E Co [a pseudonym] v Q [a pseudonym] (No 4)

[2019] NSWSC 429

Supreme Court

New South Wales

Medium Neutral Citation:	E Co [a pseudonym] v Q [a pseudonym] (No 4) [2019] NSWSC 429
Hearing dates:	19-23 November 2018; 10-13 December 2018
Decision date:	18 April 2019
Jurisdiction:	Common Law
Before:	Ward CJ in Eq
Decision:	(1)   Direct the parties to notify my associate within 7 days of any further anonymisation sought of these reasons for judgment and as to any amendment sought to the proposed orders to correct any arithmetical errors or so as better to implement the relief contemplated in these reasons. (2)   Reserve the question of costs of the proceedings to be dealt with following the filing of final submissions on costs and/or any oral hearing on costs that may be considered appropriate.
Catchwords:	CIVIL PROCEDURE — Hearings — reopened hearing on question of relief –– whether making good of the plaintiffs’ expectations would be inequitably harsh in all the circumstances –– whether imposition of conditions of the kind proposed in the principal judgment would be financially ruinous for the parties –– whether capital gains tax liability flowing from the relief granted would render the relief otherwise proposed to be granted wholly disproportionate or out of all proportion to the detriment suffered   ESTOPPEL – Proprietary estoppel – whether to grant declaratory relief recognising the existence of a constructive trust over properties and shares –– whether acceleration of the expectation would be appropriate in order to do equity and effect a clean break –– whether declared constructive trust arises at the time it becomes unconscientious or unconscionable for the promisor to resile from the promise
Legislation Cited:	Civil Procedure Act 2005 (NSW), ss 94, 100 Duties Act 1997 (NSW), s 274 Evidence Act 1995 (NSW), ss 55, 79(1), 135(a), 135(c), 192A(a) Income Tax Assessment Act 1936 (Cth), ss 102(1), 170 Income Tax Assessment Act 1997 (Cth) Uniform Civil Procedure Rules 2005, r 14.14(2)(a)
Cases Cited:	Ambridge Investments Pty Ltd (in liq) (rec apptd) v Baker [2010] VSC 59 Arfaras v Vosnakis [2016] NSWCA 65 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd ( 2001) 208 CLR 199; [2001] HCA 63 Australian Securities & Investments Commission (ASIC) v Rich (2005) 190 FLR 242; [2005] NSWSC 149 Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11 Bathurst City Council v PWC Properties Pty Limited (1998) 195 CLR 566; [1998] HCA 59 Beslic v MLC Ltd [2015] NSWSC 908 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384; [1929] HCA 24 Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44 Breen v Williams (1996) 186 CLR 71; [2009] HCA 57 Bristol & West Building Society v Mothew [1998] Ch 1 Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276; [1969] 2 All ER 367 Commonwealth of Australia v Verwayen (1990) 170 CLR 394; [1990] HCA 39 Cooke v Commissioner of Taxation (2002) 51 ATR 223; [2002] FCA 1315 Crabb v Arun District Council [1976] Ch 179 Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21 Delaforce v Simpson-Cook (2010) 78 NSWLR 483; [2010] NSWCA 84 Department of Social Security v Agnew (2006) 96 FCR 357; [2000] FCA 59 DHJPM Pty Ltd v Blackthorn Resources Ltd (2011) 83 NSWLR 728 Donis v Donis (2007) 19 VR 577; [2007] VSCA 89 E Co v Q (No 3) [2018] NSWSC 646 E Co v Q [2018] NSWSC 442 Ellison v Sandini Pty Ltd (2018) 125 ACSR 249; [2018] FCAFC 44 Evans v Evans [2011] NSWCA 92 Flinn v Flinn [1999] 3 VR 712; [1999] VSCA 109 Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 GE Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1; [2003] FCA 50 Gibson Motorsport Merchandise Pty Ltd v Forbes (2006) 149 FCR 569; [2006] FCAFC 44 Gibson v Goldsmid (1854) 5 De GM & G 757; 43 ER 1064 Gillett v Holt [2010] [2010] Ch 210 2; All ER 289 Giumelli v Giumelli (1999) 196 CLR 101 at 123-124; [1999] HCA 10 Gould v Mount Oxide Mines Ltd (In Liq) (1916) 22 CLR 490; [1916] HCA 81 Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 Honeysett v The Queen (2014) 253 CLR 122; [2014] HCA 29 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653; [2008] NSWCA 206 Jennings v Rice [2003] 1 P & CR 100 Kafataris v Deputy Commissioner of Taxation (2015) 243 FCR 291; [2015] FCA 874 Kevin John Lewis v Peter William Stewart by his tutor Peggy Lillian Mayhew [2018] NSWSC 1186 Lambert Leasing Inc v QBE Insurance Australia Ltd [2012] NSWSC 953 Langman v Handover (1929) 43 CLR 334; [1929] HCA 42 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305 McNab v Graham (2017) 53 VR 311; [2017] VSCA 352 Mercanti v Mercanti [2015] WASC 297 Muschinski v Dodds (1985) 160 CLR 583 NA & J Investments Pty Ltd v Minister Administering the Water Management Act 2000; Arnold v Minister Administering Water Management Act 2000 (No 4) [2012] NSWLEC 120 Paino v Paino [2005] NSWSC 1313 Paino v Paino [2008] NSWCA 276 Parsons v Bain (2001) 109 FCR 120; (2001) 192 ALR 722; [2001] FCA 376 Pascoe v Turner [1979] 1 WLR 431 Phelan v Middle States Oil Corporation (1955) 220 F 2d 593 Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165; [2001] HCA 31 Pirie v Richardson [1927] 1 KB 448 Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370 Priestley v Priestley [2017] NSWCA 155 R v Turner [1975] QB 834 Rhoden v Wingate [2002] NSWCA 165 Rodda v Ian Rodda Pty Ltd (No 2) [2015] SASC 128 Rodda v Ian Rodda Pty Ltd [2015] SASC 95 S & E Promotions Pty Ltd v Tobin Brothers Pty Ltd (1994) 122 ALR 637 Sidhu v Van Dyke (2014) 251 CLR 505; [2014] HCA 9 Sledmore v Dalby [1996] 72 P & CR CA 196; [1996] 2 WLUK 129 Spencer v Commonwealth (1907) 5 CLR 418; [1907] HCA 82 Truesdale v Commissioner of Taxation of the Commonwealth of Australia (1970) 120 CLR 353; [1970] HCA 27 Tyson v Brisbane Market Freight Brokers Pty Ltd (1994) 120 ALR 1; [1994] HCA 67 Varma v Varma (2010) 6 ASTLR 152; [2010] NSWSC 786 Westpac Banking Corporation v Ollis [2008] NSWSC 281
Texts Cited:	AW Scott, Law of Trusts (Little Brown & Co, 3rd ed, 1967) B Macfarlane, The Law of Proprietary Estoppel, Oxford University Press, 2014, G D Pont et al, Halsbury’s Laws of Australia (Lexis Nexis, vol 430) J D Heydon & MJ Leeming, Jacobs’ Law of Trusts in Australia (Lexis Nexis, 8th ed, 2016) J Jacob and I Goldrein, Pleadings Principles and Practice (Sweet & Maxwell, 1990) JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia (7th ed, 2006) P Young, C Croft and M Smith, On Equity (LawBook Co, 2009)
Category:	Principal judgment
Parties:	E Co [a pseudonym] (First Plaintiff) EM Co [a pseudonym] (Second Plaintiff) A [a pseudonym] (Third Plaintiff) B [a pseudonym] (Fourth Plaintiff) C [a pseudonym] (Fifth Plaintiff) Q [a pseudonym] (First Defendant) “Second Defendant” (Second Defendant)
Representation:	Counsel: A McInerney SC with N Kabilafkas (Plaintiffs) J Priestley SC with B Lloyd (19-23 November 2018); B Lloyd (10-13 December 2018) (Defendants)   Solicitors: MJF Legal Pty Ltd (Plaintiffs) Second Defendant (Defendants)
File Number(s):	2014/00198212
Publication restriction:	Restriction on publication of anything that may identify the persons identified in the principal judgment in these proceedings as “X”, “Y” and “Z”

INDEX

JUDGMENT – WARD JA		[1]
Background		[18]
Summary of parties’ submissions as to the appropriate orders		[20]
Evidence at the re-opened hearing		[27]
Expert evidence
Business valuation evidence – Business Valuation Report dated 14 November 2018	[28]
Land valuation evidence – Joint Valuation Report dated 22 October 2018	[45]
• Mr Tremain	[52]
• Mr Donoghue	[64]
• My assessment of the expert valuation evidence	[78]
Evidence from expert agronomist - report dated 17 August 2018 of John Francis	[97]
Capital Gains Tax – Mr Andrew Sneddon and Mr Andrew Lam	[111]
• Mr Andrew Sneddon
Application to ATO	[114]
Mr Sneddon’s opinion	[121]
• Mr Lam	[155]
• Conclusion as to CGT evidence	[159]
Expert financial opinion – Lonergan Edwards reports	[163]
• Objections to the Lonergan Edwards reports	[164]
• Summary of the Lonergan Edwards reports	[179]
• Reasoning	[194]
• First Defendant’s submissions on the Lonergan Edwards reports	[204]
• Cross Examination	[207]
• Conclusion as to the Lonergan Edwards reports	[254]
Stamp duty ruling		[255]
Statistical evidence as to life expectancy		[256]
Lay evidence
Evidence as to “out of cycle” cattle sales and condition of the property	[257]
• Submissions on the relevance of this evidence	[258]
• Substance of the evidence	[268]
• First Defendant’s submissions as to the “out of cycle” cattle sales evidence	[287]
• Conclusion as to “out of cycle” sales evidence	[296]
Plaintiffs’ evidence as to their financial position/ability to borrow funds	[298]
• Evidence as to the proposed sale of the C Hotel	[305]
• Ability to borrow funds	[320]
• Position regarding discharge of Westpac $2 million facility or Rabobank facility	[331]
Evidence of the sons’ in cross-examination on other issues
• Sons’ relationship with the first defendant	[352]
• Concerns by sons as to serviceability of any finance	[355]
• Claim by the first defendant in relation to what he says were his cattle	[358]
• The plaintiffs’ priority in relation to the properties	[359]
Submissions by the plaintiffs’ as to their ability to borrow funds	[363]
Submissions by the first defendant as to the plaintiffs’ ability to borrow funds	[374]
Conclusion as to the sons’ evidence of financial position	[384]
The first defendant’s evidence as to his financial position	[388]
• Objection to receipt of such evidence	[389]
• Substance of the first defendant’s evidence as to his financial position	[413]
• Cross-examination of the first defendant	[416]
Submissions by the plaintiffs as to the first defendant’s financial position	[460]
The first defendant’s submissions as to his financial position	[469]
Conclusion as to first defendant’s evidence as to his financial position	[473]
Relief
The plaintiffs’ submissions as to the relief to be granted	[477]
Submissions as to the proposed conditions referred to in the principal judgment	[497]
• Market Rent Condition	[500]
• Book Debts Condition	[510]
• The Share Acquisition Conclusion	[514]
• First Defendant’s entitlements to compensation for maintenance	[518]
• Election	[523]
• Balance of orders	[525]
Costs set-off	[532]
First defendant’s submissions as to final relief	[534]
• Other relief	[585]
Determination		[599]
Conclusion as to the final orders		[670]
Costs		[676]
Orders		[677]

Judgment

1. HER HONOUR: The principal hearing in this matter occurred over the period 14 August 2017 to 6 September 2017 and 3, 10 and 11 October 2017. On 13 April 2018 I published my reasons for judgment ([2018] NSWSC 442, to which I will refer as the principal judgment, now renamed as E Co v Q). In summary, I found that the plaintiffs’ respective claims in proprietary estoppel had been made good (see the summary at [45]-[81] of the principal judgment) as had a claim based on a joint endeavour constructive trust, though I considered (and this does not appear here to be challenged by the plaintiffs) that the relief on that basis would effectively be subsumed in the relief to be granted on the individual plaintiffs’ jointly made proprietary estoppel claim (see [46] of the principal judgment). (I should note that in these reasons I am adopting the anonymised terms used in my earlier judgments, for the reasons stated in the principal judgment.)

