Elanor Funds Management Ltd v Alceon Group Pty Ltd
[2024] FCAFC 121
•18 September 2024
FEDERAL COURT OF AUSTRALIA
Elanor Funds Management Ltd v Alceon Group Pty Ltd [2024] FCAFC 121
Appeal from: Elanor Funds Management Ltd v Alceon Group Pty Ltd [2023] FCA 1291 File number(s): QUD 521 of 2023 Judgment of: BROMWICH, THAWLEY AND O’SULLIVAN JJ Date of judgment: 18 September 2024 Catchwords: AUSTRALIAN CONSUMER LAW – appellant alleges misleading and deceptive conduct in relation to the sale of Bluewater Square Shopping Centre – where trial judge found that the respondents did not engage in misleading and deceptive conduct, appellant did not rely on any misleading conduct and the appellant did not suffer any damage – held that respondents engaged in misleading and deceptive conduct in representing that Centre tenants were not in arrears of rent and had no relevant history of arrears in rent – held that the appellant sustained damage because of the respondents’ conduct – damaged quantified on appeal – appeal allowed
AUSTRALIAN CONSUMER LAW – where second respondent pleaded apportionable claim against first respondent – where respondents concurrent wrongdoers – damage apportioned between respondents
EVIDENCE – where appellant alleges that trial judge relied on expert accounting evidence which relied on untested hearsay evidence in the form of annotations to business records – annotations objected to – annotations should have been rejected where controversial
PROCEDURAL FAIRNESS – where trial judge declined to consider appellant’s submissions about why various conclusions of expert in connection with actual rent arrears position were wrong or should be qualified, including on the basis that hearsay annotations were inadmissible and unreliable – appeal court able to consider and address the submissions on appeal – submissions mostly made out – actual arrears position quantified on appeal
EVIDENCE – assessment of credibility – trial judge treated reliance evidence with “caution” on the basis that such evidence must be treated with caution because it is self-serving and hypothetical – observations about whether such evidence must be treated with “caution”
EVIDENCE – assessment of credibility – trial judge treated evidence of an employee of the appellant with “caution” because employee was considered to have an interest in the outcome of the litigation – interest in outcome of litigation not identified – observations about whether evidence of an employee of a party must be treated with “caution”
EVIDENCE – assessment of credibility – one part of opinion evidence of expert witness considered by trial judge to be unexplained – lack of explanation considered to go to more than the reliability of the evidence – where expert’s explanation for opinion not referred to by trial judge
DAMAGES – assessment of market value by reference to opinions of experts adopting broadly the same methodologies – discussion of proper approach to determination of value – discussion of duty of court to form and act on its own opinion of value – role of expert is to furnish the court with the necessary scientific criteria for testing the accuracy of their conclusions, so as to enable the court to form its own independent judgment by the application of these criteria to the facts proved in evidence
DAMAGES – determination of real or true value of Centre with the assistance of expert opinion evidence on market value – loss or damage because of misleading conduct determined
Legislation: Australian Consumer Law s 18, s 87CB, s 87CD, s 236
Competition and Consumer Act 2010 (Cth) s 137B
Corporations Act 2001 (Cth) s 286, s 1305
Evidence Act 1995 (Cth) s 79
Trade Practices Act 1974 (Cth) s 82
Trade Practices Act 1976 (Cth) s 52
Cases cited: 101 Collins Street v City of Melbourne (unreported, Batt J, 2 April 1996)
Addenbrooke Pty Ltd v Duncan (No 2) [2017] FCAFC 76; 348 ALR 1
Advanced Holdings Pty Ltd as trustee for The Demian Trust v Commissioner of Taxation [2021] FCAFC 135
Ardizzone v Valentino Nominees Pty Ltd [2019] WASC 55
Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; 250 CLR 640
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; 236 FCR 1
Barnes v Forty Two International Pty Ltd [2014] FCAFC 152; 316 ALR 408
Blatch v Archer (1774) 1 Cowp 63
Brewarrana Pty Ltd v Commissioner of Highways (No 2) (1973) 6 SASR 541; 32 LGRA 170
Butcher v Lachlan Elder RealtyPty Limited [2004] HCA 60; 218 CLR 592
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304
Carter v Commissioner of Taxation [2020] FCAFC 150; 279 FCR 83
Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Davie v Magistrates of Edinburgh 1953 SC 34
Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd [1992] FCA 550; 38 FCR 471
Elanor Funds Management Ltd v Alceon Group Pty Ltd [2023] FCA 1291
Flexible Steel Lacing Co v Beltreco Ltd [2000] FCA 890; 49 IPR 331
Google Inc v Australian Competition and Consumer Commission [2013] HCA 1; 249 CLR 435
Gould v Vaggelas [1985] HCA 75; 157 CLR 215
H & Q Café Pty Ltd v Melbourne Café Pty Ltd [2023] VSCA 200; 72 VR 53
Hanave Pty Ltd v LFOT Pty Ltd (formerly Jagar Projects Pty Ltd) [1999] FCA 357; 43 IPR 545
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546
Hill v Commissioner of Highways [1966] SASR 316; 13 LGRA 369
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; 217 CLR 640
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10; 247 CLR 613
Keys Consulting Pty Ltd v CAT Enterprises Pty Ltd [2019] VSCA 136
Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; 243 CLR 361
Lang v The Queen [2023] HCA 29; 97 ALJR 758
Latteria Holdings Pty Ltd v Corcoran Parker Pty Ltd [2014] FCA 880; 224 FCR 519
Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; 52 NSWLR 705
Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88; 372 ALR 440
Murphy v Overton Investments Pty Ltd [2004] HCA 3; 216 CLR 388
O’Kelly Holdings Pty Ltd v Dalrymple Holdings Pty Ltd (1993) 45 FCR 145
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; 149 CLR 191
Potts v Miller [1940] HCA 43; 64 CLR 282
P-Value Pty Ltd v Vicland Property Group No 1 Pty Ltd [2016] VSC 100
Rush v Nationwide News Pty Ltd (No 5) [2018] FCA 1622
Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8; 97 ALJR 388
Short v Crawley (No 38) [2008] NSWSC 917; 67 ACSR 627
Shrimp v Landmark Operations Limited [2007] FCA 1468; 163 FCR 510
Yorke v Lucas [1985] HCA 65; 158 CLR 661
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 963 Dates of hearing: 20 – 21 May 2024 Date of last submissions: 6 June 2024 Counsel for the Appellant: Mr A F Fernon SC and Ms E M Keynes Solicitor for the Appellant: Holding Redlich Counsel for the First Respondent: Mr M S Henry SC and Mr D Delany Solicitor for the First Respondent: Arnold Bloch Leibler Counsel for the Second Respondent: Mr S S Monks Solicitor for the Second Respondent: Clyde & Co ORDERS
QUD 521 of 2023 BETWEEN: ELANOR FUNDS MANAGEMENT LIMITED (ACN 125 903 031)
Appellant
AND: ALCEON GROUP PTY LTD (ACN 122 365 986)
First Respondent
CPRAM INVESTMENTS PTY LTD (ACN 120 836 839)
Second Respondent
ORDER MADE BY:
BROMWICH, THAWLEY AND O’SULLIVAN JJ
DATE OF ORDER:
18 SEPTEMBER 2024
THE COURT ORDERS THAT:
1.The first respondent’s notice of contention be dismissed.
2.With the exception of Ground 5, the second respondent’s notice of contention be dismissed.
3.The appeal be allowed.
4.Set aside the orders made on 30 October 2023 and, in their place, order:
(a)the first respondent pay to the appellant the sum of $2,360,000, plus interest at Court rates calculated from 1 November 2017.
(b)the second respondent pay to the appellant the sum of $590,000, plus interest at Court rates calculated from 1 November 2017.
(c)the first and second respondents pay the appellant’s costs of the proceedings at first instance.
5.The first and second respondents pay the appellant’s costs of the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
BROMWICH AND THAWLEY JJ:
OVERVIEW
This appeal raises forty-four grounds of appeal from orders made by a judge of this court, dismissing proceedings instituted by the disappointed purchaser of a shopping centre in Queensland: Elanor Funds Management Ltd v Alceon Group Pty Ltd [2023] FCA 1291 (hereafter “J”). The two respondents each rely on a notice of contention raising alternative bases for upholding various aspects of the decision of the trial judge.
On 1 November 2017, Elanor Funds Management Ltd purchased the Bluewater Square Shopping Centre in Redcliffe, Queensland, from Alceon Group Pty Ltd (the first respondent). CPRAM Investments Pty Ltd (the second respondent) had been appointed by Alceon on 13 December 2012, under an investment management agreement, as one of the joint managers of an unregistered management investment scheme known as the “Bluewater Trust”. Its duties included the identification of opportunities to dispose of the Centre.
Elanor acquired the Centre by entering into a Put and Call Option Agreement on 15 September 2017 and exercising the Call Option on 23 October 2017. This mechanism was adopted because Elanor was also purchasing the Centre for the purposes of an unregistered management investment scheme that it would market to sophisticated investors.
