that their involvement in the overall transaction is an additional factor pointing to the appropriateness of the trading society test in this case. There would be an incongruity in holding that the restraints binding WPR were not subject to the restraint of trade doctrine but that the corresponding restraints binding the Adjacent Owners and the individual defendants were so subject.
It is of the essence of the trading society test that its application to exclude the restraint of trade doctrine will depend upon the circumstances of each case. It involves the courts excluding from the doctrine “such contracts or provisions of contracts as, under contemporary conditions, may be found to have passed into the accepted and normal currency of commercial or contractual or conveyancing relations”.[65] Hence, its application involves conclusions of fact on the basis of the evidence adduced.
[65] [1968] AC 269 at 332-3.
In Specialist Diagnostic Services Pty Ltd v Healthscope Ltd,[66] Croft J held that it was the convenantee which had the onus of adducing evidence that the restraints in question (which restrained a landlord from carrying on, or permitting another to carry on, on its premises any trade or business similar to that of the tenant) were an accepted part of the structure in a trading society. The same principle should apply in the present case: it is C Convenience which makes the positive assertion that the restraints of trade contained in the restrictive covenants are outside the doctrine; and there is some overlap between the matters relevant to the application of the trading society test and the proof of matters going to the reasonableness of restraints (in the event that the doctrine is applicable) which makes it appropriate for one party to have the onus on both issues.
[66] [2010] VSC 443.
C Convenience adduced scarcely any evidence to discharge this onus. Although Mr Shahin gave evidence of the Peregrine Group acquiring a number of service stations, no evidence was led to indicate that covenants of the present kind were an accepted incident in such sales. Mr Shahin acknowledged in his cross-examination that the restrictive covenants were an attempt to protect other On the Run businesses from the effects of possible competition from a like business on the Property. While that intention may be understandable, it falls short of showing that covenants of this kind are an accepted part of contracts for the sale and purchase of service stations.
Accordingly, I consider that applying the trading society test, the restraint of trade doctrine is applicable to the restrictive covenants in SC cll 11 and 12.
Issue Two: Did the Restrictive Covenants Constitute an Unlawful Restraint of Trade?
As noted earlier, the onus is on C Convenience to show that the restrictive covenants in cll 11 and 12 were not wider than was reasonably necessary to protect its legitimate interest. Before examining the evidence on that topic, it is necessary to address an antecedent issue, namely, whether C Convenience had, by its pleadings, raised any issue concerning the reasonableness of the covenants.
Absence of Plea of Material Facts that the Covenants were Reasonable
In the course of opening the case of C Convenience, counsel referred to features of the evidence to be adduced which it was said indicated the reasonableness of the restraints.
At the conclusion of that opening, counsel for the defendants submitted that C Convenience was, in this respect, advancing a case which went beyond its pleading. Counsel contended that the effect of the pleadings of C Convenience in relation to the alleged unlawful restraint of trade was to put in issue two matters only: first, whether the restrictive covenants did amount to restraints of trade; and, secondly, whether the restraint of trade doctrine was applicable to those restraints. Counsel contended that C Convenience had not made any plea, supported by material facts, to the effect that the restrictive covenants protected some legitimate interest of C Convenience or that the covenants were reasonably necessary to protect any such interest. Nor for that matter had C Convenience pleaded any material facts in support of a plea that the restraints were reasonable in the public interest.
The submissions of counsel for the defendants on these matters were intertwined with other submissions going to the tenability of the case of C Convenience (even if properly pleaded). As at that time the parties contemplated a short trial with limited oral evidence, I considered it appropriate to permit C Convenience to lead the evidence upon which it had opened and to defer to this judgment a ruling concerning its admissibility.
For the reasons which follow, I consider that the defendants’ submissions should be upheld.
The issue on the pleadings arose in the following way. The defendants pleaded the restrictive covenants in their Defence and Cross-Action. They alleged that the Contract and related agreements relied upon by C Convenience constituted one indivisible transaction containing a series of unlawful restraints of trade and that each was void as being contrary to public policy. They asserted, accordingly, that C Convenience was not entitled to any relief at all arising from the breach of the contract upon which it relied (Third Defence par [1A]).
This pleading was particularised in the defendants’ Cross-Action. The defendants pleaded each of the three sets of restrictive covenants outlined earlier in these reasons and in par [23] identified a number of their features. They then pleaded in par [24] that the restrictive covenants were not reasonable in the interests of the parties and were not in the public interest and, accordingly, were unlawful restraints of trade. The defendants went on to plead in par [25] that the restraints were not severable and sought declarations that each of the Option Deed, the Contract, the Adjacent Owners’ Deed and the Guarantee Deeds was void as being contrary to public policy.
C Convenience’s Reply and Defence to Cross-Action did not make any response to par [1A] of the Defence. It admitted two of the pleas in par [23] of the Cross-Action but otherwise denied it. It made no plea at all to par [24] of the Cross-Action but made a lengthy response to the defendants’ pleading in par [25] that the impugned restraints were incapable of being severed.
By r 100(1)(c) of the Supreme Court Civil Rules 2006, C Convenience was required to raise specifically any “special defence” on which it relied. Rule 100(1)(e) required it to plead the material facts on which each special defence is based. A “special defence” for the purpose of the rule is defined in sub-r (3) to be “a defence other than a denial that facts alleged by the plaintiff, or a denial of facts alleged by the plaintiff give rise to a cause of action”. Although this sub-rule refers to a plaintiff, that expression is to be understood as referring also to a claimant by cross-action.
A plea that an otherwise unlawful restraint of trade is enforceable because it is reasonable in the interests of the parties and in the public interest is a form of special defence. Accordingly, it was incumbent upon C Convenience to plead, at the least, that if, contrary to its denial that the restrictive covenants did amount to a restraint of trade and were subject to the restraint of trade doctrine, it was nevertheless justified as being reasonable in the interests of the parties. Such a pleading should have included a plea of material facts. This is especially so as C Convenience carried the onus on that issue.
Counsel for the defendants referred to correspondence[67] by which the defendants’ solicitors had sought (unsuccessfully) clarification from C Convenience concerning the reach of its plea. However, as I understand the correspondence, it was directed to a slightly different issue from that now raised by the defendants. In that circumstance, I consider it inappropriate to attach much significance to the content of the response from C Convenience.