2. When I published the principal judgment on 13 April 2018, I indicated the broad findings I had made and the ambit of the relief that I then had in mind. I made no orders in that regard other than to direct the parties to prepare short minutes of order to reflect my reasons and to forward those, and any brief written submissions in relation to those orders, to my associate by a specified date. The hope that any further submissions in this matter might be brief was misplaced.

3. What subsequently transpired was, first, a dispute between the parties as to the ambit of submissions that could properly be made in accordance with those directions and then, more relevantly for present purposes, a submission for the plaintiffs in effect that they would be denied procedural fairness were they not to be permitted to adduce evidence and make submissions in relation to the relief that I had envisaged would be appropriate in light of the findings made in the principal judgment.

4. For the reasons that I published on 14 May 2018 ([2018] NSWSC 646, to which I will refer as the re-opening judgment, now renamed as E Co v Q (No 3)), I concluded that, while leave to re-open would not strictly be necessary in order for the plaintiffs to be permitted to make submissions as to the appropriate form of relief (or conditions to be attached thereto), leave was necessary insofar as the plaintiffs sought to adduce further evidence going to the issue of relief (since, in effect, that would amount to a re-opening of the evidence in the hearing) but that such leave should be granted (see [116] of the re-opening judgment).

5. That led to further evidence being adduced from both sides as to various issues including as to: the estimated market rent for the farming properties the subject of the proceedings over the balance of the first defendant’s life (as estimated according to life expectancy tables) and the net present value thereof; the value to be attributed to the first defendant’s shares in E Co and EM Co, respectively; the financial ability of the sons and/or E Co to meet financial conditions of the kind I had anticipated be imposed on the acceleration of the sons’ expectations of an interest in the farms; and (over the objection of the plaintiffs) evidence by the first defendant as to his current financial position.

6. After a number of interlocutory stoushes, the re-opened hearing commenced on 19 November 2018 and was heard over a period of some nine days (a significantly extended time frame from that which had been contemplated on 14 May 2018 when I fixed the re-opened hearing for three days); the re-opened hearing only finally concluding on 13 December 2018.

7. I will summarise in due course the evidence adduced on the re-opened hearing. At this stage, I simply note (not least because it may well be relevant to the ultimate issue as to costs and it is as well to advert to this upfront so that it can be addressed in due course in submissions on costs) that, although the plaintiffs’ submissions that had led to the grant of leave to re-open had focussed on the prospect that financial conditions of the kind I had proposed to impose would be financially ruinous to them, the evidence adduced by the plaintiffs did not in my opinion establish that proposition; nor, in respect of the plaintiffs’ borrowing capacity as at late 2018, did it go much beyond assertions by the sons as to their (and E Co’s) financial position.

8. Relevantly, there was no evidence that any approach had been made by the sons to any financier or bank as to their individual or collective borrowing capacity (including that of E Co) in the event that the properties (or one or more of them) were to be transferred to the sons in equal shares following the determination of these proceedings (although there were communications by one or more of the sons with representatives of both Westpac and St George banks over the relevant period relating to the borrowings secured over various assets in which there would seemingly have been the opportunity to do so); and the evidence of B and C at the hearing confirmed that no such discussion had been held.

9. Nor was the affidavit evidence initially filed on the re-opened hearing by one or more of the sons completely candid (a matter to which I will return in due course), insofar as there was no reference in the sons’ September 2018 affidavits to what was by then at least B and C’s intention to place the C Hotel on the market for sale (information that both B and C accepted was relevant to the relief to be determined in this re-opened hearing but the deliberate omission of which they denied was misleading). By the time of the re-opened hearing, the evidence was that not only was the C Hotel on the market for sale – a decision said to have been made in August 2018; but also that a prospective purchaser had made one or more offers for the hotel such that an indicative price for that asset was known. (I interpose to note that there was a concern by the plaintiffs to keep confidential the information in relation to the C Hotel sale, lest it prejudice their commercial negotiations; and, since I have no information as to whether that sale has eventuated, I will not include in these reasons details as to the financial aspects of the proposed sale.)

10. In contrast to the lack of any independent evidence for the plaintiffs as to their capacity to borrow any funds that might be needed to satisfy orders of the kind I had envisaged imposing on the acceleration of their expectations in relation to the properties, there was evidence from a financial expert called by the first defendant (Mr Wayne Lonergan of Lonergan Edwards) and expert reports (jointly prepared by Mr Lonergan and Dr Hung Chu, also of that firm), which in my opinion did establish that (although not necessarily financially ruinous to the sons) conditions of the kind that I had proposed to impose on the acceleration of the sons’ expectations in relation to the properties (namely, the payment of both a sum to reflect the net present value of market rent for the first defendant’s life expectancy and the payment of sums recorded in the books of E Co as debts owing to the first defendant) would not likely be able to be met at this stage (at least as lump sums) whether by E Co, the sons individually, or E Co and the sons collectively; though it might be possible for a regime to be put in place whereby that could be effected over time.

11. That said, as it emerged from their written submissions and oral argument at the re-opened hearing, the real focus of the plaintiffs’ complaint as to the relief that I had envisaged was that it proceeded on a misapprehension of principle as to the ambit or proper exercise of the discretion to grant relief (insofar as that relief were to involve the acceleration of the expectations of the plaintiffs) and, at least in relation to the proposed “market rent” condition, was inconsistent conceptually with a constructive trust having already arisen (by, the plaintiffs say, no later than 27 June 2013). With some qualifications, I accept the force of that criticism. I observe, however, that this does not turn on the financially ruinous (or otherwise) impact of what I had proposed by way of imposition of conditions on the plaintiffs; and that, but for the plaintiffs’ desire to adduce further evidence, this could surely have been dealt with by way of submissions at a much earlier stage (and with no doubt considerably less expense than has presumably been incurred by all parties in preparation for the re-opened hearing). That, too, may be relevant in due course to take into account on the question of costs.

12. In summary, for the reasons that follow, I am persuaded that the conditions that I had considered it appropriate to impose on the acceleration of the sons’ expectations in relation to the properties should not be imposed; but that, without taking into account the potential capital gains tax (CGT) ramifications of relief making good the plaintiffs’ expectations (whether or not there be an acceleration of the sons’ expectations), the relief proposed to be granted would be inequitably harsh in all the circumstances of this case. In particular, the spectre of a significant CGT liability on the part of the first defendant (the final quantum cannot here be determined), which could have arisen on the happening of a CGT event as early as July 2003, in my opinion makes it wholly disproportionate, or out of all proportion, to the detriment suffered by the plaintiffs (from the first defendant resiling from the relevant expectation) for relief now to be granted by way of a declaration of constructive trust (and/or an order for the transfer of the properties) that encompasses all of the properties the subject of these proceedings.

1. I remain firmly of the view (which has only been reinforced by the evidence given by each of the sons in the re-opened hearing) that the relationship between the members has irreparably broken down and that this breakdown will affect their ability co-operatively to work together in what was always expected to be a joint farming business. This confirms my view that what is needed, so far as is possible, is for there to be a clean break between the family members. (I interpose here to note that I consider that in relation to the E Co and EM Co shares that will not now be possible in light of the stance adopted by the plaintiffs on this issue).

2. I do not suggest, as the plaintiffs seem to have perceived, that this is or should be elevated to a free-standing rule of law of some kind. However, when determining how the plaintiffs’ expectations should in equity be made good, it is impossible not to take into account the circumstances that call for a clean break in this case, namely the complete lack of trust now reposed by the sons in their father (extending seemingly, to his solicitor, the second defendant, who holds a power of attorney for the first defendant and is named as one of the executors in the first defendant’s last Will). Indeed the lack of trust in their father (and his solicitor) was put forward as the reason for the filing of less than candid affidavits by the sons in September 2018 in advance of this re-opened hearing. Those circumstances, in my opinion call for an acceleration of the sons’ expectations in relation to the farms. The prospect of the family relationship being repaired sufficiently so as to enable the first defendant and his sons henceforth to work together in a joint farming enterprise or otherwise seems fanciful in the extreme; and neither side suggested to the contrary.

3. In those circumstances, I have concluded that the relief to be granted should be an amalgamation of the so-called “pathways” for relief (using the terminology adopted by Nicholson J in Rodda v Ian Rodda Pty Ltd (No 2) [2015] SASC 128 (Rodda (No 2))), put forward by the respective parties in this case. I do not consider that permitting some form of election on the part of the plaintiffs as to the structure of the final relief is appropriate, particularly if that might lead to the present situation in relation to the ownership of the farms continuing. In that regard, I accept the first defendant’s submission that it is ultimately for the Court to determine the relief to be granted.

4. What I have concluded is appropriate by way of the final relief to be granted is to the following effect: declarations as to the holding by the first defendant of his freehold interest in the properties (subject to E Co’s existing lease of the properties) and his shares in E Co and EM Co on constructive trust for the sons but to carve Property No 11 out of that declaratory relief; orders for the sale of Property No 11 and for the payment to the sons as equitable compensation in respect of their expectations in relation to that property in such amount, if any, as remains out of the proceeds of sale of that property after the first defendant has satisfied (whether wholly or in part) any CGT liability that arises from the findings I have made and/or the final orders that are to be made in accordance with these reasons; an order for the acceleration of the sons’ interest in the properties the subject of the declaratory relief (i.e., the properties other than Property No 11) (but not their beneficial interest in the first defendant’s shares in E Co and EM Co) by the making of an order for the transfer of those properties; and that there be an order for the payment to the first defendant of an amount representing the net present value of a notional rent for the now remaining nine years of the first defendant’s life expectancy.

5. I propose, when publishing these reasons, to list the matter for directions to deal with three matters: any submissions as to the final form of the orders I am now proposing to make – see [677] below) ; any concerns as to further anonymisation of these reasons; and the issue of costs. Lest there be any doubt, this is not an invitation for a further re-opening of the hearing or the matters determined in these reasons.

Background

18. It is not necessary here to set out the background to the dispute between the parties. It is amply set out (some might well say at too great length) in the principal judgment. The underlying dispute was between the first defendant (re-named in the title to these proceedings as Q but to whom I will here refer simply as the first defendant) on the one hand and, on the other hand, his three sons (A, B and C) and two companies in which each of the four family members is involved (E Co and EM Co) (albeit the first defendant now only as a shareholder) and through which the family members had from 2002/2003 engaged in a joint family business venture (extending both to farming and non-rural activities).

19. Nor is it necessary here to set out the findings made in the principal judgment or the relief I then considered appropriate. Suffice it to note that I was then of the view that the proposed imposition of conditions on the acceleration of the sons’ interest or expectations in the farms (for the payment of a sum by way of a notional market rent for the balance of the first defendant’s life expectancy – the “market rent” condition and by way of a repayment of loan advances or payment for the book value of certain transferred cattle – the “book debts” condition) was appropriate to ensure so far as possible that the acceleration of the sons’ interest or equity in the farms (which I considered, and the plaintiffs did not dispute, would go beyond making good their expectations) did not unduly prejudice the first defendant or render the relief to be granted wholly disproportionate in all the circumstances. In that regard I described this as a “constructed” element of the relief there proposed.