Elanor contended that, during the sale process, Alceon and CPRAM engaged in misleading or deceptive conduct, breaching s 18 of the Australian Consumer Law (ACL), being schedule 2 to the Competition and Consumer Act 2010 (Cth) (CCA). The final form of the pleadings was contained in a Further Amended Statement of Claim (FASOC).
By the time of closing submissions, Elanor’s case was confined to what was said to be three representations referred to as the “commencement date representation”, the “arrears representations” and the “rental return representation”. The alleged conduct of particular importance to the appeal related to nine tenants who operated in the Centre’s two restaurant precincts (referred to collectively as the Food Court Tenants) and concerned whether they were in, or had a history of, arrears in rent at the time Elanor conducted its due diligence.
As the trial judge noted at J[30]:
[30]Elanor contends that the data room contained copies of … a document for each month between December 2016 and July 2017 in the form of a Tenant Arrears Report. … [A] primary contention of Elanor (opened on its case), is that the Tenant Arrears Reports “did not identify any of the [Food Court Tenants] as being in arrears for any amount” and further that no other arrears report nor any other documents were provided which recorded tenancy arrears between December 2016 and July 2017 ...
Elanor contended that:
(a)it was provided with Tenant Arrears Reports in the due diligence data room which did not disclose that any of the Food Court Tenants were in, or had a history of, arrears;
(b)when Elanor later asked CPRAM – during a tenant by tenant review on 30 August 2017 – whether there were any such arrears, it was not informed of any relevant history;
(c)to varying degrees, a number of the Food Court Tenants did have a history of, or were in, arrears at relevant times;
(d)if it had known the true position, Elanor would have re-calculated what it was prepared to offer to purchase the Centre by notionally excluding the tenants which it considered to be “at risk” from its calculation of anticipated income, and made other adjustments, with the result that it would not have proceeded with the offer of $55.25 million which it had made in an expression of interest on 16 August 2017; and
(e)it either would have paid less for the Centre or, if an offer less than $55.25 million were not acceptable to Alceon, it would not have purchased the Centre.
Elanor agreed with the proposition put by the trial judge that, if Elanor had known the true position, it would only have been prepared to pay an amount which was less than the minimum amount which Alceon was prepared to accept, namely $55.25 million: J[1], [42]. The case was therefore conducted as a ‘no transaction’ case. Leaving relevant defences aside and assuming Elanor were otherwise successful, there was no issue that the measure of damages was the difference between the real value of the Centre and the price which was in fact paid. Elanor contended that the real value of the Centre was $49 million: J[6]. The price paid was $55.25 million, although the parties agreed that there should be an adjustment of $650,000 (related to a rental guarantee). Accordingly, Elanor claimed a loss of $5.6 million.
The trial judge concluded that Elanor failed to prove that: (a) Alceon or CPRAM engaged in misleading or deceptive conduct; (b) Elanor relied on that conduct; or (c) Elanor sustained any loss. The proceeding was therefore dismissed: J[8].
As is explained further below, the evidence established that:
(a)Alceon and CPRAM provided Elanor and its representatives (including Mr Hamilton of CBRE Pty Ltd, providing investment advisory services to Elanor) access to a data room for the purpose of enabling Elanor to undertake a due diligence process.
(b)Elanor examined Tenant Arrears Reports for the months December 2016 to July 2017 contained in the data room (the Data Room Arrears Reports). These were business records of the entity managing the tenancies (Savills (Qld) Pty Ltd) sourced from their electronic management system. The Data Room Arrears Reports did not reveal any of the Food Court Tenants as having arrears of rent in any month.
(c)No other Tenant Arrears Reports, nor any other documents, were provided in the data room or otherwise which recorded arrears in respect of any of the Food Court Tenants for the period December 2016 to July 2017.
(d)There was in fact a significant history of arrears on the part of one or more of the Food Court Tenants in every month from December 2016 to July 2017. Indeed, there were a number of Tenant Arrears Reports that existed at the time of due diligence (but which were not in the data room) that recorded rental arrears, first obtained during the trial proceedings under subpoena (the Discovered Arrears Reports).
(e)At a meeting on 30 August 2017, CPRAM (by Mr Frenil Shah) did not identify any of the Food Court Tenants as having arrears, or a history of arrears, or any issue in respect of their respective sales, when asked questions in that respect by Elanor (through its agent, Mr Hamilton).