[67] Exhibit P2.
However, for the reasons given earlier, I consider that the pleadings of C Convenience do not raise the issue on which its counsel opened, and that I should uphold the defendants’ objection.
Nevertheless, I consider it undesirable for this aspect of the matter to be determined on a pleading point. Accordingly, despite my inclination to uphold the defendants’ objection, I will consider the evidence which C Convenience adduced on this topic. As will be seen, I consider that that evidence is, in any event, insufficient to establish that the restrictive covenants were reasonable as between the parties.
Were the Restraints Reasonable as Between C Convenience and WPR?
It is convenient again to consider in the first instance only the restrictive covenants contained in the Contract.
Whether restraints are reasonable is a question of law and not of fact[68] and is a matter for decision by the Court, and not a matter for admission by a party.[69] For this reason, the acknowledgments contained in Special Condition cl 11.3 are of limited significance on this issue. C Convenience has the onus of establishing the facts upon which the assessment of reasonableness is to be made.
[68] “The Restraint of Trade Doctrine”, 3rd Ed, Heydon, LexisNexis, Butterworths at 43-4.
[69] Buckley v Tutty (1971) 125 CLR 353 at 377.
C Convenience’s concession with respect to the Blackwood site is, in effect, an acknowledgement that the restraints cannot be justified by reference to that site.
C Convenience relied on a number of matters in combination. The parties had negotiated freely and on an apparent equal footing. The defendants proposed a major development on the Adjacent Land and the Property comprising a five‑star 50 room boutique hotel, function centre, retail floor space, carparking, residential apartments and retirement village units. On 16 December 2008 the Minister for Urban Development and Planning made a “major project” declaration under s 46(1) of the Development Act 1993 (SA) in respect of the overall site (including the Property). This was three days before Luigi De Rosa exercised the Option. The principal concern of the defendants was to acquire the remaining land which they did not control in order to proceed with the development.
The implication was that the defendants were experienced businessmen with the ability to make appropriate assessments of their own commercial interests.
Next, C Convenience noted that none of the proscribed activities was proposed as part of the major development. It also emphasised that none of the defendants had raised concerns about the restraints, and that they were not the reason for WPR failing to settle on the Contract.[70]
[70] It is not necessary to discuss whether the evidence on which C Convenience relied for this submission was admissible.
The implication was that the restraints would not have interfered in a practical way with the defendants’ proposed use of the Property and therefore were not unreasonable.
In my opinion, it is not appropriate to regard this as a significant matter. As Walsh J observed in Amoco Australia Pty Ltd v Roccas Bros Motor Engineering Co Pty Ltd,[71] except within very narrow limits, courts must have regard to the rights and obligations created by the agreement rather than to the manner in which they think it likely that the agreement will operate in fact.
[71] (1973) 133 CLR 288 at 300-1.
In any event, C Convenience’s proposition cannot be accepted without some qualification because the defendants’ plans did include some retail use of the Property. The covenants would have restricted them from developing a convenience store, a small supermarket and a Subway outlet as part of that retail use. However, I accept that the defendants, in late 2008, had no intention at all of engaging in fuel selling as part of their proposed development, nor any of the other retail services commonly associated with such outlets. In this respect, it could be said that the restrictive covenants were immaterial to the defendants. WPR had, in effect, acknowledged as much in SC cl 11.2.4.
Mr Shahin gave evidence that it was the intention of C Convenience to demolish the existing improvements on the Property and to remove the underground fuel tanks before settlement. SC cl 7 entitled it do so. C Convenience submitted that the effect of such demolition and removal would give rise to a discontinuance of the existing use of the Property as a service station. Under the applicable Zoning Regulations, the use of the Property for a service station was a non‑complying use. The submission was that in these circumstances the cessation of the existing use would have made it difficult, in any event, for WPR to have obtained planning approval for the conduct of a service station business on the site, even it had wished to. However, C Convenience led very little evidence concerning the practical implementation of the planning approval regime in this context. In that circumstance, I am inclined to attach little weight to this submission.
C Convenience referred again to Exhibit P6, ie, the documents indicating the comparative sales performance of other sites in the eight weeks before and after the closure of the Hyde Park business, and in the eight weeks before and after the opening of the redeveloped business on the Property. The submission again was that the Exhibit indicated the effect on the other sites of an operating business on the Property with the inference that it was reasonable for C Convenience to seek protection from such competition.
For the reasons given earlier, I regard Exhibit P6 as having limited utility. Of course, one may expect in a general way that the cessation of business by one trader may improve the position of other traders selling identical or similar products in the same vicinity. To the extent that Exhibit P6 confirms that commonsense inference, it does have some utility, but in my opinion, little more than that.
C Convenience led evidence from Mr Shahin to the effect that the service station which Shahin Enterprises had operated on the Property from 2000 to late 2009 had not been profitable. It did not however adduce any evidence in the nature of financial statements relating to trading on the site.
It was not altogether clear what inference C Convenience asked the Court to draw in the present context from this evidence of Mr Shahin. It could not mean that the Property could never be improved so as to be made profitable: C Convenience’s own expenditure on the Property in the redevelopment and upgrade which was completed in June 2010 is by itself an indication to the contrary.
C Convenience referred to the fact that the land benefited by the restraints was (with the exception of 714 Goodwood Road, Daw Park) owned by other members of the Peregrine Group and that those sites were subject to leases in favour of Shahin Enterprises permitting it to carry on businesses of the type which were the subject of the restraints. In this way, the restraints were for the benefit not only of the Dominant Land but also of the entity which (if settlement had occurred) had previously traded on the Property and would continue to trade elsewhere.
C Convenience led no evidence regarding the availability of service stations and other retail fuel outlets generally in the vicinity of the Property or the various Dominant Land sites. Accordingly, the Court does not have evidence of the market generally for each of the five proscribed activities in the areas which may be affected by those restraints. This makes it difficult to assess the necessity and reasonableness of the restraints designed to protect the businesses conducted on the Dominant Land sites. When a restraint is said to be reasonable in protecting a business from competition, it is usually necessary for the covenantee to show, by evidence, that the businesses do compete with one another and, if possible, of the extent to which they do so.[72]
[72] ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 at 660.