Summary of parties’ submissions as to the appropriate orders

20. There is a plethora of written submissions (in volume by far the most from the plaintiffs) on which reliance was placed at the re-opened hearing. So, for example, the plaintiffs not only relied upon their submissions dated 31 October 2018 filed in advance of the re-opened hearing but also their submissions dated 4 August 2017 filed in advance of the principal hearing; submissions on relief dated 10 October 2017 at the close of the principal hearing; their closing submissions of 21 September 2017; their submissions in reply of 2 October 2017; supplementary submissions for the re-opened hearing dated 10 December 2018 and 18 November 2017 [sic] and closing submissions for the re-opened hearing dated 12 December 2018, respectively. There was, perhaps unsurprisingly, some development of the respective parties’ positions in the course of their respective submissions. I have attempted in these reasons to encapsulate the gist of what was ultimately submitted by the respective parties’ way of the appropriate final relief, without attempting to restate precisely all of those earlier submissions.

21. In essence, the plaintiffs argue that the fundamental premise of orders making good their respective expectations (emphasising the distinction between the expectations of the sons and those of E Co) is the recognition of the existence of a constructive trust over both the freehold (in the case of the sons) and leasehold (in the case of E Co) interest in the properties; and they seek declarations in this regard. Thus, their submissions are premised on the relief now to be granted commencing with a declaration of constructive trust (rather than, say, relief by way of equitable compensation, as the first defendant submitted both at the principal hearing and at the re-opened hearing would be appropriate course or, as the first defendant seeks in his now fallback position, a transfer to them of only some of the properties without any declaration of trust).

22. The plaintiffs submit that, since part of the expectations had a testamentary aspect, there are broadly two ways in which effect may be given to the constructive trust: first, to maintain this trust during the first defendant’s lifetime (referred to in their closing submissions as Pathway A); and, second, to accelerate the position of the parties to achieve a “clean break” (referred to as Pathway B).

23. As I understand it, the plaintiffs do not oppose acceleration of the relevant expectations per se. Indeed, the sons seem to accept that the ongoing operation of the farms under the ownership of the first defendant would not be feasible (or at least “not ideal”, in C’s words). Rather, as adverted to above, what they oppose is the imposition of the market rent and book debt conditions as conditions placed on the acceleration of those expectations. They argue that what would be accelerated under Pathway B would be the rights and obligations of the parties arising from the constructive trust (i.e., the relief contemplated under Pathway A) and, hence, that when determining what conditions should be imposed to reflect the fact that the expectations are to be accelerated (and in determining whether the acceleration would be wholly disproportionate in the circumstances), regard must be had to those rights and obligations.

24. Broadly speaking, the position of the plaintiffs in that regard is that the first defendant, as a constructive trustee of the freehold and leasehold interest in the properties (for the sons and for E Co, respectively), has no legal or equitable right to profit by way of rent; nor to repayment of the amounts recorded as book debts in the accounts of E Co; nor to compel the purchase of the shares he holds in E Co and EM Co. Thus, they submit, the Court may not impose, as a condition for granting relief, that the plaintiffs make such payments. It appears to be accepted by the plaintiffs that if there were to be a accelerate of their expectations the first defendant “may have a legal or equitable right to a modest allowance for living expenses for the term of his natural life” but, despite having been the recipients of considerable generosity from the first defendant over the years, they are now what can only be regarded as parsimonious in the amount that they are prepared to concede would be appropriate in this regard (suggesting in their proposed orders an amount that would meet only around half of the first defendant’s current annual rental payments, on the evidence before me). In earlier submissions the plaintiffs seemed to contemplate that the first defendant might receive a “commercial” rent after a “grace period” (of five years or more) from the final determination of any and all appeals in this matter (see [59]-[60] of their written submissions dated 31 October 2018) but the plaintiffs’ proposed orders do not seem to reflect this.

25. In their closing written submissions on the re-opened hearing, it was submitted for the plaintiffs that, as the first defendant is the “sole effective cause” of the circumstances giving rise to the desirability of a clean break, it would be appropriate to provide the plaintiffs with an election between the two “pathways” referred to above (i.e., Pathways A and B). However, in oral submissions, the plaintiffs’ position appeared to be that if their submissions as to the constructive trust being the fundamental premise of the relief to be granted were accepted (as in essence they are) then no such right of election would be sought by them. (The plaintiffs’ submissions did not envisage that one or more of the farming properties might be “carved out”, so to speak, of any declaration of constructive trust but, since a division of ownership of the properties was in effect put forward by the first defendant in his proposed alternative “pathway” (Pathway C), the plaintiffs have already had an opportunity to be heard against such a result in that context.)

26. The first defendant’s position, in essence, is: first, that it is clear that there must be a “clean break” and that the conditions that I had envisaged in the principal judgment on the acceleration of the sons’ interest in the properties are appropriate and should be imposed; and, second, that if that not be the case, then the relief granted should be that contemplated by his Pathway C, in effect that there be a division of the properties as between the first defendant and the sons (broadly speaking, that he retain the Main/7 Aggregation and Property No 11 and that the rest of the properties are transferred to the sons), with the sons to be liable for any CGT payable on the transfer of the particular properties that are transferred to them. The first defendant also argues, in effect, that acceleration of the sons’ expectations in relation to the properties without conditions of the kind I had envisaged would cause significant detriment (not least, having regard to his potential CGT exposure).

Evidence at the re-opened hearing

27. As noted earlier, further evidence was adduced at the re-opened hearing as to a range of matters. While much of it is not ultimately of assistance, having regard to my acceptance of the plaintiffs’ criticism of the basis on which I had proposed to impose the conditions to which they object, for completeness I summarise below that evidence and my conclusions in relation thereto. The evidence may conveniently be grouped into the expert evidence, evidence of a private stamp duty ruling, other statistical evidence and lay evidence.

Expert evidence

Business Valuation evidence – Business Valuation Report dated 14 November 2018

28. The parties jointly retained an expert (Ms Fiona Bateman of Dolman Bateman & Co Pty Ltd), a chartered accountant qualified in the field of forensic accounting and business and company valuation, to provide an expert report as to the value as at 31 December 2017 of the shares owned by the first defendant in each of E Co and EM Co.

29. Ms Bateman was instructed to value the shares on the assumption that E Co was in a position to continue its farming operations on the properties but was liable to reimburse the first defendant the sum of $2.123 million (the recorded book debt, to which sum I will refer, consistently with some of the experts, as the “Loan Amount”, though I was not satisfied that this amount was an advance repayable in the first defendant’s lifetime (see [1234] of the principal judgment)) and to account to the first defendant for a sum representing the net present value of the market rent for the subject properties as valued by an independent valuer from the date of judgment for the period of the first defendant’s life expectancy (see the letter of instruction dated 12 October 2018). Ms Bateman was provided with certain information relating to the companies and with the separate conclusions that had been reached by the respective real estate valuers (Mr Tremain, who was engaged by the plaintiffs, and Mr Donoghue, who was engaged by the first defendant) as to the estimated future rent for the properties. (The valuers had not met in conclave by that time and hence there was at that stage no agreed position between the experts as to the gross market rent for the properties.)

30. In her report dated 14 November 2018, Ms Bateman assessed the value of E Co, as at 31 December 2017, in a negative amount (-$699,967) and the first defendant’s 25% share of E Co, as at that date, at -$174,992. She assessed the value of EM Co, as at 31 December 2017, also in a negative amount (-$641,764) and the first defendant’s 25% share of EM Co, as at that date, at -$160,441 (see Ms Bateman’s report dated 14 November 2018 at [4].) The valuation was made on a going concern basis ([9]) and on the basis of “fair market value” ([10]) (which Ms Bateman explained is the standard adopted in Australia and which valuation concept does not assume that the business would be sold).

31. Ms Bateman noted that the liabilities exceeded the book value of the assets in both of the entities valued but considered it likely that the market value of the livestock and the plant and equipment exceeded the book value applied in her valuation (see at [5]). In cross-examination by Senior Counsel for the first defendant as to the balance sheet position (for E Co) if the balance sheet were to be reconstructed to give a market value (rather than the book value) for stock, and assuming the average income per head of cattle in 2017 (of $1,271) remained the same, Ms Bateman confirmed that the market value would be $2.6 million (T 433.4) and that this number would then replace the $112,000 figure adopted in the report by reference to the book value of the stock (T 433.30).

32. Ms Bateman assessed the net present value of the future rent (the “Specific Market Rent” – a capitalised term in the letter of instructions at [7(b)]) of the subject properties, applying the market rent provided in the valuation reports of each of the expert valuers, as being: $5,915,755 (the future net market rental as per Mr Donoghue’s report; and as $6,316,726 (the future gross rental as per Mr Tremain’s report) (see [7] of Ms Bateman’s report). (The respective Specific Market Rent figures were thus calculated on a different basis – net versus gross; and hence the two cannot readily be compared.)

33. Ms Bateman noted that, for the purposes of her valuation report, she had been instructed to exclude the outgoings related to the ownership of the subject properties in her calculation of future rent payable (see at [8], where Ms Bateman also noted that reference was made to the outgoings related to the ownership of the subject properties in Mr Tremain’s report, to which she referred as the Opteon report, at p 121).

34. Ms Bateman was cross-examined by Senior Counsel for the first defendant as to the value placed by her on EM Co’s interest in a particular holding company (R Co) that holds investments in two properties (not being any of the properties the subject of this litigation) and, in particular, as to her adoption of the “adjusted book value” of those properties as shown in the relevant financial accounts (rather than the market value of those properties) (see T 434-435). Ms Bateman explained that she had been instructed by both parties so to do (T 434.31; T 434.48); said that she had never seen the use (in accounting documents, as I understand her answer) of the term “fair value adjustment” (T 435.33) but said that that was not necessarily incorrect; and accepted that, if the true market value was the adjusted amount, then that was the appropriate adjustment to be made (T 435.35). Ms Bateman accepted that if the total of the “fair value assessment” were notionally added back into the 2017 accounts (and assuming Senior Counsel’s arithmetic, as put to her in cross-examination, were to be correct) that would produce a positive net asset situation for R Co (T 435.46) and hence a positive value in respect of EM Co’s half interest in R Co (T 436.1; 436.22) (though I note here that Ms Bateman also seemed to suggest that the difference would not be great – a proposition that Senior Counsel for the first defendant appeared also to accept (see T 436.30)).

35. As to Ms Bateman’s consideration of which valuation method to use when calculating the net present value of market rent, Ms Bateman explained in cross-examination the reason for her view that goodwill could not exist in a business of the kind operated by E Co (T 436.37ff); namely, the value of the net assets employed in the business, being the cattle, are so high that “the figures are never going to work for a goodwill to occur in this type of business”; (and see the exchanges with Counsel at T 437.19-46).

36. Ms Bateman also explained the methodology for calculation of the net present value for future rent (T 440-441) and, in essence, said that the easiest way to calculate it would be to take the annual amount divided by 52 to reach a weekly amount “and then find a website including ours that has the discount tables on it and use that” (T 441.21ff) or, as was put to her by Senior Counsel for the first defendant, to take the weekly amount, to take the multiplier for an amount of $1 and to multiply it by ten “as at 11 years” (T 441.45).

28. In response to questions from Senior Counsel for the plaintiffs, Ms Bateman explained that the discount rate she had adopted when assessing the net present value of future rent (of 3% - see Schedule 8 to her report) was what she considered appropriate in circumstances where there was “basically no risk”, stating that it was “really only the market value of the money” (T 442.14) or the “market value of the interest” (T 443.7) and, hypothetically, that if a 4.5% rate had been adopted by another valuer that would probably be “[the valuer] considering that there would be a higher return available to the person receiving the money” (T 442.45). (Pausing here, I note that a 4.5% rate was adopted in the Lonergan Edwards report – [157] and see the summary of those reports from [175]ff below.)