The trial judge confined his analysis essentially to the Tenant Arrears Report for July 2017 and to what was said at the meeting on 30 August 2017. The reasons why the trial judge concluded that the respondents’ conduct was not misleading or deceptive were, in summary, that, although: (i) the Tenant Arrears Report for July 2017 did not disclose that any of the Food Court Tenants were in arrears; and (ii) CPRAM failed to tell Elanor that there was in fact a history of arrears when it was asked questions in relation to each Food Court Tenant on 30 August 2017:
(a)Elanor “assumed” the risk that the data in the data room was inaccurate and “chose not to undertake any due diligence as to the accuracy of the data contained therein”: J[235];
(b)Elanor “assumed the accuracy” of the business records in the data room, including the Tenant Arrears Reports: J[235];
(c)Elanor could have better investigated or audited the information which was in the data room and asked questions through a question and answer facility in order to determine that the Tenant Arrears Reports were incorrect: J[226], [238].
The reasons why the trial judge concluded that Elanor did not rely on the conduct were, in summary, that, although: (i) Elanor calculated its offer price for the purchase of the Centre by reference to the anticipated income to be derived from the rent; and (ii) marketed the investment to investors in the proposed managed investment scheme by reference to the anticipated return from the rental income to be derived from the Centre over a three year term:
(a)“the arrears position of individual Food Court Tenants was not a consideration which Elanor took into account at the time”: J[264] (see also J[257]); and
(b)“the redevelopment potential of the site was a primary motivating factor to acquire the Centre”: J[271].
The reason why the trial judge concluded that no loss was suffered was, in summary, that Elanor in fact got a remarkable deal: the real value of the property, on the hypothesis that there were nine “at risk” Food Court Tenants, was $58.7 million, namely $3.45 million more than the actual sale price of $55.25 million. The actual sale price was agreed, after a marketing campaign, between sophisticated investors (Elanor and Alceon) pursuing their respective commercial interests in an arm’s length transaction conducted, at least from Elanor’s perspective, on the basis that none of the Food Court Tenants were “at risk”.
For the reasons given below, each of the trial judge’s three reasons for dismissing Elanor’s claim was affected by error:
(1)The respondents’ conduct viewed as a whole, including their silence, conveyed that there was no history of arrears on the part of any of the Food Court Tenants between December 2016 and July 2017. Assessed in the context of the whole course of conduct, the Data Room Arrears Reports conveyed that none of the Food Court Tenants had arrears in any month from December 2016 to July 2017:
·the Data Room Arrears Reports, including the Tenant Arrears Report for July 2017, did not indicate that any of the Food Court Tenants had arrears in rent;
·there was no other document in the data room or otherwise which identified any arrears of rent on the part of the Food Court Tenants; and
·on 30 August 2017, CPRAM represented (either expressly or through silence) that the Food Court Tenants had neither current arrears nor a relevant history of arrears.
What that conduct conveyed was misleading because there was a material history of arrears, including outstanding arrears as at 31 July 2017.
(2)If Elanor had not been misled by the respondents’ conduct, Elanor would only have been prepared to offer an amount lower than $55.25 million for the purchase of the Centre with the (uncontroversial) result that it would not have purchased the Centre.
(3)The real value of the Centre was $51.65 million. The result is that Elanor is entitled to damages in the amount of $2.95 million once account is taken of the agreed adjustment of $650,000 related to the rental guarantee. This amount should be apportioned between the respondents as concurrent wrongdoers.
In the reasons that follow, references to relevant affidavits are provided by stating the name of the deponent, followed by a number indicating whether the reference is to the first or second affidavit, followed by the relevant paragraph number. References to “AB” are to the page number of Part C of the Appeal Book. These include references to the trial transcript.
FACTUAL BACKGROUND
Elanor is a corporation within the Elanor Investors Group. It conducts an investment and funds management business. Elanor is the responsible entity of the Elanor Investment Fund which is a registered managed investment scheme operated pursuant to a trust. Units in the trust form part of stapled securities listed on the Australian Stock Exchange: J[10].
Mr Blake McNaughton, an executive director of Elanor, was centrally involved in assessing the purchase of the Centre as an investment to be marketed to sophisticated investors in a proposed unregistered management investment scheme.
Mr McNaughton reported to Mr Michael Baliva as to the outcome of the assessments that he made concerning the prospective acquisition: J[12]. Mr Baliva was Elanor’s co-head of real estate: J[12]. Mr Baliva’s primary role was to report to Elanor’s board in relation to the proposed acquisition.
The Centre was constructed in 2008 as a neighbourhood shopping complex. It comprised 49 tenancies with a Woolworths Supermarket as the anchor tenant: J[2]. It was purchased by Alceon on 3 April 2013 for $41,750,000: J[51].
Alceon entered into an investment management agreement with CPRAM on 13 December 2012 under which CPRAM accepted appointment as one of the joint managers of the “Bluewater Trust”. CPRAM’s duties included identification of intended trust acquisitions, management of trust assets, budgeting, forecasting, reporting and oversight of day-to-day asset management and administration of trust assets: J[19]. It also had the task of identifying opportunities for the disposal of trust assets: J[50].