In my opinion, a number of features indicate that the restraints are unreasonable. The most obvious matter is that C Convenience did not itself have any business to protect. Nor did it own any land at all, let alone land in the vicinity of the Property. The interests of the Dominant Land Owners and of Shahin Enterprises are not to be aligned with those of C Convenience. As noted earlier, C Convenience eschewed any suggestion that the Court should lift the corporate veil so as to identify C Convenience with the owners of the Dominant Land sites or with Shahin Enterprises itself.
I add that it is unlikely that any attempt to lift the corporate veil would have been successful. Mr Shahin’s evidence was to the effect that the Peregrine Group had deliberately separated land ownership from the operation of the businesses, describing it as “a good strategy” by which, amongst other things, the respective liability risks arising from land ownership and business operation could be separated. Having deliberately adopted such an operating structure, and having benefitted from it, the Peregrine Group ought not be permitted to have the Court ignore its consequences, when those consequences are inconvenient.
Secondly, this is not a case in which the owners of the Dominant Land had made the purchases of their respective sites, or made expenditures on them, in the expectation that they would not face competition from a business on the Property. On the contrary, Shahin Enterprises had operated a service station on the Property since 2000, and it had, apparently, been used as a service station for many years before that. This suggests that the restrictive convenants were in the nature of an opportunistic attempt to secure advantages for the Dominant Land Owners, or for the businesses conducted on those sites, for which they could have had no reasonable expectation.
That is especially so as C Convenience had, before December 2008, sought and obtained planning and development approval for the upgrade which was carried out in 2010. When WPR did not complete the settlement, it seems that C Convenience moved almost immediately to commence the upgrade. That has some significance in the present context because it indicates that the businesses at the Dominant Land sites would, absent the intervention of the sale, have faced competition from an On the Run business conducted on the Property in any event.
Next, some of the business activities which are the subject of the restraints were defined in very wide terms. It could be said that a service station, vehicle washing and Subway businesses are reasonably specific. However, a convenience store was defined widely in SC cl 11.4.3 to include “a convenience store, snack bar, delicatessen or similar place where beverages, confectionery, groceries and bakery products are generally offered for sale by retail for consumption off the Property, (but does not include a café)”. This definition was capable of embracing a large number of possible business activities.
The supermarkets which are the subject of the restraint were confined to those with a floor area of less than 2,000m². However, this too could have precluded a wide range of businesses. On its terms, it did not apply only to supermarkets selling food or grocery items but could include supermarkets selling goods of any kind at all.
The restraints were to operate during a very long period: 69 years or, in the alternative, at least 25 years. C Convenience presented no evidence at all to indicate that restraints for such long periods were necessary or reasonable. In my opinion, these periods were so excessive as to indicate by themselves the unreasonableness of the restraints.
It is also pertinent to the issue of reasonableness that the Property would continue to be subject to the restraints even if Shahin Enterprises Pty Ltd (or any of its successors) or the Dominant Land Owners (or any of their successors) ceased to conduct on those sites businesses of the kind to which SC cl 11.4 referred. Further still, the restraints were to operate for the benefit of 714 Goodwood Road, Daw Park even though that site comprised vacant land.
Conclusion on Unreasonableness of the Restraints
In summary, I consider that the restrictive covenants cannot be characterised as having been reasonable as between the parties, ie, as extending no further than was reasonably necessary to protect a legitimate interest of C Convenience. Clause 25 of the SC, to which I will refer later, requires that the covenants be construed and interpreted, so far as possible so as to avoid a conclusion of invalidity or unenforceability. Such a construction is not possible. Nor can individual elements of the restraints be severed so as to preserve some parts. The unreasonableness of the time during which the restraints are to operate indicates by itself that some form of blue pencil severance of this kind is not possible. The same may be said of the absence of any legitimate interest of C Convenience (or of the Dominant Land Owners or Shahin Enterprises) to be protected by the covenants.
It is not necessary to address separately the restraints to which the Adjacent Owners and the individual defendants were subject. The same considerations indicate that the restraints to which they were made subject were also unreasonable and, accordingly, unenforceable.
I conclude therefore that cll 11 and 12 are contrary to public policy and are therefore unenforceable in their entirety.
As the restrictive covenants form the subject matter of the Adjacent Owners’ Deed, it is, for the same reasons, wholly unenforceable.
Finally, the reasons given above indicate that cll 6 to 11 inclusive of each of the Deeds of Guarantee of the individual defendants are unenforceable.
Are the Covenants Reasonable in the Public Interest?
My conclusion that the restraints go beyond what is reasonably necessary to protect the legitimate interests of C Convenience makes it unnecessary to consider this issue in detail.
However, for completeness I note that many of the same considerations apply, bearing in mind the underlying rationale for the restraint of trade doctrine.
It may also be said that the public interest in encouraging competition in the retail sale of petrol indicates, by itself, that the restraints were not reasonable in the public interest.
Issue Three: Severance
Both parties made extensive submissions on this topic. C Convenience submitted that, if reading down of the restrictive convenants in the Contract was not possible so as to avoid unlawfulness, the offending clauses should be severed, with the effect that its remaining provisions were enforceable. The defendants, on the other hand, submitted that severance is neither possible nor appropriate.
Severance: General Principles
It is convenient to commence with the general statement of Jordan CJ in McFarlane v Daniell:[73]
A valid promise is none the worse for being associated with a void promise from which it is severable; and although a promise which is wholly void cannot be enforced, a promise partly void but not illegal is capable of being enforced to the extent to which it is severable and valid. Again, a promise in consideration of a number of promises some only of which are void, although not illegal, is inherently capable of being enforced … If, however, it is made conditionally upon the prior or concurrent performance of all the promises by the other party, whether enforceable or void, it may be unenforceable unless the condition of performance of the void promises is in fact fulfilled.[74]
(Emphasis added)
In the same case, Jordan CJ stated a test for severability as follows:
When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature … If the elimination of the invalid promises changes the extent only but not the kind of contract, the valid promises are severable. … If the substantial promises were all illegal or void, merely ancillary promises would be inseverable.[75]
Thus, severance will generally be possible if the elimination of the unenforceable promise changes only the extent, but not the kind, of the contract.
[73] (1938) 38 SR NSW 337.
[74] Ibid at 347.
[75] Ibid at 345.