29. The first defendant, in his closing submissions on the re-opened hearing, opposed the evidence from Ms Bateman as to the appropriate discount rate to be adopted, on the basis that no reason had been given as to why the process provided for in the orders made in May 2018 was not followed but that objection was not pressed orally. The May 2018 orders amended the letter of instruction in the form proposed by the first defendant to allow for alternative assumptions as to the rent to be payable for the subject properties in accordance with the expert evidence of the real estate valuers to be appointed by the respective parties in accordance with the orders (see 7(b) of the letter of instruction); and to allow for the alternatives of a calculation by reference to forensic tables as proposed by the first defendant or a calculation by reference to any expert actuarial evidence relied upon by the plaintiffs (see 7(c) of the letter of instruction). Ultimately, however, the question of the appropriate discount rate was treated as a matter for submission.

30. Ms Bateman accepted that she had effectively adopted a balance sheet valuation approach for E Co (T 446.1). Asked by Senior Counsel for the plaintiffs to assume various matters (namely, that the stock of cattle for E Co is now 50% of what it was for the financial year ending 2017; that there were increased sales of cattle to meet legal expenses of the proceedings; that the properties on which E Co conducts the farming business require some capital works to be undertaken; that there will need to be a level of expenditure or some “inputs”, such as fertilizer, to improve the pasture and measures taken for blackberry control, to bring the properties back to the condition they might have been in sometime prior to 2015-2017; and that it might take three to five years in order to get stock levels, by natural increase, back to the sorts of levels in which they were in the past – see T 443.17-444.34), and then asked as to how those matters factored into the methods of valuation (T 444.36), Ms Bateman’s response (from T 444.42) was as follows:

A.   Okay, so we’re talking about this ‑ what I’ve done is basically 18 months old so there is stock value that is different than even the stock value ‑ the 2,012 or however many cattle they had on hand at 2017, so you’d be looking at the change in the net assets being whatever the new cattle amounts are.  The fact that there is more expenditure to be incurred to get the property up to a certain level, that would really be ‑ I would expect to be in the value of the property because it’s an expense of the company, the company will have to pay that, so it’s, I suppose, a forward expense that’s known or should be known, it’s able to be calculated but wouldn’t form normally a part of a normal balance sheet of a set of accounts, it can be a contingent expense that’s going to be incurred but that would actually make the profit situation much worse because, clearly, the expenses of getting the pasture and the land up to its needed position is an expense that will be written off throughout the years.  So, I mean, you can value it but all it does is ‑ I mean, you can value it at a point in time, so if you’re saying, in 2018, the value’s different to this because the cattle is valued at a different amount—

Q.     Yes?

A.     Fine, can do that, you’re saying that the property needs to have $300,000 worth of expenses to put it back into a position, that’s really the value of the property but it’s calculable.

Q.     When you say it’s the value of the property, you’re drawing a distinction between the landlord and the operating company who’s the lessee?

A.     Mm.

Q.     If you assume there’s no difference?

A.     Yeah, well, it’s just ‑ if I was the landlord—

Q.    Making that assumption?

A.     Yeah, if I’m the landlord, I’m operating the business too so the expenses just – it’s just not normal to – it’s normal but you look at your property and say, “Look, it’s worth $1 million but not it’s really only worth $950,000 because it’s really in a poor condition.”

Q.     … what tools we need so that we can then conceptually take those tools and apply them to the facts when we know them to value [E Co]?

A.     Being quite honest, I would take it off the value of the land, that’s – it’s like any sort of business, I’m just trying to conceptualise it into any sort of business, you’ve got a value that’s not quite right because the land or the farm, it’s not really worth quite that much, it’s worth a little bit less because you’ve got to pay out something to bring back into a position, you need to fix up the fences, I don’t know what it is you’re talking about but you need to expend some capital to put it into a position that might make it the $17 million or whatever dollars the property is valued at.  It’s more of a property issue then, I would think.  Of course, for profit and loss, it’s going to be ‑ if I’ve got to expend 100, 200 grand each year into the next couple of years, my profits are going to be very poor.

40. Ms Bateman accepted that a balance sheet valuation approach was essentially a winding-up approach to assessment (T 446.4) – in effect, valuing the first defendant’s shares as 25% of the value of the respective companies (as I noted earlier, in her report she said that she was valuing the companies on a going concern basis – see [9] of her report; and that the fair market valuation concept did not assume that the business would be sold – see [10] of her report). In response to some questions from me, Ms Bateman said that, if one approached the matter on a compulsory purchase order basis, there might need to be some adjustment to reflect that (see from T 447.5):

A.     Sorry, I’m selling to somebody today, based on what it is, you know, it’s the net asset value.  I know the property’s worth a million dollars, I know the business is worth the cattle and the other things and I probably know that I have to spend $300,000 to get it up to the next level, the person buying the business.

Q.     Yes.  So if you know that you’re going to have a known capital expenditure you would expect that a willing but not anxious purchaser would be paying somewhat less to take that into account?

A.     Yes, exactly.

Q.     And a willing but not anxious vendor would assume that they would have to take that into account in lowering the price to meet the purchaser’s expectations?

A.     That’s right.

Q.     And that’s how you would adjust for that on a compulsory purchase order basis?

A.     Yes.

41. Taken back to that issue by Senior Counsel for the first defendant, there was the following exchange (from T 448.50):

Q.     The question I had for you, madam, was you were indicating that when [you] were being asked about the impact of capital expenses, and I don’t want to query your conclusion on that, but is it relevantly, if you were to take into account if you were a purchaser and you were taking into account needed capital expenditure, would it also at the same time be relevant for the purchaser in the method of valuation that might be relevant to consider the increased productivity or the increased value of the product being made as a result of that capital expenditure?

A.     Look, you have to make an educated decision based on if you know you’ve got to spend another couple of hundred thousand a year or whatever, is it worthwhile me operating this business, and that’s the bottom line, that the business comes to a point that it’s not a viable business anymore.

42. In essence, Ms Bateman’s opinion was that the value of the business could be no less than the net asset value of the business. She said that the rent had been factored into the balance sheet assessment approach (T 447.31); that she had probably assumed that cattle sales were normal in the years in question (T 447.48); and (from T 448.8) that:

A.     Okay, when people buy businesses, you know, when somebody’s buying something, so there can be no less value than what the value of the assets are.  The value of the assets are what’s on the balance sheet, adjusted for proper true values of assets and liabilities.

Q.     Yes, so that if you’re looking at the assets on the balance sheet adjusted for the proper true value, would you not take into account the amount of stock that there is today irrespective of how it got to be that amount?

A.     Exactly and that’s how I would look at it today, when I’m buying it I would look at that.  Now, is the business valuable, maybe nobody wants to buy it, because the true value of the business might be negative, you know ‑ sorry, not the value of the business, the value of the business can be no less than the net asset value, we’ve already decided that, you know, so the net asset value has to be the value of the business, but I may not actually want to run the farm, I might just sell off the cattle because I can get $1,000 a head for the cattle and I can see all that off, but the farm itself might actually not be truly viable if the expenditure is so high that I can’t make a profit, then it’s not valuable, I don’t want to keep using it, I don’t want to keep doing it.  So that’s the other side of it, what’s the ‑ it can be worth no less than the net asset value and maybe it’s got ‑ the farm itself has no value other than the cattle and you sell that off if you buy it, but if I’ve got to pay 570,000 a year in rent and I’m not going to make enough profit to do so, then I won’t do so, I won’t continue. [my emphasis]

43. With no disrespect at all to Ms Bateman, who I considered to be an objective and careful witness who listened attentively to the questions and gave considered responses, and whose evidence I have no difficulty accepting, the proposition that a purchaser would not be likely to buy a farming business if the rent for the property on which the business was to be conducted was likely to be so high that no profit could be made therefrom seems to me to be self-evident as a matter of common sense (as Ms Bateman herself seems to have considered), at least unless there were some other reason for the purchaser to acquire what on that scenario would be assumed to be a property for a loss-making business. This highlights the difficulty I will come to with the evidence from the respective real estate valuers as to the likely market rent for the properties (namely, that each appears to have given weight largely to one side of the equation – the lessor’s assumed wish to maximise investment returns or the lessee’s assumed wish to conduct farming operations at a profit); although at least in the case of Mr Tremain, he had regard to some historical evidence of expenditure on outgoings, whereas Mr Donoghue’s opinion as to investment return was based on no more than his generally stated opinion referable to what he considered to be “industry standard”.

44. What I take from Ms Bateman’s evidence, which I broadly accept, is that the value of the shares held by the first defendant in E Co and EM Co, on a balance sheet assessment approach, is a negative amount (or, at best, in relation to EM Co might be a small amount if the shares held by it in R Co have a small positive value by reference to the underlying market value of the investment properties held by that holding company). I also found helpful her explanation as to the easiest methodology by which to calculate the net present value of whatever might be the figure to be adopted as the notional future rent for the balance of the first defendant’s life expectancy, though I propose to leave those final calculations to the parties. Relevantly, I did not understand Ms Bateman to cavil with the proposition that the value to be placed on a minority shareholding in a private company would be discounted to reflect the lack of control on the part of the shareholder (which I consider would be relevant if one were to be valuing the first defendant’s shares in E Co on a compulsory purchase order basis).

Land Valuation evidence – Joint Valuation Report dated 22 October 2018

45. As adverted to above, expert valuation evidence was called from two real estate valuers: Mr Martin Tremain (called by the plaintiffs) and Mr Thomas Donoghue (called by the first defendant). Each prepared an individual report and, after a conclave, a Joint Valuation Report dated 22 October 2018 was prepared and signed by each of them.

46. In their Joint Valuation Report, the valuers agreed that: the market value for the properties in 2018 was $20,000,000; and the gross market rent for the properties in 2018 was to be calculated as 3% of the capital value (being $600,000) rising at 2% per annum thereafter.

47. Where the two valuers were not agreed was as to the calculation of “net” market rent (i.e., the gross market rent less outgoings).

48. Mr Donoghue (who the plaintiffs note was not provided with the reports of the expert agronomist, Mr Francis, or the expert financial analysts, Mr Lonergan and Dr Chu (see below at [100]ff and [160]ff respectively), nor with information as to the prior financial performance of the E Co farming business) adopted a methodology which valued net market rent at 2.5% of the capital value of the subject properties and produced a future net rental of $5,915,755.

49. Mr Tremain, on the other hand, was of the view that it was possible to have regard to comparable leases to determine the gross market rent, though he also acknowledged that “the apportionment of gross rental in terms of rental and apportionment of outgoings can vary considerably” (see Mr Tremain’s report at [16.4]). Mr Tremain had regard to the actual outgoings paid in respect of the properties (see his 14 August 2018 report at [15.1]) and opined that the indicative net rental in respect of the subject properties was $166,245 for the period 2018-2022 and $185,611 for the period 2022-2026 (see Mr Tremain’s report at [17.10]). The plaintiffs note that, included in Mr Tremain’s costings, are amounts for fertilizer and pasture improvement (see Mr Tremain’s report at [15.1]), which have not been undertaken in recent years (the plaintiffs’ evidence being that the reason for this is a combination of drought and these proceedings).

50. Both Mr Donoghue and Mr Tremain expressed views as to the carrying capacity of the properties and the impact of the current drought (see Mr Donoghue’s report at [4.1]; [4.3]; Mr Tremain’s report at [12.2]; [15.1]). It is not necessary to dwell on those aspects of their reports.