Mr Frenil Shah was a director of CPRAM. He was the portfolio manager in relation to four shopping centres, including the Centre. Mr Shah’s responsibilities included supervising centre managers and liaising with external contractors and consultants. As portfolio manager he was responsible for oversight of the day-to-day management and administration of the Centre, financial analysis and reporting, as well as being a direct liaison with the tenants. Mr Frenil Shah supervised Mr Carrigan (a leasing manager), Mr Song (an analyst) and Mr Neil Shah (his brother and a junior analyst). Mr Frenil Shah recommended that Alceon engage Savills as the property manager for the Centre.
Alceon engaged Savills as the on-site property manager at the Centre, under a property management agreement dated 19 December 2015: J[14]. Ms Anna-Maree Coco was employed by Savills as the on-site property manager between May 2016 and November 2017: J[14]. Savills provided services which included the general administration of each of the tenancies by collecting rent, holding security deposits, ensuring compliance with tenant obligations, maintaining a tenancy schedule, maintaining tenancy files and financial management: J[51]. Savills’ financial management obligation included the preparation of: monthly financial management reports for the Centre; a monthly statement of monies received and expenses incurred; the issue of monthly invoices to tenants; the collection of rent and charges; and review of rental arrears.
Savills operated a reporting system, referred to as the “MRI Management System”, for its financial management and reporting obligations to Alceon. Neither Alceon nor CPRAM had the ability to make changes within the MRI Management System, but CPRAM could generate reports from it: J[162].
CPRAM recommended to Alceon that the dining or restaurant areas or precincts in the Centre be upgraded: Shah 1 at [30]. The proposed project formed part of a broader strategy for the Centre, designed to attract a range of new tenants and adding “attractive dining options” in the Centre: Shah 1 at [32]; J[55]. It involved upgrading the existing restaurant precinct and the creation of a new restaurant precinct, referred to in the cross-examination of Mr McNaughton as the “casual dining precinct”. The “casual dining precinct” was also sometimes referred to as the “new precinct” or the “external precinct”. CPRAM’s recommendation was accepted and work commenced in late 2016.
Elanor’s case focussed on the nine Food Court Tenants. Two of these tenants had operated for some time (Bel Cibo and Sushi Kuni) and the remainder were new tenants. The nine Food Court Tenants were:
(1)TGS Kuber Pty Ltd trading as Dizzy Dukes Bar and Grill, which operated an American style bar and grill. According to the lease terms, its lease commenced on 1 April 2017. The actual rent commencement date was 1 June 2017: AB235.
(2)Kailash Corporation Pty Ltd trading as Burrito Bar, which operated a Mexican restaurant. According to the lease terms, its lease commenced on 1 March 2017. The actual rent commencement date was 14 May 2017: AB235.
(3)Tushaan Enterprises Pty Limited trading as Bel Cibo, which operated an Italian restaurant. According to the lease terms, its lease commenced on 1 May 2016. The actual rent commencement date was 15 June 2016: AB235.
(4)Mass Nutrition Chermside Pty Ltd, which was a supplier of fitness supplements. According to the lease terms, its lease commenced on 1 April 2017. The actual rent commencement date was 1 May 2017: AB235.
(5)Queensland Employment Services Pty Ltd trading as Kebab Express which operated a fast-food outlet. According to the lease terms, the lease commenced 1 April 2017. The actual rent commencement date was 1 June 2017: AB235.
(6)Gorani Pty Ltd trading as Sushi Kuni, which operated a Japanese style fast food outlet. The lease for the original operator of Sushi Kuni commenced on 15 February 2015. The lease was assigned with effect from 30 April 2017. The actual rent commencement date was 15 June 2016: AB235.
(7)TGS Kuber Pty Ltd, trading as Mumbai Blues, which operated an Indian restaurant. According to the lease terms, the lease commenced on 1 March 2017. The actual rent commencement date was 1 May 2017: AB235.
(8)Thai Me Down Pty Ltd, which operated a Thai restaurant. According to the lease terms, the lease commenced on 1 May 2017. The actual rent commencement date was 1 July 2017: AB235.
(9)Ms Jie Liu trading as Redcliffe Noodle Kitchen, which operated an Asian noodle restaurant. According to the lease terms, the lease commenced on 1 April 2017. The actual rent commencement date was 25 June 2017: AB235.
Alceon appointed the real estate firms Stonebridge Property Group and CBRE to market the Centre for sale: J[56].