This test has been adopted or referred to with approval in a number of subsequent decisions, including by the High Court in Thomas Brown & Sons Ltd v Fazal Deen[76] and in SST Consulting Services Pty Ltd v Rieson,[77] and by the Privy Council in Carney v Herbert.[78] However, it is not the sole test of severability. The test is a flexible one and there are no set rules which will decide all cases.[79]
[76] (1962) 108 CLR 391 at 411.
[77] [2006] HCA 31 at [47]-[48]; (2006) 225 CLR 516 at 531-2.
[78] [1985] 1 AC 301 at 310-11.
[79] Ibid at 309; See also Humphries v The Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 597 at 619 (McHugh J) and SST Consulting Services Pty Ltd v Rieson [2006] HCA 31 at [42]-[43]; (2006) 225 CLR 516 at 530.
Brooking J in Electric Acceptance Pty Ltd v Doug Thorley Caravans (Aust) Pty Ltd held that a void promise may be severed “if it is not the main consideration”.[80]
[80] [1981] VR 799 at 819.
C Convenience emphasised authorities which indicate that severance will ordinarily be permitted if the impugned covenants were inserted solely for the benefit of the plaintiff covenantee. In this respect the Privy Council said in Carney v Herbert:[81]
Subject to a caveat that it is undesirable, if not impossible, to lay down any principles which will cover all problems in this field, their Lordships venture to suggest that, as a general rule, where parties enter into a lawful contract of, for example, sale and purchase, and there is an ancillary provision which is illegal but exists for the exclusive benefit of the plaintiff, the Court may and probably will, if the justice of the case so requires, and there is no public policy objection, permit the plaintiff if he so wishes to enforce the contract without the illegal provision.[82]
(Emphasis added)
McHugh J referred to this passage with approval in Humphries v The Proprietors “Surfers Palms North” Group Titles Plan 1995,[83] saying:
In my opinion, in cases where a provision in a contract is void, it is not for the exclusive benefit of the parties seeking to enforce the contract, and is part of the consideration for an indivisible promise of the defendant, the proper test for determining whether the void position is severable from the indivisible promise is that formulated by the Full Court of the Supreme Court of Victoria in Brew v Whitlock [No 2]. In that case, the Full Court said that “once the conclusion is reached that the invalid promise is so material and important a provision in the whole bargain that there should be inferred an intention not to make a contract which would operate without it”, the invalid promise should be treated as inseverable from the contract.[84]
(Citations omitted) (Emphasis added)
[81] [1985] 1 AC 301.
[82] Ibid at 317.
[83] (1994) 179 CLR 597.
[84] Ibid at 621-2.
Similarly, in Whitlock v Brew,[85] Taylor, Menzies and Owen JJ considered that a clause inserted solely for the benefit of one of the parties and capable of being waived by that party could be severed.[86] McPherson J made a similar observation in Firmin v Gray & Co Pty Ltd.[87]
[85] (1968) 118 CLR 445.
[86] Ibid at 461.
[87] [1985] 1 Qd R 160 at 179.
A conclusion that a restrictive covenant of an ancillary kind operates for the exclusive benefit of the party seeking to enforce the contract may be one aspect of the circumstances relevant to the wider question of whether the offending provision is so material and important in the whole agreement that it should be inferred that the parties did not intend their contract to operate without it.
The defendants submitted that severance required not only the ability to sever particular covenants but also the divisibility of the consideration provided for those covenants, that is, that the whole of a contract containing unenforceable covenants is unenforceable unless the covenants are both severable and supported by divisible parts of the consideration.
For this submission, the defendants relied upon the judgment of Rich and Dixon JJ in Horton v Jones.[88] At issue in that case was the enforceability of an oral agreement by a testator that, in exchange for the appellant taking him into her home and caring for him, he would leave her his fortune. As his assets included interests in land, the promise was, to that extent, unenforceable. On the question of severance, Rich and Dixon JJ said:
If a contract which is not evidenced by writing, contains more than one promise and, although one of the promises is of a description to which the Statute of Frauds applies, another or others are not, the whole contract is unenforceable except when the promises are not only themselves severable but may be referred to and supported by independent or divisible considerations or divisible parts of a consideration capable of distribution …[89]
[88] (1935) 53 CLR 475.
[89] Ibid at 485.
Collin v Holden[90] is an application of this approach. It involved the enforceability of a compromise of litigation. The terms of compromise, which were signed by both counsel but not by the parties, required the defendant to make a payment to the plaintiff and, upon payment, for the plaintiff to transfer her interest in certain real estate to him. The manner in which the settlement was recorded did not comply with the Victorian equivalent of the Statute of Frauds. Upon the defendant refusing to comply with the terms, the plaintiff argued that the defendant’s promise to make payment was severable and supported by independent or divisible consideration. Tadgell J rejected the submission, citing both Horton v Jones and Hodgson v Johnson.[91] In the latter case, Lord Campbell CJ held that:
…One contract, founded upon one consideration, cannot be bisected so as to make a new contract and a new consideration out of one half.[92]
[90] [1989] VR 510.
[91] [1858] EL BL & EL 685.
[92] Ibid at 689.
The defendants submitted that in the present case, the consideration being provided by C Convenience, ie, the conveyance of the land, was indivisible, with the effect that severance of the restrictive covenants was not possible.
Ultimately, the question of whether offending provisions should be severed is to be determined by reference to the intention of the parties as disclosed by the contract itself. The Court is to enquire whether the parties intended that the parties’ agreement was to have a continued operation despite the unenforceability of those provisions, or was conditional on those provision being efficacious. This was the approach taken by Taylor, Menzies and Owen JJ in Whitlock v Brew.[93] In that case, the High Court dismissed an appeal against the decision of the Full Court of the Supreme Court of Victoria in Brew v Whitlock (No 2)[94] in which that Court, after reviewing a number of authorities on the topic of severability in cases concerning uncertainty, had said:
These authorities … point to the test as being the intention of the parties as to whether the operation of the contract apart from the impugned part was to be conditional on the efficacy of the part, or whether it was to take effect notwithstanding the failure of that part. That intention is to be ascertained from the construction of the contract as a whole. The process of construction will have regard to such considerations as the independence in form of the impugned part, any interdependence of that part in formal operation with the rest, the effect that severance would have on the operation or meaning of what is left, the nature of the subject-matter dealt with in the part and its relative importance in the setting of the whole bargain, whether the impugned part is one of several promises supported by different considerations or by a common consideration, or whether it is part of a single consideration supporting a promise or promises or whether it is one of several considerations, and, if so, whether it is a material or important part of the total consideration or merely subordinate.[95]
(Emphasis added)
The Full Court concluded that a special condition in the parties’ contract was uncertain and refused severance, saying:
[W]e have come to the view that the proper conclusion is that it should be inferred that the parties did not intend to make a contract which would operate without the material and important provisions of special condition 5 being effective, and that that condition is not severable.[96]
[93] (1968) 118 CLR 445.