51. Unfortunately, it was not possible for the two real estate valuers to give evidence concurrently, which obviously meant that (unlike the position with the tax experts) there was no opportunity for the first of the experts to be cross-examined, Mr Tremain, to comment on what Mr Donoghue said when he was later cross-examined.

• Mr Tremain

52. Mr Tremain (the plaintiffs’ expert) was cross-examined on 21 November 2018. Relevantly (as would seem to me unsurprising), he accepted that it was a matter of negotiation between lessor and lessee as to the respective responsibilities between them in relation to outgoings (T 266.44). He also accepted (again surely a matter of common sense) that, from a lessor’s perspective, the lessor would be trying to achieve an acceptable rate of return on his capital investment in the land (see at T 266.49). (Equally, I might add, one would expect a lessee of agricultural or grazing land to be seeking to obtain a rental that would permit an acceptable profit from the operation of the farming business, assuming that the property was to be rented for the purposes of such a business and not simply as a residence.)

53. Mr Tremain was cross-examined as to the comparables referred to in his report as comparable market indicators (T 267.5ff), from which cross-examination it was apparent that some of the information was derived from the selling agent for the particular property in question and some was based on his understanding of the apportionment as between lessor and lessee in relation to the outgoings and operational costs – evidence that was not before me and that it is impossible for me here to test. His evidence was that agricultural leases were “often not even produced” (T 269.13) and may not be in writing; and that, in the region where the properties in this case are situated, 4.5% would be the upper end of the range of gross rent figures to determine the applicable rent (T 269.25). Mr Tremain confirmed that he had been instructed to assume that all outgoings would be paid from the gross rent (T 270.22; 26; 29).

54. Asked by Senior Counsel for the first defendant whether it was consistent with his experience that one way of dealing with the issue of outgoings, and who bears the other costs associated with the land, is that the higher the percentage applied for the gross rent the more the outgoings that are borne by the landlord, Mr Tremain gave the following evidence (T 269.31ff):

A.     Agricultural leases are so variable.  I’m not trying to miss your question, by the way, but they all come down to a negotiation on lease.  Grazing leases in particular compared to a cropping farming lease, the conditions are a lot more straightforward.  With grazing leases, regrettably, they can be very complex and on a one by one and often they can have a management plan and people will meet each year to discuss a new arrangement but, yeah, I couldn’t agree there’s a fixture between 2 and 4% in terms of waiting about going.  It depends on the deal on the property at the time.

Q.     Perhaps I put it too emphatically.  Would you agree that one of the methods for setting a lease amount between a landlord and a tenant that’s adopted in the rural grazing industry, if I can use that word, is to say pay the X% which might be on the lower part of the range and, in consideration for that, because it’s lower than it might otherwise be, the tenant will bear some of the outgoings?

A.     Yeah, they traditionally work on the gross and work backwards, so yep, if it’s 3% and the outgoings are X and the net is the difference, it’s traditionally based on gross and then work back to the net, as opposed to a net build up to a gross.

55. The difference between Mr Tremain’s figure for net rent and that of Mr Donoghue, Mr Tremain explained, was that he had adopted a 3% gross rent and effectively worked “backwards”, deriving a net rent from the gross rent less outgoings, whereas, he said, “Mr Donoghue has adopted 3% gross. Mr Donoghue has docked 2.5% net” (T 270.4).

56. Thus, the approach taken by Mr Tremain was: to work backwards from the gross market value of the properties (his opinion as to this value, before the conclave, being around $18,000,950); to adopt a 3% figure from that to arrive at gross market rent (around $570,000); and then to deduct from that all lease outgoings (of $403,000), but not all the costs of operating a farm, based on the financial statements in the 2018 year (see T 270.38ff); and then from the 2018 year to add an amount for a pasture improvement budget. As explained by Mr Tremain, the gross market rent of $570,000, on those numbers, would comprise the amount paid in cash by the tenant ($166,000) with the balance being the contribution to outgoings paid by the tenant (see T 272.15ff).

55. Mr Tremain accepted that the return on capital for the lessor on this scenario (i.e., of an indicative net rent of $166,000) would be 0.008% (assuming the numbers put to him in cross-examination were correct) (T 271.10) but did not accept that this would “almost certainly” be unacceptable for any landlord or landowner. Mr Tremain said (from T 272.1):

With the agricultural lease, as I touched a moment ago, they’re based primarily on a gross rent, which we have agreed, the capital we’ve agreed, we’ve agreed on a gross lease of 3%.  The biggest variable factor is the contribution of outgoings, which has a direct impact back to our net rental.  So we have to look at actuals, and we need to make a judgment on a portion of outgoings.  Probably our most important thing is to make sure that we have a lease that is equitable, that tenant can service, and a landlord is also happy with.  So we have, it’s got to be about sustainability of a rent, a lease. [my emphasis]

58. Later pressed on that issue, Mr Tremain said that he considered a net return to the landlord of $166,000 for the 2018 year was realistic in circumstances where “we’ve come through a large property increase, returns haven’t been necessarily commensurate to capital gain and this property does require significant inputs” (T 276.35).

59. Mr Tremain did not accept that if there was a big capital requirement for inputs it would make sense for the burden of costs to fall on the person who was going to benefit therefrom (i.e., it was said, the tenant) (T 272.49-273.27). He accepted the proposition that one of the reasons a landlord would make contributions to the outgoings would be because ultimately the landlord would get some benefit from them in terms of a “well maintained” property (T 285.27; 39). (Pausing here, this immediately illustrates the difficulty of assuming that a landlord would accept the burden of payment of outgoings in a situation where the landlord is holding the property in question as constructive trustee for the tenant (or persons associated with the tenant) and will not himself or herself obtain any benefit from the maintenance of the property; and, conversely, the difficulty of proceeding on the hypothesis that the landlord would be in a position to seek market rent from the property so as to profit from the lease.)

60. Mr Tremain’s evidence was that he was not commonly involved in negotiations for agricultural leases between landlords and tenants (T 274.5), saying that “[w]e see them, and we value properties with leases, we don’t sell or negotiate leases” (T 274.12). Mr Tremain also gave evidence that historically one did not see much beyond three to four year leases of grazing properties (see T 283.2).

61. Mr Tremain accepted that Mr Donoghue had said to him words to the effect that “you wouldn’t lease a rural property and get that return” in relation to Mr Tremain’s indicative net rental but his account of the conversation was as follows (from T 277.27):

A.     The conversation went in regard, in terms of assessing the outgoings and we put less credence on a percentage net return as opposed to a percentage based on a gross less outgoings, and that’s primarily how our report was based.  As opposed to Mr Donoghue took the view of an estimated net profit which we obviously, after the joint report, was the factor that we didn’t agree on because a net component added to the outgoings took the lease round to an unequitable, unsustainable level.

Q.     Could you repeat that for me?

A.     We couldn’t agree on a fixed net return on the property because ‑ and I use the example, if it was 600,000 Mr Donoghue has applied a 500,000 net return and what, in my view ‑ and some of the independent reports we’ve been provided with is that if you add 500,000 to the outgoings, the total gross rent then becomes inequitable and the tenant cannot service.

…

A.     … at the end of the day, a desired net may not be achievable by virtue of the product capability of the property.  So we have to make sure that our rent is kept at a sustainable equitable level.

62. Mr Tremain confirmed that the area of the disagreement with Mr Donoghue was as to the outgoings (from T 280.1):

A.     It was very difficult.  We agreed, ended up agreeing, on market value and gross lease, as we can see in the independent report.  Our biggest stumbling block was that we were provided, and had access to, financial data, plus including the ones we have adopted in the report, where Mr Donoghue didn’t have access to those, or provided with them, so we stumbled to discuss them because we looked at a different approach.  I had actuals, Mr Donoghue didn’t have any.

Q.     So you are approaching it on the basis that you had some financial information that showed the level of outgoings historically, and who had paid them?

A.     True.

Q.     And you applied that going forward?

A.     Plus, plus a little bit, plus the pasture and improvement.

Q.     Which is where you got to 403,000?

A.     Yep, and Mr Donoghue didn’t have those, so he took the practice of adopting an estimated 0.5% outgoings, which was $100,000, to derive a net of $500,000.

Q.     Starting from the point of a fixed‑‑

A.     He started from a gross of 600, which was a 3% gross, and then worked backwards on 0.5% outgoings to derive, well I believe that’s how he’s done it, or in reverse he’s adopted 2.5% net, which obviously means there’s 0.5% of market value in outgoings.

63. For the first defendant, it is emphasised that the approach adopted by Mr Tremain (of deducting all outgoings from the estimated gross market rental) was one that was based on instructions.

• Mr Donoghue

64. Mr Donoghue was cross-examined on 10 December 2018.

65. In his report of 14 August 2018, he had valued the properties as at 1 July 2018 as $21,080,000 and had given his opinion as to a rental value of $527,000 for that year, a percentage of 2.5% of the value of the properties. He accepted: that his process of reasoning was to assess the value of the properties as a freehold concern and then to consider an appropriate percentage rental to the owner of the properties in order to discern an appropriate market rental value (T 496.7); that his opinion was that 2.5% was the appropriate percentage (T 496.18); and that this was simply an exercise of judgment on his part (T 496.22). He said that this was “industry standard” in his view (T 496.36).

66. Mr Donoghue did not refer in his report to any “industry standard” as such (simply to a percentage range that he said in the witness box was adopted in rural leases); nor did he refer to any source materials or documentation in support of his contention that 2.5% was “industry standard”. The unsatisfactory nature of his evidence on this issue can be gleaned from the following exchanges in cross-examination by Senior Counsel for the plaintiffs (from T 497.4ff):

Q.   …  You have identified pages 91 and 92.  Now, is there any reference on those pages to “industry standard”?

A.     Look, it touches on it in terms of the percentage range adopted in rural leases.

Q.     Well, I just want to make sure we’re clear about it.  You said that you were referring to an “industry standard.”

A.     Grazing rates tend to be on the lower side, ranging from between 2.5 and 3.5.  I’m basing that on an industry standard.

Q.     But am I right in saying that nowhere in your report do the magic words “industry standard,” do you?

A.     Look, I can’t clarify it because I haven’t read over my report thoroughly today, so—

Q.     But if you were to put forward evidence about an industry standard, one would expect support from industry documentation, for example; correct?

A.     That’s correct.  And also from industry knowledge.  Like, I’ve leased properties myself.  We speak to many landholders that are leasing country.  I didn’t actually have any leases in that vicinity, therefore, I didn’t put any in.  I based it on an industry standard that I know myself.

Q.     But you haven’t‑‑

A.     As a professional, I’m aware of the percentage levels.

…

Q.     Nowhere in your report do you bring forward any evidence for the Court where you identify any industry standard, do you?

A.     Well, I just noted the last line on page 843.  It gives a percentage range, which I classify as industry standard.

Q.     Nowhere in your report do you put forward any evidence of an industry standard, do you?  Meaning by reference to source materials or documentation?

A.     No.  Other than my percentage range, no.

Q.     So from the terms of the Court assessing your opinion, you say 2.5% is industry standard.  Why?  Because I know.  That’s what it is; correct?

A.     Yes.

Q.     And you haven’t provided any other support for it?

A.     No, I haven’t.

Q.     So it’s based on your judgment?

A.     Yes.  Which I was asked to give. [my emphasis]

67. In response to a question by me as to what he meant by his reference to “industry standard” (when he said that there were “industry standards” in place), he said (from T 504.50):

A.     It’s my knowledge of leasing country myself, and knowing many people are currently leasing, and that’s – that’s my industry knowledge.