By an Information Memorandum finalised on 2 May 2017 and emailed on that day to Mr McNaughton, Alceon sought expressions of interest for a sale of the Centre closing on 30 May 2017: J[3], [56]. It noted that leases and associated documents were available in an electronic data room. Mr McNaughton was provided with access to the data room on 10 May 2017. He commenced inspecting documents on 11 May 2017. There was a data room log which recorded who accessed the data, when, for how long and what was viewed. Documents could be downloaded and printed, either individually or in bulk. The data room log recorded that Mr McNaughton performed a bulk download of all of the documents in the data room on 18 May 2017 (comprising 484 documents) and another bulk download on 23 May 2017 (comprising 486 documents).
On 30 May 2017, Elanor submitted an expression of interest to Alceon to purchase the Centre for $54.75 million: J[3], [58]. The trial judge found at J[59] that, at this time, Mr McNaughton:
(a)knew that the Food Court Tenants in the casual dining precinct had not commenced to trade and that this area was “a work in progress” and that they “may or may not fall into rental arrears”;
(b)had made no inquiries as to whether any of the Food Court Tenants outside of the casual dining precinct had commenced to trade and did not know whether or not those Food Court Tenants were in arrears in rent.
As to the matter in (a) above, only three of the nine Food Court Tenants were located in the “casual dining precinct”. This precinct was the subject of works which sought to take advantage of that area’s frontage to a council carpark, which explains why it was sometimes referred to as the “new precinct” or the “external precinct”: AB2969.21 – 26; AB1439. It was uncontroversial that Mumbai Blues, Thai Me Down and Redcliffe Noodle Kitchen were located in what was referred to as the “casual dining precinct” or “external precinct”: AB3111.22 – 26. These were new tenants. It was uncontroversial that Sushi Kuni, which was adjacent to the “casual dining precinct”, had commenced trading by at least July 2015, about two years earlier: AB2928.41 – 2929.3. It was also uncontroversial that Sushi Kuni had continued to generate income over the course of the whole period in which the casual dining precinct was being developed T115.10 – 15; AB1464.
Elanor’s expression of interest: (a) expressly assumed the annual fully leased and passing net operating income as $4,230,309 and $3,870,759 respectively, as had been represented in the Information Memorandum; (b) required Alceon to grant a rental income guarantee equivalent to 2 years’ gross market rent for any tenancy that was vacant as at the settlement date (there being five vacant tenancies at the time); (c) requested the grant of an exclusive dealing period of 20 business days during which Elanor would conduct due diligence to its satisfaction and negotiate in good faith to agree and execute a contract of sale; (d) was stated to expire on 2 June 2017: J[58].
Alceon did not accept Elanor’s expression of interest. Alceon entered into a conditional contract with another prospective purchaser for a price of $57 million: J[60]. This contract failed to complete. Mr McNaughton and Mr Baliva then met with Mr Gartland of Stonebridge, and Elanor was invited to submit a further expression of interest to purchase the Centre: J[3], [60]. Mr Baliva inspected the Centre with Mr Gartland after this meeting.
The casual dining precinct upgrade, as a whole, was complete by at least 1 July 2017, probably by late June 2017: J[55]. However, that is not to say that none of the three Food Court Tenants in that area traded until then. It was uncontroversial that Mumbai Blues traded in at least June 2017: AB1464.
After his inspection of the property, Mr Baliva reviewed the Information Memorandum with Mr McNaughton: J[61]. The trial judge stated:
[61]Mr McNaughton then undertook certain calculations in order to derive a purchase price for the Centre. At that time Mr McNaughton had more than five years’ experience in analysing potential investments and in determining an appropriate investment yield. He derived a yield of 7%, in part based upon yield information disclosed for comparable sales in a database that he had access to. There is a difference in those comparable sales between initial yield and core market yield. As explained by Mr McNaughton, initial yield is based on the passing rent and core market yield is based on the fully leased market rent. In those comparable sales the initial yield is within the range of 5.57% at the lower end and 8.97% at the upper end. On the assessment undertaken by Mr McNaughton, the majority of comparable sales revealed initial yields of 6.5% or less. Despite that comparable sales information, Mr McNaughton considered that the Centre should be purchased at a higher yield for a number of reasons: the reported sales for Woolworths were less than what might be expected, the Centre faced an increased risk of competition, the Woolworths lease was due to expire (subject to the exercise of any options) in 2028, the catchment area for the Centre was limited by its proximity to the coast and was relatively small in comparison with other centres and the purchase price that Alceon wanted (in excess of $50 million) was comparatively high with a corresponding increased risk of investment.