[94] [1967] VR 803.
[95] Ibid at 807-8. See also Knox CJ in Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 72, cited by Taylor, Menzies and Owen JJ at 461.
[96] Ibid at 812. See also Rentokil Pty Ltd v Lee (1995) 66 SASR 301 at 306-7; Electric Acceptance Pty Ltd v Doug Thorley Caravans (Aust) Pty Ltd [1981] VR 799 at 821.
Use of Extrinisc Evidence
In relation to the ascertainment of the parties’ intention, the defendants tendered correspondence between Peregrine Corporation and Luigi De Rosa and his agent during the negotiation of the Contract. In a letter of 8 February 2008 Peregrine insisted upon a restrictive covenant against a service station, carwash or convenience store, saying that it would be a “deal breaker” regardless of the price. In a letter of 28 March 2008 Peregrine said:
As discussed, we are only willing to sell the site on the condition that the land is not used for any purpose which has direct competing interests with our existing businesses in the area or the business we would build on that property in the event we do not sell it.
Finally, in a letter dated 22 April 2008, Peregrine Corporation described the uses to be prohibited by the restrictive covenants as “non negotiable”.
Counsel for C Convenience objected to the admissibility of this evidence to construe the parties’ intentions. I received the correspondence indicating that I would rule on the objection to admissibility in these reasons. For the reasons which follow, I now conclude that the correspondence is inadmissible for the purpose for which the defendants tendered it.
The usual position is that resort may not be had to extrinsic evidence for the purposes of ascertaining the parties’ intentions concerning severability.[97] More generally, the High Court has recently affirmed that, despite some authorities which suggest a different view, courts in Australia should continue to apply the approach stated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.[98] That approach permits evidence of surrounding circumstances to be given to assist in the interpretation of a contract if the language is ambiguous or susceptible of more than one meaning.
[97] See the observations of Taylor, Menzies and Owen JJ in Whitlock v Brew (1968) 118 CLR 445 at 461.
[98] (1982) 149 CLR 337 at 352. See Byrnes v Kendle [2011] HCA 26 at [99], (2011) 85 ALJR 798 at 820; Western Export Services Inc v Jireh International Pty Ltd. [2011] HCA 45 at [3]-[5]; (2011) 86 ALJR 1 at 2-3.
For reasons which I will give later, I do consider that there is some ambiguity in the severance provisions in the Contract but that does not make the parties’ statements of their intentions in the course of their negotiations admissible. Mason J said in Codelfa:
Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But insofar as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself.[99]
[99] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1986) 149 CLR 337 at 352.
Although Mr Taplin accepted the instructions of the defendants’ solicitors to make the valuation on the basis of Scenario Four, he did not claim that his estimate of value on that basis was the market value of the Property on 10 July 2009. Indeed, in his cross‑examination Mr Taplin pointed out that he had not claimed in his written report of 16 October 2011 (which comprised the greater part of his evidence‑in‑chief) that any of his valuations on Scenarios Two, Three and Four were market values. Nor did he claim that any of those Scenarios represented the highest and best use of the Property.
As indicated, I do not accept Mr Taplin’s statement of value on the basis of the Scenario Four as giving a proper indication of the market value of the Property.
Mr Taplin’s Scenario Two: A Petrol Filling Station and Residential Use
Mr Taplin was instructed by the defendants’ solicitors to assess the market value of the Property on the basis that its highest and best use involved utilisation of the front portion for a petrol filling station, with the remainder being subdivided for residential purposes.
For a valuation on this basis, Mr Taplin assumed that a service station may occupy 1,500m² and that the remaining land could be subdivided into 10 unit allotments fronting on to Le Hunte Street. He then developed a hypothetical development proposal, making a number of assumptions as to the costs, timing, interest rates, consultants’ fees, development costs and sales revenue. It is not necessary to describe that process in detail. This hypothetical development model led Mr Taplin to his estimated value of $5m if the Property was not subject to the restrictive covenants.
The fundamental difficulty with this approach to valuation is that residential use of the Property is a non-complying use under the Unley Council’s Development Plan. The fact that a development is a non-complying development does not mean necessarily that it will not be able to proceed. It does mean, however, that it can proceed only if the proponents obtain the approvals contemplated by s 35(3) of the Development Act 1993 (SA). No appeal lies against a refusal of such approval.[110] In the present case this means that any development proposal for residential use would have required the approval of both the Unley Council and the Development Assessment Commission.[111]
[110] Development Act 1993 s 35(4).
[111] Development Act 1993 s 35(3).
It would be inappropriate to assess the market value of the Property at 10 July 2009 by reference to a potential use of the Property to which it could not, absent approvals under s 35(3) of the Development Act, be lawfully put. There is in any event an element of speculation as to whether consent would be given to the kind of development involved in Scenario Two.
I note that, as with Scenario 4, Mr Taplin did not state that his valuation on the basis of Scenario 2 was a valuation of the market value of the Property.
Mr Taplin’s Scenario Three: Commercial Purposes and Residential Use
For his third Scenario, Mr Taplin was instructed by the defendants’ solicitors to assess the market value of the Property on the basis that the Goodwood Road frontage of the Property was utilised for “standard commercial purposes” with the remainder being sub‑divided for residential purposes.
Again, Mr Taplin adopted the hypothetical development approach, on the assumption that the front portion of the Property could be used to house a showroom, office or shops in accordance with the zoning regulations. He assumed that 1,500m² would be used for commercial purposes and reached an estimate of land value for that area of $1,100m². Mr Taplin assumed that 10 separate residential townhouse sites could be developed on the rear of the Property facing on to Le Hunte Street, making the same analysis as he had in the case of Scenario Two.
Mr Taplin’s estimate of value on the basis of Scenario Three faces the same fundamental difficulty as did Scenario Two. It is based on a proposed use of the rear portion of the Property which is a non-complying use. For this reason I am not willing to accept it as the basis for an assessment of market value.