68. Pausing here, the difficulty I have in placing any reliance on Mr Donoghue’s opinion as to 2.5% being an “industry standard” is that nowhere in the report does Mr Donoghue explain the basis of his reasoning; i.e., the basis on which he formed the opinion that a 2.5% figure is standard within the industry (which is what I understand him to mean by “industry standard”). It is impossible for me to test Mr Donoghue’s assertion that, as a professional, he is aware of the percentage levels (irrespective of how many properties he may himself have leased over the years – as to which there was, in any event, no evidence).

69. Mr Donoghue’s report contained a number of other generalisations said by him to be based on his industry knowledge as a professional in the field (see T 503) without reference to any particular reasoning or to any particular examples.

70. Mr Donoghue was cross-examined as to his knowledge of the expert witness code of conduct (see T 500) the content of which he could not recall off the top of his head but which he seemed at one stage to conflate with the code of conduct to which he says he always adheres when undertaking valuations (though later accepting that this was a different code of conduct).

71. Asked by Senior Counsel for the first defendant as to his statement that “[g]enerally long-term rural lease agreements are calculated on the basis that the lessee being responsible for all outgoings”, he said (from T 502.28):

A.     Can I just speak freely for a minute?  Rural leases aren’t a standard lease like a commercial or industrial lease.  Many times we have outgoings in and out.  The lessee paying all or some rates.  There is no standard set procedure are rural leases, and the majority of them aren’t registered on title, which makes it very difficult to source.  It’s only through your own experience and negotiation with agents and the people that negotiate these leases that you’re able to ascertain this information.  Within s 16(b)(iii), it does ask what we consider relevant, and that’s what I considered it [sic] relevant at the time.  I don’t know whether you wanted it spelled out over three pages, but I put in what I thought which ‑ the question was asking.

Q.     Well, 16(b)(iii), directing your attention to the expenses associated with land ordinarily borne by, on the one hand, the lesser and, on the other hand, the lessee in leasing arrangements of this type.  Now, in the answer you just gave a moment ago, you’ve given an answer to that.  You’ve said it depends on the circumstances; correct?

A.    Correct.

Q.     It can change‑‑

A.     Yep.  Everyone is different.

Q.     Everyone is different.  And so in effect your answer to that question is there’s no standard position as to who bears what expenses; correct?

A.     Correct.

Q.     But we don’t see that anywhere in your report, do we?

A.     It was asking for my interpretation of the ‑ of the ‑ the question was asking me to answer the question, and I ‑ I think I spell it out there and say that there aren’t any, and I’d have to find the exact paragraph, but there’s no standard set leasing clause for rural land.

72. Mr Donoghue said that, in hindsight, he should have put some evidence in the report but then said that there was not evidence “relevant or comparable” to this property (T 504.31). He disagreed that the Court could not make an assessment of the weight to give to his evidence (from T 504.36):

A.     Look, I do disagree because I do have a good handle on the rural market, and I think you’ll find that the industry standards are there and in place, and if you’re even aligned with what Martin Tremain completed in his report, we aren’t too far in gross terms percentage rate ‑ even in his ranges, we are very similar in terms of his overall percentage rates.  So I don’t think that I’m off the mark.  If anything, I probably should have put some evidence in that was not similar country but to provide a level of methodology that you could understand.

73. As to whether his opinion as to the net rental would differ if the situation were that the land was held on trust by the owner for lessee beneficiaries (and who will be meeting all the expenditure on the properties going forward from the time of inception of the trust) (see T 508.22), and after some confusion as to whether the reference to a “trust” was a reference to a relationship of love and affection between lessor and lessee (see T 508.36ff), Mr Donoghue’s position was that “his rates” would be the same or potentially higher (see T 509). Pausing here, the logic whereby a tenant who would eventually obtain the property would pay a higher net rental to a trustee who had no effective legal rights with respect to the property was not explained and was certainly not discernible from Mr Donoghue’s answers in cross-examination. It seemed to me that this answer was one that might colloquially be described as “off the top of his head”, Mr Donoghue’s only explanation being that (from T 510.15):

A.     Because that’s where the market would fit in my opinion.

Q.     When you say, “That’s where the market would fit.”  What do you mean by that?

A.     That would be an adopted percentage return that an owner would be wanting to receive – that’s not [sic; but my notes of his evidence were that he said that’s “my”] professional opinion.  I can’t explain it any other way.

…

Q.     So what’s your process of reasoning in that situation?

A.     Look, I’d have to look at the situation in isolation.

74. From my observation, and with no criticism in this respect of Mr Donoghue, who is not a lawyer and for whom this line of questioning may have been unexpected, Mr Donoghue exhibited no real understanding of the concept of a trust or of the difference between a trustee and a beneficiary (or beneficiaries), or as to what is meant by a reversionary interest. That is evident from the following responses to my questions(from T 512.12):

Q.   As I understand your position, you have approached consideration of the rental issue by reference to what an owner of the property would want to get back at a rate of return.

A.   That’s correct.

Q.     The assumptions that Mr McInerney has been asking you to make in effect go to the proposition:  how would your answer change, if at all, if the owner of the property had no beneficial interest in the property?  So that the owner of the property is holding the title to the property for somebody else’s benefit entirely?

A.     I would need time to think about it, but I do believe the rent would be higher in that regard.

Q.     Even in circumstances where the owner will have no benefit from that higher rent if the owner‑‑

A.     I would ‑ I would need more time to give you an answer on that.  I can’t give you a conclusive “Yes” or “No” on that.

75. As to the difference of opinion in relation to net rental values, Mr Donoghue’s position was: that he was not working on the “actuals” (i.e., actual outgoings); that he considered that they were “excessive in terms of costings based on – they just seemed high in my – in my industry experience, being an ex-farmer”; and that his feeling was that they were “high” (see T 516). He could not answer one way or the other how his view would change if he factored in the actual outgoings but he said that he considered that if he were to do so “you would have to adopt a much higher gross rate to account for the discount in the costs associated to the lessee” and that it was uneconomical (T 517.28). He could not see any sense in an asset of that value being leased “at that low amount” and he was of the view that the landlord should derive a return of 2.5% (T 517.31).

76. As to how the figure of 3% of gross rental had been agreed upon by him, Mr Donoghue’s evidence was that net rental should be 2.5% and he had adopted a gross rental percentage of 3% of overall value on the basis that the landlord would be paying $100,000 a year in expenditure (see T 519.27).

77. The plaintiffs submit (and I agree) that it is readily apparent from the cross-examination of Mr Donoghue that: there is no general principle which applies to agricultural leases (T 502.26- 503.1); he did not have regard to the actual expenses of the E Co farming business in formulating his opinion (T 513.16-31); his choice of 2.5% was ultimately a normative expression of the return that he “felt” (see T 516.46-517.11) a landlord “should” obtain from a lease of the properties (T 503.9-17, 513.33-37); and he was not able to provide a reasoned, logical justification for his conclusion other than that was his opinion (T 496.9-22, 497.48-498.5, 519.34-44). (As I understand it the plaintiffs also point to the evidence given by Mr Donoghue as to his understanding of the expert witness code of conduct, as undermining the reliability of his evidence.) The plaintiffs submit that no reliance can be placed on the opinions of Mr Donoghue insofar as they contradict those of Mr Tremain.

• My assessment of the expert valuation evidence

78. I regarded Mr Tremain as the more reliable expert, in the sense that he had at least applied his mind to a consideration of what might be regarded as comparable leases (although there was little by reference to which one might test the comparisons) and the basis on which he explained the methodology by which a net rent is traditionally struck for agricultural leases made sense. I accept that he had been instructed to work on actual outgoings (and hence that he was not expressing an opinion as to the likely outgoings in the present case, other than by reference to the agronomist (Mr Francis)’s report as to the significant inputs that would be required in relation to the properties).

79. Mr Donoghue, on the other hand, seems to have regarded the process of giving expert evidence as one in which all that was sought was his personal opinion (“as a professional”) without the need to disclose any reasoning process by which he had reached or held that opinion. To the extent that Mr Donoghue invoked “industry standards”, it was clear from his evidence in cross-examination that all he was doing was expressing a personally-held opinion as to what he considers is generally the practice in relation to agricultural leases, not any particular industry standard as such (in the sense, say, of an accounting standard). His approach seemed to be that he had been asked to give his opinion; he had given his opinion; and that was that. He displayed a degree of truculence when tested in the witness box as to the basis for that opinion; seemingly taking issue with the temerity of anyone who sought to challenge his stated opinion and resorting to broad brush statements of opinion, without any apparent consideration of the question being asked (when, for example, he proffered the opinion as to how his opinion would change, if at all, in the trust scenario there put to him). I do not share Mr Donoghue’s confidence as to my ability properly to assess the weight to be placed on what is, in essence, no more than an assertion by him that I should accept his opinion because he has a “good handle on the rural market” – see [72] above.

644. The criticism made by the plaintiffs as to the course that I had proposed (insofar as it attempted flexibly to craft relief that would address the respective parties’ positions) was that it followed the approach that seems broadly to be adopted in the United Kingdom (and advocated in academic literature such as Professor Macfarlane’s text) and suggested a larger discretion than the principled approach to be adopted in this jurisdiction having regard to what was said in Langman v Handover, Bofinger, and Giumelli. I accept that there is some force to that criticism (particularly in relation to the proposed Share Acquisition Condition but also in relation to the Market Rent and Book Debts Conditions, both of which assume that the first defendant would be entitled to profit from the holding of the properties and the shares), though the plaintiffs themselves (in their 31 October 2018 submissions) appeared to consider that the first defendant, albeit as constructive trustee, might have a legitimate expectation to “real benefits” or a share of the profits of the business at least after some kind of “grace period”. However, if such conditions are not imposed then in my view the question of proportionality becomes a live issue.

645. What clearly emerged from the evidence at the re-opened hearing was the significance of the issue as to the potential CGT consequences flowing from the final relief to be granted (an issue about which there was no evidence at the principal hearing). It was not suggested by the plaintiffs that this was an irrelevant consideration to take into account in determining the final relief in this matter. Indeed, the plaintiffs in their submissions relied upon English authority as to the relevance of the likely effect of taxation when assessing the relief to be given on a proprietary estoppel claim (referring to Jennings v Rice [2003] 1 P & CR 100 at [52] per Robert Walker LJ; and academic commentary by Professor B Macfarlane, The Law of Proprietary Estoppel, Oxford University Press, 2014, at [9.62]).

646. The difficulty which this poses for me in the present case is that there is a real prospect that a declaration recognising the existence of a constructive trust over the properties from a particular date (whether that be 27 June 2013 or, as I consider to be the appropriate date, 1 July 2003) may have significant CGT consequences, irrespective of whether there is also an order providing for the acceleration of the sons’ interests or expectations in relation to the farms. The argument by the plaintiffs in this regard seems to be (and I am here only paraphrasing the effect of their submissions) that the first defendant caused the problem and he should therefore live with the consequences (or, to use a colloquial expression, that having made his bed he must lie in it). I am not, however, persuaded that the spectre of CGT consequences can be dismissed so readily. This has been the aspect of the matter that, since the re-opened hearing, has given me the most pause in the determination as to what relief should finally be granted.

647. Subject to one qualification, I remain of the view expressed in the principal judgment that orders should be made for the acceleration of the sons’ interests or expectations in relation to the properties. That qualification is this. While I accept the plaintiffs’ submissions that transfer of legal title to the properties should not be subject to a Market Rent Condition in respect of the land, and that this in practical terms would be inconsistent with the basis on which the lease agreement was struck in the context of the joint farming business endeavour in which the first defendant and the plaintiffs were participating, I am troubled by the likelihood that a declaration of a constructive trust over the properties (whether or not coupled with an order for the acceleration of the beneficial interests under that constructive trust) will give rise to a significant CGT liability on the part of the first defendant.