Mr McNaughton applied the yield of 7% to the net operating passing income: J[62]. He used a figure of $3,907,170 which was the same as the figure for total passing net operating income disclosed in a revised statement of financial figures for the Centre that had been emailed to Mr McNaughton on 2 August 2017. The figure of $3,907,170 was based on a financial summary and projection as at 1 December 2017. In order to calculate the purchase price, Mr McNaughton divided $3,907,170 by the yield of 7% and then multiplied the result by 100 to arrive at $55,816,714. In accordance with his practice, Mr McNaughton subtracted $500,000 on account of his estimate of the expected future capital expenditure, based on 1% of the purchase price and then rounded down to $55.25 million. At the time, Mr McNaughton was aware that there were five vacant tenancies: J[68]. He addressed this by including a condition in the expression of interest that Alceon provide a rental income guarantee equivalent to two years’ gross market rent for any vacant tenancy as at the settlement date.
Mr McNaughton and Mr Baliva discussed Mr McNaughton’s calculations and Mr Baliva agreed with his assessment and methodology.
Mr Baliva signed a second expression of interest, dated 16 August 2017 to purchase the Centre for $55.25 million.
On 18 August 2017, Alceon and Elanor entered into a Heads of Agreement in relation to a potential sale of the Centre for $55.25 million.
The Heads of Agreement provided for an exclusive dealing period of 20 business days, commencing on 21 August 2017 and concluding on 15 September 2017 during which period Elanor would conduct due diligence: J[4]. The Heads of Agreement also relevantly provided (J[69]):
(1)The annual fully leased and passing net operating income, as at 1 December 2017, was $4,266,720 and $3,907,170 respectively, as per the information provided.
(2)The vendor would grant to the purchaser a rental income guarantee equivalent to two years’ gross market rent for any tenancies which are not subject to a lease at the date of settlement, as per the financials provided as at 1 December 2017. This guarantee would be held in a trust account managed by the purchaser’s solicitor.
(3)All outstanding leasing incentives, fit-out contributions, rental abatements, and other capital commitments would remain the responsibility of the vendor and be adjusted in the purchaser’s favour at settlement.
(4)All bank guarantees and or security deposits required under the leases would be in place at settlement and novated across to the purchaser. There would be an adjustment in favour of the purchaser for any outstanding bank guarantees or security deposits not provided at settlement.
In mid-August 2017, Mr McNaughton spoke with Mr Alexander (Sandy) Hamilton of CBRE Pty Ltd for the purpose of retaining CBRE to undertake a due diligence assessment: J[72]. Mr Hamilton was the regional director for CBRE’s investment advisory services with experience in performing due diligence investigations for investors buying or selling multi-tenanted properties, including regional and sub-regional shopping centres in Australia: J[13]. Mr McNaughton requested the submission of a written proposal from CBRE, with a fee estimate, which he received on 21 August 2017: J[72].
Amongst other matters, Mr Hamilton offered a “financial and tenancy due diligence service” which included “comparison of the net income provided by the vendor with our revised estimate of the sustainable net income”. Pursuant to the scope of works, Mr Hamilton advised that he would undertake “a critical review of all income and expenditure” to cover a number of issues including: a review of the commercial aspects of the lease agreements and audit of the tenancy schedule; the identification of any clause in the lease “that may have an impact on the income stream”; review of the trading performance of the property including the major tenants and each individual tenant; review and comment “upon the current arrears report”; the undertaking of a SWOT analysis; the identification of “‘problem’ tenants” by analysis of arrears reports; and the undertaking of a check of rental and other charges due under each lease with the charges depicted on monthly invoices. CBRE offered to do this work for a fee of $50,000 plus GST. Mr McNaughton accepted the proposal.
On 21 August 2017, Mr McNaughton sent an email to Mr Hamilton attaching a financial pack of relevant information.
Mr McNaughton also contacted Mr Kwan on 21 August 2017, first by telephone and then by confirming email: J[73]. Mr Kwan was a partner and Head of Valuation and Advisory at Knight Frank Valuation and Advisory Queensland (KFVAQ). Mr McNaughton provided to Mr Kwan the financial information received from Stonebridge and the Information Memorandum and requested a valuation proposal. Mr McNaughton received a fee proposal from Mr Kwan later that day, which he accepted: J[74].
Alceon and CPRAM made information available in an electronic data room for Elanor to conduct its due diligence: J[53]. Mr McNaughton and Mr Baliva had access to the data room throughout the due diligence period: J[71]. Amongst other things, the data room contained copies of: (a) leases for the Food Court Tenants; (b) Incentive Deeds; and (c) the Tenant Arrears Reports: J[53]. CBRE and Elanor were each able to make inquiries regarding the tenants and the financial position of the Centre through a question-and-answer facility in the data room. As is explained further below, the Tenant Arrears Reports did not identify any of the Food Court Tenants as being in arrears for any amount: J[54].