I do not mean to imply by this that the prospect of approval being obtained for a non-complying use is altogether irrelevant to an assessment of the market value of the Property. On the contrary, the prospect of such approval being obtained at 10 July 2009 is a relevant consideration, but it is inappropriate to assess market value on the basis of a use which was not at the date of the valuation, lawful.
Valuation by the Direct Sales Comparison Method
As indicated earlier, this was the method adopted by Messrs Brooke and Waterhouse and by Mr Taplin in his Scenario One, albeit that Mr Taplin reached a markedly higher estimate of value. Each of Mr Brooke and Mr Waterhouse considered that the direct sales method should be the primary methodology of valuation in this case, whereas Mr Taplin considered that it should be used as a guide only, and in the nature of a cross-check of the methodologies which he had used. Given my rejection of those methodologies, it is not necessary to discuss this difference in approach.
Mr Taplin considered that the “existing use rights” which permitted the Property to be used for fuel selling added value to the site. He considered that purchasers wishing to engage in the fuel selling business would pay a “large premium” for such a site because of the difficulties in obtaining approvals for the conduct of such businesses on other sites. He also noted that modern fuel selling outlets were not stand alone businesses but generally incorporated a retail component, take-a-way food outlets and car washes.
Accordingly, Mr Taplin considered in the first instance the sales of three service station sites. These were at 5-11 Hackney Road, Hackney, 220 Kensington Road, Marryatville, and 150 Brighton Road, Somerton Park which were sold on 30 July 2007, 22 August 2007 and 30 October 2007 respectively. After making some deduction for the value of the improvements on those sites, Mr Taplin calculated the land “plus licence” values of each at $2,193m², $1,180m² and $1,630m².
However, each of these three properties was the subject of long term leases to Woolworths. Mr Taplin accepted that the sale price in each case was probably struck having regard to the yield resulting from the rental payable under those leases. That is to say, the prices in those cases were derived from a capitalisation of the income under the leases, a methodology which was not possible in relation to the Property. This makes comparison with the sales of those sites of limited utility.
Mr Taplin overlooked two other service stations sales. One was the sale of 488 South Road, Kurralta Park in January 2007 for a sale price of $650,000. As it had an area of 1,488m², this reflected a value of $437 per square metre.
The second was the site purchased by the Peregrine Group at 17 King William Road, Unley (referred to by that Group as the Hyde Park site). This was purchased in November 2008 for $1,320,000. With an area of 2,428m², this reflected a value of $544m² prior to redevelopment.
It is not known whether negative factors such as contamination were reflected in these sale prices. However, they are markedly different from those used by Mr Taplin and confirmed to my mind the inappropriateness of a literal comparison with the Hackney, Marryatville and Somerton Park sites.
Mr Taplin then referred to the sale of four main road commercial sites. The first was the sale of 171 Fullarton Road, Dulwich for a sale price of $2m in March 2008. The evidence disclosed three sales of this property: the first on 15 June 2007 for $750,300; the second on 25 March 2008 for $2m ($2,336/ m²); and the third on 26 November 2008 for $2,090,000 inclusive of GST ($1,900,000 plus GST). The sale on 26 November 2008 was to an adjoining owner and was regarded by the valuers as not a true indication of market value.
The second was the sale of 49 Glen Osmond Road, Eastwood in March 2008 for $2,750,000. With an area of 1,865m² this sale reflected a value of $1,475 per square metre. Although the land contained a former surgery, it was purchased as a development site.
The third sale was that of 43 Goodwood Road, Wayville in April 2008 for $3,250,000. It had an area of 2,255m² with improvements described as being in good condition. Mr Taplin accepted that the sale price reflecting $1,441/m2 had been determined by capitalisation of the rental income and not as an encumbered development site.
Finally, Mr Taplin referred to the purchase of 63 South Road, Thebarton in August 2008 for $930,000. That sale analysed at $840m² but Mr Taplin considered that it was inferior to the Property in “aspect, zoning and utility”.
There are relevant differences between the Property and the four commercial sites which Mr Taplin used for comparison purposes. Fullarton Road at Dulwich was recognised by all valuers as an area containing premium office space which can command relatively high rentals. The area in the vicinity of the Property cannot be likened to it. The property at South Road, Thebarton is in an area zoned industrial. I agree with Mr Taplin’s comment that its zoning, aspect and utility make it of limited usefulness for direct sales comparison purposes. Although 43 Goodwood Road is proximate to the Property, its sale price was determined by reference to features which are not applicable to the Property. The property at 49 Glen Osmond Road is in a superior location and, apparently, not subject to the same zoning restrictions as the Property. Nevertheless, as will be seen later, I consider that it is of some use for present purposes.
Mr Taplin adopted the technique of attributing a higher value to the land at the front of the Property, and a lower value to the land at the rear so as to produce a “blended” valuation. For the land at the rear, he assumed a value of $750m². He acknowledged, however, that he had not identified any comparable land appropriate for development for residential purposes of that value.
There are some further matters which I consider make it inappropriate to attach much weight to Mr Taplin’s opinions. He was the least impressive of the three valuer witnesses. This possibly resulted from inexperience on his part with the duties and responsibilities of a person who accepts a retainer which may result in the person being called to give expert evidence.
Mr Taplin was unable to identify all the documents to which he had had regard in preparing his report.[112] Some of the material he said was “on his computer”; other material he had accessed through the internet; and other material he could not identify at all. This made it difficult for counsel to check the factual assumptions upon which his opinion was based.
[112] Cf Supreme Court Civil Rules 2006 r 160(3)(c).
Mr Taplin accepted that it was unusual for a valuer to provide a valuation on the basis of the highest and best use identified by the valuer’s client. However, apart from outlining in his report the instructions which he had been given, Mr Taplin did not qualify his opinion in any way by a statement that the instructed uses were not necessarily the highest and best uses of the Property. Nor did he qualify his opinion with a statement that his estimates of value may not represent market value. In this respect, Mr Taplin’s report was capable of being misleading.
Further, Mr Taplin acknowledged that he had not anywhere in his report stated an opinion as to the highest and best use of the Property. His explanation was that the “overriding instruction” from the defendants’ solicitors had been to provide valuations on the basis which they had identified.