648. I consider that this makes the relief sought by the plaintiffs (on either Pathway A or Pathway B; or, indeed, a combination of the two) sufficiently disproportionate, or out of all proportion, to the detriment or prejudice the plaintiffs will suffer (from the first defendant’s decision to resile from the expectations he encouraged in his sons that he would hold the farms during his lifetime to be used for the purposes of the family business then to be entered into with his sons and that the farms would be left to them on his death), in the sense considered in Delaforce (at [4]) and Priestley (at [164], to which I referred at [1187] and [1189] of the principal judgment), to require a departure from the strict making good of the plaintiffs’ expectations on either of those “pathways”. That is because, even taking into account the possibility that the first defendant may have access to a source of funds hitherto not disclosed by him, the very making of a declaration of constructive trust over all of the properties (whether the sons’ beneficial interest therein might then be accelerated or not) has the potential to give rise to a not insignificant CGT liability (and probably interest, if not also penalties) at the same time as none of the said properties would on that hypothesis be available to the first defendant to offset any part of that liability.

649. In those circumstances, I have concluded that the appropriate relief as to the farming properties is an amalgamation of each of the so-called pathways put forward by the respective parties: namely, that there be a declaration as to the existence of a constructive trust as from July 2003 over each of the farming properties the subject of the dispute, with the exception of Property No 11 (and, but only as to the date of the constructive trust having arisen, Property No 10); that there be an order for the transfer to the sons of the legal title to the said properties (i.e., with the exception of Property No 11); that there be an order for the payment to the first defendant of an amount representing the net present value of a notional rent for the now remaining nine years of the first defendant’s life expectancy; that Property No 11 be sold; and for the payment to the sons, as equitable compensation in respect of their expectations in relation to Property No 11, such amount, if any, as remains out of the net proceeds of sale of that property after any payment by the first defendant out of those proceeds of sale to satisfy any CGT liability that arises from the findings I have made and/or the final orders that are to be made in accordance with these reasons.

650. I accept that the making of such an order in relation to Property No 11 means that the sons will in effect be contributing to the payment of any CGT liability (or, if that liability be no more than the proceeds of sale of Property No 11, in effect meeting that liability). However, in all the circumstances of the case (and notwithstanding the fact that it was the first defendant’s decision to resile from the relevant expectation in relation to the properties that precipitated the findings that are likely to lead to that CGT liability), I consider that this is necessary in order to ensure that the making good of the sons’ expectations (their prima facie entitlement to relief) does not operate in a way that is inequitably harsh to the first defendant. It also seems to me not inconsistent with the expectation itself that one of the properties the subject of the proposed joint farming activity should be available to meet a liability incurred in relation to the recognition of the sons’ beneficial interest in the remaining properties (noting that the relevant expectation was never in terms of the holding of the specific farms as such – it being contemplated that there might be a sale or acquisition of one or more properties over which the farming business was to be conducted during in the course of the first defendant’s lifetime, albeit after consultation with the sons).

651. Another course to remove the disproportion that I consider would otherwise arise between detriment and relief would have been to adopt the first defendant’s alternative suggestion, namely that there be a transfer only of Property No 4 to A (with or without some additional equitable compensation) and the payment of equitable compensation to B and C. However, that form of relief would not in my view adequately make good the expectation of the sons that the properties would be held, and made available for the joint farming business, during the first defendant’s lifetime and then would pass to them on their father’s death; and would potentially give rise to issues as to how A’s expectation in relation to the whole of the properties would be measured against B and C’s expectations in relation thereto, for the purposes of assessing the amount of equitable compensation necessary to make good those expectations. Nor was there any principled basis put forward as to the calculation of any such equitable compensation.

652. So that there is no doubt, I emphasise that I consider that it is necessary to carve Property No 11 out of the declaration and relief to be granted (and for it to be made available for the payment of part or all of any CGT liability) not because of any obligation on the part of the plaintiffs to “do equity” but because I consider that otherwise the relief I propose to grant would be wholly disproportionate, or out of all proportion, to the detriment suffered by the plaintiffs and hence the equity which is to be made good. The likelihood is that there will be a CGT liability arising from the recognition of the existence of a constructive trust over the remaining properties (other than Property No 10) as from July 2003 (whether that be a CGT event E1 or CGT event A1; and whether that event is determined by the ATO to have occurred in July 2003 or, later, say on 27 July 2013).

653. I consider it appropriate for Property No 11 to be carved out of the relief because Property No 11 has not historically been regarded by the parties as essential for the operation of the farming business (it being a property that the sons conceded it had been contemplated at one stage might be sold). Property No 11 represents roughly 16% in terms of overall acreage of the properties (1,625.37ha out of the aggregate holding 9,893.97ha (adopting Mr Tremain’s measurements (cf Mr Donoghue who stated 1,625.35 ha and 9,899.30ha, respectively)) and between 8-11% in terms of value (it being valued at about $1.6 million by Mr Tremain and $2.29 million by Mr Donaghue), i.e., 11% of value ($2.29 million out of $21.08 million as per Mr Donaghue) or 8% ($1.6 million out of $18.95 million as per Mr Tremain). It is the property the sale of which, were it necessary, the sons would least complain about (although I do not by this suggest that they will be at all happy with, or likely to accept, such an outcome).

654. I also remain of the view (which the plaintiffs do not challenge other than as to its calculation) that there should be compensation for the loss of the future income stream from the properties if the expectation is accelerated. I accept that it should not be calculated on a market rent basis for the reasons put forward by the plaintiffs but I do not consider that it should be limited to the amount the plaintiff suggests. As to the amount of the notional rent, I note that the plaintiffs in oral submissions acknowledged that it would be equitable to permit the first defendant a sum to support him for the balance of his life, and that they have advocated for this amount to be informed by the basis on which, historically, rent for the properties had been set and agreed between the parties (and that, in at least some of their written submissions appeared to consider that the first defendant might obtain “real benefits” to some extent from the business to be operated on the properties).

655. The rent, as at the time of the purported termination of the lease, was $100,000 per annum, less rates and insurance to be borne by the first defendant. On the transfer of the properties, the plaintiffs will become liable for rates taxes insurance and other outgoings in respect of the properties (other than Property No 11, which I have concluded should be carved out of the relief to be granted to the plaintiffs). They will not have the benefit of the ongoing use of Property No 11 and will not be liable to pay any notional rent for that property.

656. Historically, the arrangement whereby rent was struck was as a percentage of the value of the leased property; but, more importantly, for present purposes, it was struck so as not to produce a taxable income for the first defendant. I infer that it was anticipated that the rent (and income from the farming operations) was at least intended (with whatever distributions from his family trust that the first defendant would at that stage receive) to maintain him during his lifetime. The first defendant is no longer a primary producer and is approaching the end of his life. The evidence at the principal hearing confirmed at the re-opened hearing was that the family trust distributions have now ceased and the first defendant’s evidence in the witness box, largely consistent with his bank statements and income tax returns, is that he does not now receive an income. I accept that there is a suspicion that he receives or is able to call upon income from other sources and that his evidence as to his financial position raises more questions than it answers in this respect. I have therefore not relied on that evidence in reaching the conclusions I have reached as to the question of proportionality of the final relief. Nevertheless, the fact remains that the expectation held by the sons included an expectation that the first defendant would benefit to some extent from the arrangement into which they were entering; and it might well be thought that it would not be inappropriate in that context for a notional rent to encompass some kind of buffer for contingencies that may arise towards the end of the first defendant’s life.

657. Balancing the fact that the lease would not include Property No 11 (and hence the area leased would be reduced by about 10%) and that on this scenario the first defendant would not be paying rates and insurance for the properties to be transferred to the sons, but also that the first defendant’s needs towards the end of his life are unknown (and that the plaintiffs at least at one stage contemplated that there might be “real benefits” after the expiry of a “grace period”), and approaching the matter in a broad brush way, I have concluded that the appropriate notional rent for the purposes of calculating the compensation payable for the lost future income stream would be a fixed $80,000 per annum without deduction for rates or insurance. Applying a discount rate of 3% (as Ms Bateman would do), the present value of that income stream over nine years would be in the order of $640,000; applying a discount rate of 4.5% (as Mr Lonergan would do) the figure would be in the order of $600,000 (on my rough calculations, which I do not suggest would meet actuarial standards). On the Lonergan Edwards’ calculations, either sum would be able to be met by E Co (or the sons) as a lump sum. That is particularly the case where it has been contemplated that there would be set-offs applicable in any event.

658. I have noted earlier Ms Bateman’s reason for adopting a 3% discount rate (that it reflects the likely risk rate for the return on money in the hands of the recipient). Mr Lonergan adopted 4.5% on the basis that the projected relevant payments would have been akin to E Co’s “debt-like fixed obligations” and applied the interest rate payable on long term agri-business loans” (see [157]; [150](a) of the first Lonergan Edwards report), referring to the fixed interest rates on a five year Agri-business interest only loan applied by NAB (4.45%) and CBA (4.55%).

659. In that regard, I consider that it is appropriate to adopt the discount rate put forward by Ms Bateman (as the joint expert); though I note there is little difference between the two outcomes. That is because it is not clear to me that the Agri-business interest only rate would be the most relevant to be adopted in circumstances where the first defendant is the recipient of the income stream; and because the approach adopted by Ms Bateman seemed in general to be a conservative one.

660. As to the position in relation to the first defendant’s shares, acceptance of the plaintiffs’ arguments on the re-opened hearing (and absent acceleration in relation to the shares) will logically leave the first defendant as a minority shareholder in both E Co and EM Co (giving rise to the possibility of further disputes, a matter seemingly of concern to the plaintiffs having regard to the submissions made on 31 October 2018 as to the shares falling into the hands of the first defendant’s solicitor and sister as executors of the first defendant’s estate – a problem which I had sought to pre-empt by the compulsory acquisition of the first defendant’s shares).

661. In the principal judgment (at [78]) I raised the question as to whether the expectation as to the benefit of the farming business extended to what was to happen on the death of the first defendant. At [78]-[79], I said:

I have also considered in this context the first defendant’s existing shareholdings in E Co and EM Co. The intention of the first defendant was that, subject to the uncommunicated success condition, his sons (and by extension their families) would obtain the benefit of the farming business conducted on the farms during his lifetime (see T 808). It is less clear what expectation there was (or that the first defendant understood his sons to have) as to the ownership of his interest in the companies on his death. I am of the view that it is implicit in what was understood by the first defendant to be his sons’ expectations in entering into the new family business that they would have the benefit of that family business going forward after his death. On that basis an order that the first defendant’s shares in E Co and EM Co be acquired by the sons (at a price to be determined by an independent valuation of the shares) would similarly be appropriate.

Moreover, to effect a clean break between the parties it seems to me that it would be necessary for the sons to buy out their father’s interest in E Co/EM Co. I have thus concluded that it would be appropriate, as a term of the relief to be granted under which the sons’ interest in the farms is to be accelerated, for the sons to acquire the first defendant’s shares in the companies at a value that represents the present worth of those shares (independently valued) calculated on the assumption that E Co is in a position to continue its farming operations on the properties but having regard to the requirement (to which I turn below) for E Co to pay to the first defendant the book value of the cattle transferred to it in 2003 and the advances made to it over the years (without interest). However, relief in those terms was not canvassed in oral submissions at the close of the hearing. In those circumstances I propose to seek further submissions on this aspect of the relief to be granted.