Although Mr Taplin had referred to the Development Plan Zone in which the Property is situated, he did not anywhere in his report acknowledge that Scenarios Two and Three involved uses which were categorised as non‑complying. His explanation was that he was simply providing valuations on the basis of the instructions and that, in any event, it was not uncommon for development authorities to permit uses which are non-complying. That may be so, but Mr Taplin did not seem to appreciate that a possibility that a non‑complying use may be permitted could not be equated with a permitted use.
Generally, I consider that Mr Taplin’s evidence was marked by absence of attention to detail and in some instances by a certain evasiveness. These aspects of his evidence may have been attributable to the shortness of time within which he had prepared his report, or to lack of experience as an expert witness. However, it did not engender confidence in his opinions.
I agree with Mr Brooke’s observation that Mr Taplin appears to have relied for comparison on sales of improved land, in better locations and in a more buoyant market.
Finally, I consider that Messrs Brooke and Taplin are correct in considering that as at July 2009, the GFC had resulted in some overall decline in values.
For these reasons, I do not consider it appropriate to make an assessment of the market value of the Property on the basis of the opinions of Mr Taplin. That does not mean that his opinions are wholly immaterial: only that I am not prepared to act on his estimates of value as the basis for the assessment.
Mr Brooke’s Opinion
Mr Brook considered some 13 properties for the purposes of his direct sales comparison. In relation to each property, he gave the detail which I set out below and, in addition, a short description. I will not repeat that description in these reasons.
Date
Address
Sq m
Purchase price
$
Value per
sq m
$
03/08
49 Glen Osmond Road, Eastwood
1,865
2,750,000
1,475
12/08
337 Payneham Road, Marden
1,648
1,240,000
752
10/08
200-202 Main North Road, Prospect
1,397
815,000
583
04/08
294 Main North Road, Prospect
1,335
950,000
711
11/08
198 Churchill Road, Prospect
1,382
785,000
568
10/07
96-98 Main North Road, Prospect
1,692
2,240,000
1,323
06/07
41 Goodwood Road, Wayville
517
979,000
1,894
04/08
43 Goodwood Road, Wayville
2,255
3,250,000
1,441
01/08
49 Goodwood Road, Wayville
1,666
1,600,000
960
06/08
51 Goodwood Road, Wayville
3,760
700,000
186
04/06
53 Goodwood Road, Wayville
1,115
1,280,000
1,148
11/07
170 Fullarton Road, Dulwich
781
1,930,000
2,471
03/08
171 Fullarton Road, Dulwich
856
2,000,000
2,336
The first five of these properties were sold as development sites, ie, they were either vacant land or the improvements on them were regarded as adding no value. It also seems that the two properties at 170 and 171 Fullarton Road, Dulwich were sold as development sites.
Mr Brooke thought it appropriate to disregard the sale of 51 Goodwood Road, Wayville as it was a related party transaction not effected on the open market.
Mr Brooke referred to the recognised principle in valuation that, on a pro rata basis, a larger parcel of land will sell for a lower value per square metre than a smaller site, all other things being equal. He noted that there had been no sales of land zoned for commercial purposes within a few kilometres of the central business district which were as large as the Property.
For the reasons given earlier, Mr Brooke attached relatively little significance to the sales of the properties at 170 and 171 Fullarton Road. I agree with that aspect of his approach.
I also consider that some of the other sales, although relevant, were of limited utility. They were the sales of properties which were further distant from the Central Business District than the Property and in non-comparable locations. They include the Marden property as well as the four properties at Prospect. This leaves the sales of the properties on Goodwood Road, Wayville (other than 51 Goodwood Road) and at 49 Glen Osmond Road, Eastwood. Mr Brooke regarded the sales of 43 and 49 Goodwood Road, Wayville as being “probably the most persuasive pointers” to the value of the Property. In relation to these properties, Mr Brooke said:
The property at 43 Goodwood Road was sold to … the same group of purchasers who have contracted to buy the subject property at $1441 per square metre including the value of the building. I do not know if the property was for sale on the open market or whether the purchasers approached the owners with a price which would induce them to sell the property.
The property at 49 Goodwood Road is improved with inferior structural improvements that occupy only portion of the land and appear in only fair condition. This appears to be an arm’s length transaction between unrelated parties. The sale shows a value of $960 per square metre.
The difference in value between the price paid for 49 Goodwood Road and the price paid for 43 Goodwood Road can be attributed to the lower value added by the buildings on 43 Goodwood Road.
Both of these sites are significantly smaller in area than the subject property.
As can be seen, the square metre value of $745 which Mr Brooke used in his valuation of the Property is significantly less than the lower of the two values derived from the sale prices for 43 and 49 Goodwood Road, Wayville. Even if, for the reasons discussed in relation to Mr Taplin, the sale at 43 Goodwood Road is of limited utility, the figure of $745m2 is low in comparison. I doubt that the disparity can be accounted for by the larger size of the Property, and the decline in values occasioned by the GFC.
There are other matters which incline me to the view that the assessment of market value should not be made on the basis of Mr Brooke’s estimate. Mr Brooke was not willing to attach significance to the fact that the Property is a corner block, with access from both Goodwood Road and Le Hunte Street. However, this adds to the flexibility of the uses to which the Property could be put. Amongst other things, the long rectangular shape of the Property on a corner allowed for the prospect that, subject to development approval, some subdivision of portion of the rear could be effected for residential purposes. It is not clear whether any of the 13 properties to which Mr Brooke referred were also corner properties.
Secondly, I consider that Mr Brooke dismissed too readily the possible attraction of the Property to someone wishing to conduct a petrol selling business. Such a business could be conducted on the Property because it was an existing use, even though it would otherwise be a non‑complying use. Mr Brooke observed that over the last 15-20 years before July 2009, there had been a substantial reduction in the number of petrol filling stations in the Adelaide metropolitan area with a resultant consolidation of petrol station sites. This led him to consider that licences for petrol filling stations may not be as valuable as Mr Taplin had thought.
In my opinion, that line of reasoning does not allow for the prospect that the value of the remaining sites may increase, as the number of competitors dwindles. That would be especially so if the demand for petrol in the vicinity remains the same or even increases, and if zoning conditions inhibit the development of new sites. In this respect it is pertinent that although the evidence of C Convenience did not establish that there would be an increase in the value of the other On the Run businesses from a complete cessation of petrol selling on the Property, that is apparently what the Peregrine Corporation sought to achieve by the restrictive covenants.