666. See also at [1225] of the principal judgment. While there was no pleaded expectation relating to the ownership of the business (through the shareholding of the respective companies), there was no pleading point taken on this issue by the first defendant and the only complaint by the plaintiffs (ironically, perhaps given their stance in relation to adherence by the first defendant to the pleaded case) was as to the proposition that there should be a buy out of the first defendant’s interest in the companies.

667. The plaintiffs have argued that there is no basis for an order for the buy out of the first defendant’s shares (though they seek an order for the transfer of those shares). In that regard, the plaintiffs argue that in Gillett v Holt part of the proprietary estoppel was directed not just to the land, but to the relevant companies which farmed the land. It is submitted that it was in that context, where there were company law suits also involved in the litigation, that in Gillett v Holt, the court came to deal with those as part of the orders that were made. It is submitted that, there (unlike the present case), the issue and part of the substratum of the facts in the case was that part of the nature of the disappointment of the expectation related not just to the land and the farming on the land, but the control of the companies and their management; and in effect the shares in the company formed part of the property the subject of the proprietary estoppel.

666. The plaintiffs submit that it might be a different circumstance if, in the present case, the first defendant had been the director or, effectively, the controller of E Co but the plaintiffs say that is not here the case (and it is submitted that the accounting and taxation advice in the latter part of 2002 made clear that there was a deliberate separation of the father from having a controlling position in the company). The plaintiffs nevertheless accepted in their 31 October 2018 submissions that the first defendant might have a legitimate expectation to a quarter of the profits of the business (after the grace period”) – see [66] of the submissions.

667. In the circumstances, I will make no order for the acceleration of the sons’ expectations in relation to the first defendant’s minority shareholding in the companies. I appreciate that that means a complete break is not possible but I do not consider it affects the relief to be granted in relation to the properties. (Had a compulsory purchase order been sought, and made, I would have been inclined to accept Ms Bateman’s evidence that the shares have a nil value, not least because even if adjustments of the kind that first defendant says should be made to the valuation in respect of E Co, on a compulsory purchase order there would need to be an appropriate discount to reflect the minority nature of the first defendant’s shareholding and his lack of control in relation to the company. However, the issue does not here arise given the objection by the plaintiffs to the conceptual basis on which any order for the purchase of the shares might be made.) I will, however, put in place a mechanism for the transfer of the shares on the first defendant’s death in an attempt to obviate disputes arising at that stage.

Conclusion as to the final orders

670. The above sets out my conclusions as to the principal relief necessary to make good the plaintiffs’ expectations: a declaration of constructive trust in favour of the sons – in the case of the properties (other than Property No 11) with effect from 1 July 2003, in the case of all of the properties (other than Property No 11) except Property No 10 and, in respect of Property No 10, with effect from the time of its acquisition, such trust being subject to the agreement for lease between the first defendant and E Co in respect of all the properties (other than Property No 11, which is to be sold in accordance with these orders); the acceleration of the sons’ beneficial interest in the said properties with an order for the transfer of the properties the subject of the constructive trust to the sons; an injunction to restrain the first defendant dealing with or entering the properties the subject of the agreement for lease; in the case of Property No 11, an order that it be sold (at public auction or by agreement with the sons) and out of the net proceeds of sale, after payment by the first defendant to satisfy any CGT liability that arises from the findings I have made and/or the final orders that are to be made in accordance with these reasons, payment of the balance by way of equitable compensation to the plaintiffs; and an order that the first defendant hold the shares in E Co and EM Co on constructive trust for the sons but be entitled to profit distributions if any in respect of those shares during his lifetime, the shares to be transferable on his death to the sons.

671. As to the notional rent amount, I consider it should be calculated on the basis indicated above. I had considered whether there should be a mechanism whereby it be paid in exchange for the provision of signed transfers in respect of the properties (other than Property No 11), rather than set off against other amounts payable or to be payable to the plaintiffs by the first defendant but in the circumstances where the amount to be paid to the first defendant in this regard will largely be balanced by the amount to be repaid by him in relation to the proceeds of sale of Property No 12, that does not seem to me to be necessary to remove any disproportion that would otherwise have arisen had there been a large difference between the two amounts). As to set-offs in respect of other accounts there was no dispute that this should be as I had earlier envisaged.

672. As to the remaining matters, I can deal with them in relatively brief compass.

673. I consider that the unpaid rent for the period from July 2014 to the date of judgment (in effect to 30 June 2019 since the rent is payable under the agreement for lease at the end of the financial year) should be calculated as the plaintiffs propose in accordance with the provisions of the agreement for lease as last varied. I see no basis for there to be a calculation of unpaid rent inconsistent with the terms of the agreement for lease that I considered to have been wrongly terminated by the first defendant. As to the evidence of B in relation to invoices forwarded on to E Co for payment (to which objection was made but which the first defendant was in a position, had he wished, to adduce evidence to dispute), I accept that evidence. Accordingly, the unpaid rent amounts will be as the plaintiffs have calculated.

674. As to the W Deed amount that is due, I accept that interest should be paid both on this and on the plaintiff sons’ three-quarter share of the net proceeds of sale of Property No 12 (as from the dates set out in the plaintiffs’ proposed orders) on the basis that the treatment of interest should be uniform (but that interest should be payable on both).

675. As to the release of the guarantee given by the first defendant to Westpac, I accept the first defendant’s position that the plaintiffs should be required to procure a release of that (and any other extant guarantees provided to secure borrowings by them or the companies or in relation to their business(es)); and that, if for some reason those releases cannot be procured, there should be an indemnity in the first defendant’s favour in relation thereto.

Costs

676. As to costs, it was agreed that the question of costs should be reserved pending the final determination as to the appropriate orders. I will make directions to facilitate this when these reasons are published; and will consider at that stage the extent of any set-off in relation thereto.

Orders

677. For the reasons above, I propose to make the following orders. In circumstances where the structure of the relief to be granted has been hotly contested (and already the subject of a re-opened hearing following the plaintiffs’ complaint as to procedural fairness were that not to occur), I will defer making these orders until the issue of costs has also been resolved. This will give the parties an opportunity to point to any necessary corrections to be made in the arithmetical calculations or any misapprehension by me as to the submissions that were made in the course of the re-opened hearing in relation to the matters considered above (the possibility for which arises not least because of the successive sets of submissions relied upon in that regard). The orders that I propose are as follows.

1. Judgment for the plaintiffs on their second further amended statement of claim.

2. Dismiss the first defendant’s cross-claim.

3. Declare nunc pro tunc that the first defendant holds his freehold interest in the properties listed in Confidential Schedule 1 to these reasons (the Properties) (which, for the avoidance of doubt, excludes the property referred to in these reasons as Property No 11), subject to the existing leasehold interest of the first plaintiff in the Properties pursuant to the terms of the agreement for lease entered into between the first plaintiff and the first defendant on or about 1 July 2003 and as varied in November 2011, such trust having arisen:

1. in the case of each of the Properties other than the property referred to in these reasons as Property No 10, on or with effect from 1 July 2003, that being the date on and from which I am satisfied that there was sufficient detrimental reliance by the plaintiffs on the expectation from which the first defendant sought to resile on 27 June 2013 to make the first defendant’s conduct unconscientious; and

2. in the case of Property No 10, with effect from the time of its acquisition, by which time there was sufficient detrimental reliance by the plaintiffs on the expectation from which the first defendant sought to resile on 27 June 2013 to make the first defendant’s conduct unconscientious.

4. Declare nunc pro tunc that the first defendant holds his shares in the first plaintiff and the second plaintiff, respectively, (the Shares) on constructive trust for the third, fourth and fifth plaintiffs in equal shares, such trust again having arisen on or with effect from 1 July 2003, that being the date on and from which there was detrimental reliance by the plaintiffs on the expectation from which the first defendant sought to resile on 27 June 2013 to make the first defendant’s conduct unconscientious.

5. Declare that the legal title to the Shares be transferred to the third, fourth and fifth plaintiffs (absent any agreement between the parties for the shares to be transferred to them at an earlier time) on the first defendant’s death but that, during the term of the first defendant’s life, the first defendant be entitled to participate in any dividends payable in respect of the Shares as if the Shares were not held by him on constructive trust for the third, fourth and fifth plaintiffs.

6. Order that the first defendant forthwith transfer the Properties to the third, fourth and fifth plaintiffs, and do all things necessary to effect those transfers within 28 days of these orders.

7. Order that the first defendant, by himself, his servants and agents or otherwise, be restrained from selling, disposing, encumbering, or in any way dealing with, any of the Properties or the Shares so long as the first defendant retains legal title to any of the Properties or the Shares.

8. Order that if the first defendant fails to execute a document as required to effect order 6, the Registrar of the Supreme Court of NSW execute such document pursuant to s 94 of the Civil Procedure Act 2005 (NSW) on the plaintiffs presenting to the Registrar an affidavit by their solicitor setting out facts proving the failure of compliance to the satisfaction of the Registrar.

9. Order that the first defendant, by himself, his servants and agents or otherwise, be restrained from entering upon the Properties.

10. Order that the plaintiffs pay to the first defendant, within 28 days, the sum of $640,000, representing the net present value of the sum of $80,000 per annum over the period of the first defendant’s present life expectancy (namely, nine years), calculated at a discount rate of 3%.

11. Order that the first defendant provide to the plaintiffs within 28 days of these orders executed transfers for nominal consideration in their favour in equal shares of the Shares, such transfers to be held in escrow by the plaintiffs and not registered until the first defendant’s death.

12. Order that the first defendant pay to the third, fourth and fifth plaintiffs the sum of $577,465, in respect of the proceeds of sale of Property No 12, plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) from 11 September 2012.

13. Order that the third, fourth and fifth plaintiffs pay to the first defendant the sum of $156,250, in respect of the Deed referred to in these reasons as the W Deed, plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) from 30 April 2014.

14. Order that the third, fourth and fifth plaintiffs pay to the first defendant the following amounts by way of unpaid rent for the following financial years, plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) from the dates specified:

1. $22,677, for the financial year ending 30 June 2014, plus interest from 30 June 2014;

2. $6,739, in respect of rent for the financial year ending 30 June 2015, plus interest from 30 June 2015;

3. $83,572, in respect of rent for the financial year ending 30 June 2016, plus interest from 30 June 2016;

4. $39,648, in respect of rent for the financial year ending 30 June 2017, plus interest from 30 June 2017;

5. $772, in respect of rent for the financial year ending 30 June 2018, plus interest from 30 June 2018; and

6. such amount, if any as represents unpaid rent of $100,000 less rates and insurance paid by the plaintiffs in relation to the Properties in respect of rent for the financial year ending 30 June 2019.

15. Order that Property No 11 be sold as soon as practicable by the first defendant (at public auction or otherwise by agreement with the third, fourth and fifth plaintiffs) and that, after payment of any amount to the Australian Taxation Office in payment of any capital gains tax liability arising in respect of a capital gains tax event in relation to the Properties, the first defendant pay to the plaintiffs the balance, if any, of the net proceeds of sale by way of equitable compensation for the loss of their expectations in relation to Property No 11.

16. Order that the payments ordered in orders 10 and 12-14 above be stayed until the issue of costs is determined; and then set-off against each other.

17. Order that the third, fourth and fifth plaintiffs do all things necessary to obtain a release of the guarantee provided by the first defendant to the Westpac Banking Corporation, being the subject of the Westpac Deed (the Westpac Guarantee).

18. Order the plaintiffs jointly and severally to indemnify and hold harmless the first defendant from any liability arising under the Westpac Guarantee and any other guarantee provided by the first defendant in connection with any business or other activity of the plaintiffs.

19. Reserve the question of costs of the proceedings.

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Decision last updated: 26 April 2019