This means, in my opinion, that an assessment of market value should take account of the possible attraction to someone wishing to engage in the petrol selling business. That is especially so as the fuel business on the Property is the first such business which traffic travelling south on Goodwood Road (a major arterial road) will reach after leaving the city of Adelaide.
It is true that the site on King William Road, Hyde Park purchased by the Peregrine Group and the service station at Kurralta Park were sold at values less than that suggested by Mr Brooke. However it seems that Mr Brooke simply accepted what he was told about those sales, without making any enquiry as to the factors (including possible contamination) which may have reduced the prices otherwise obtainable.
Finally, I consider that Mr Brooke may not have attached sufficient significance to the relative rarity of the Property. As Mr Brooke himself acknowledged, there had not, for a period of about two years before July 2009, been any sale of a parcel of land zoned for commercial purposes within a few kilometres of the central business district which was as large as the Property.
These matters, in combination, lead me to the view that Mr Brooke’s estimate of value was too low.
The Opinion of Mr Waterhouse
For the purposes of his direct sales comparison, Mr Waterhouse had regard to eight sales, three of which had been referred to by Mr Brooke. These were the sales of 43 Goodwood Road, Wayville, 96-98 Main North Road, Prospect, and 49 Goodwood Road, Wayville. The remaining five sales were as follows:
Date
Address
Sq m
Purchase price
$
Value per
sq m
$
08/08
705-707 South Road, Black Forest
1,717
1,045,000
609
05/09
222 Richmond Road, Marleston
893
570,000
638
08/08
63-65 South Road, Thebarton
1,107
930,000
840
11/07
42 Nelson Street, Stepney
2,662
2,450,000
920
02/09
222 Richmond Road, Marleston
893
570,000
638
The sale of 222 Richmond Road, Marleston is included twice because there were two sales, three months apart.
It can be seen that each of the sales to which Mr Waterhouse referred involved the sale of a site of a significantly smaller size than the Property.
Mr Waterhouse acknowledged appropriately the degree of subjectivity in assessing development site values.
In his first report, Mr Waterhouse made his assessment of the value of the Property on the basis that the restrictive covenants in the contract were applicable. His approach to valuation appears to have been particularly influenced by this instruction as he considered that the restrictive covenants would have “a significant negative effect on a prospective purchaser”. My impression is that this influenced Mr Waterhouse to his relatively low valuation.
In his second report, Mr Waterhouse referred to the sale of 43 Goodwood Road, Wayville. As noted earlier, that sale occurred in April 2008 and reflected a value of $1,441/ m² (which included the value of improvements). In respect of this property Mr Waterhouse said:
This was a similarly large site which sold as an investment property and requires further analysis to deduce a land value component…[T]he sale price reflected an improved value of $1,441 per square metre...[A]fter making some deductions for the added value of improvements and lease hold covenant, [this results] in a land component being less than $1,000 per square metre.
Mr Waterhouse did not provide any explanation for his estimate of value of the Property at $2,630,000 ($700/m²), having regard to the price obtained for the sale of 43 Goodwood Road. As Mr Taplin indicated, there is a good reason to treat this sale circumspectly for present purposes. However, Mr Waterhouse did not offer that explanation, and some explanation was required.
Both Mr Waterhouse and Mr Brooke considered that the sale of 49 Glen Osmond Road, Eastwood was not directly comparable with the Property having regard to differences in locale and zoning. They pointed to relevant matters of distinction. I agree that the matters to which they referred are relevant but, nevertheless, do consider that that sale is of some assistance in the present case.
Many of the comments made above in relation to Mr Brookes’ valuation are also applicable to that of Mr Waterhouse.
In summary, I am not prepared to act on Mr Waterhouse’s assessment of value in part because he appears to have been influenced by the initial instruction to carry out a valuation on the basis that the restrictive covenants applied; and because he appears to have had insufficient regard to the sales of the other properties on Goodwood Road. Further, although the property at 49 Glen Osmond Road has relevant differences from the Property, I consider that it has more in common with the Property than the smaller blocks at Marleston, Thebarton and Black Forest to which Mr Waterhouse made reference.
Summary on Valuation
My conclusion is that, having regard to the various matters discussed in relation to the evidence of each valuer, the market value of the property at 10 July 2009 should be assessed at $3,400,000, reflecting a value of $900m². In making that assessment, I have had particular regard to the sales of the other properties on Goodwood Road (apart from 51 Goodwood Road). I have made limited use of the sale of 43 Goodwood Road. I have taken into account that the property at 49 Goodwood Road had improvements which were “in only fair condition”.
I consider that the sale of 49 Glen Osmond Road in March 2008 is also of assistance. Although in a superior area and not subject to the same zoning restrictions, it does have much in common with the Property, including proximity to the City and proximity to the superior office locations on Greenhill Road.
A value of $900/m² is higher than those obtained for the service station sites at Unley and Kurralta Park. However, given the very real prospect that those sales were affected by the presence of contamination, C Convenience has not established a proper basis for comparison of those sales with the Property. I have also taken account of the negative effects of the GFC and of the area occupied by the creek. I consider that the negative impact of those matters is offset by the contingency that approval may have been obtained for the construction of at least some residential apartments on the rear portion of the Property without detracting from the use which could be made for commercial purposes on the front portion.
A market value of $3,400,000 is much less than the price which WPR agreed to pay for the Property. However, as previously indicated that was a special price which WPR agreed upon in order to make a strategic acquisition.
Summary on Damages
My conclusion that the Property had a market value in July 2009 of $3,400,000 means that the damages of C Convenience should be assessed at $3,481,000.
Issue Seven: The Counterclaim
It follows from the above that the counterclaim of WPR and Luigi De Rosa seeking repayment of the $100,000 paid in consideration of the Option Deed and of the $400,000 deposit fails.
It is not necessary to consider whether the counterclaim should have succeeded if the Contract was wholly unenforceable.
Conclusion
For the reasons given above and subject to taking account of the $400,000 deposit, I will enter judgment in favour of the plaintiff in the sum of $3,481,000. I will hear from the parties as to the appropriate orders to give effect to this conclusion in relation to each defendant and as to interest.
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