Mr McNaughton accessed the data room on 21 August 2017 when he undertook a bulk download of 628 documents: J[57]. Each “Tenant Arrears Report” contained in the data room bore Savills logo and recorded that they were: “Produced by smart (Savills Management Accounting & Reporting Tools)”. These were produced from what has earlier been referred to as the MRI Management System. As at 21 August 2017, the data room contained seven unredacted Tenant Arrears Reports as follows:
·December 2016, dated 21 June 2017: AB1316. This referred to one tenant of the Centre, not being a Food Court Tenant. This was one page long.
·January 2017, dated 21 June 2017: AB1317. This referred to two tenants of the Centre, not being Food Court Tenants. This was one page long.
·February 2017, dated 21 June 2017: AB1318. This referred to two tenants of the Centre, not being Food Court Tenants. This was one page long.
·March 2017, dated 4 April 2017: AB1319. This referred to five tenants of the Centre, not being Food Court Tenants. This was two pages long.
·April 2017, dated 17 May 2017: AB1321. This referred to five tenants of the Centre, not being Food Court Tenants. This was two pages long.
·May 2017, dated 21 June 2017: AB1323. This referred to six tenants of the Centre. The only Food Court Tenant mentioned was Bel Cibo which had $10 credit. This was two pages long.
·June 2017, dated 25 July 2017: AB1325. This referred to five tenants of the Centre, not being Food Court Tenants. This was two pages long.
These seven Tenant Arrears Reports – together with an arrears report later added to the data room for July 2017, referred to below – will be referred to as the Data Room Arrears Reports. These did not reveal that any of the Food Court Tenants were in arrears for any of the months from December 2016 until July 2017. These Tenant Arrears Reports need to be distinguished from Tenant Arrears Reports covering some of the same months, referred to below, first produced during the proceedings under a subpoena issued to Savills, indicating that Food Court Tenants did have a history of arrears in those months, the Discovered Arrears Reports.
The trial judge found that, of the Data Room Arrears Reports, Mr McNaughton reviewed reports for May and June 2017, “but not until 30 October 2017”: at J[71]. It is clear from this finding, and what is said elsewhere including at J[126] and [155], that the trial judge overlooked that Mr McNaughton’s unchallenged evidence was that, on 21 August 2017, he briefly reviewed the documents contained in the data room that referred to the Centre income, outgoings and any documents in respect of arrears: McNaughton 1 at [44], [71] and [74]; AB2942.16 to 2943.14.
The trial judge ought to have concluded that, on 21 August 2017, Mr McNaughton reviewed the Data Room Arrears Reports for the months of December 2016 through to June 2016. Mr McNaughton’s evidence was that he did not see any documents about arrears which concerned him: McNaughton 1 at [71] and [74]. Mr McNaughton’s unchallenged evidence at McNaughton 1 at [74] was:
… I had not seen anything in my review of the documents in the Data Room, including the Dec - June Arrears Reports, to indicate that any of the Food Tenants were in arrears at any point in the six months prior. Because the July Arrears Report was not of concern, and I had not seen any other arrears reports of concern in my own review, I did not question Mr Hamilton on this further either in our meeting on 6 September 2017 or any other time. I did not investigate any of the Food Tenants further after the due diligence and prior to entering the Sale Contract. I included all of the Food Tenants in the Passing Income for the Centre in my report to the Board.
In cross-examination, Mr McNaughton accepted that his review was brief because he knew that Mr Hamilton would also conduct a review, but Mr McNaughton did not accept that he relied solely on Mr Hamilton’s review: AB2942.37-42.
As mentioned earlier, a Tenant Arrears Report for July 2017 was produced and printed on 25 August 2017 and was then made available in the data room: J[82]. It was two pages long. It refers to five tenants, none of which was a Food Court Tenant. A copy of it is reproduced at J[83]. According to the data room log, Mr Hamilton viewed this report on 27 August 2017 and again on 29 August 2017 when he printed it: J[84]. Mr McNaughton viewed the Data Room Arrears Report for July 2017 on 28 August and 30 October 2017: J[71] and [84].
It should be noted at this point that it was common ground that the true position was that some of the Food Court Tenants had been in arrears in the period from December 2016 to July 2017 and also later, in August, September and October 2017. This was the subject of evidence which included various business records and expert evidence. As mentioned, the Discovered Arrears Reports were first obtained during the course of the proceedings. The accuracy of them was the subject of debate in expert evidence to be discussed below. They comprised Tenant Arrears Reports each of which, although in the same form as the Data Room Arrears Reports, were significantly lengthier and were heavily redacted (but not necessarily appropriately) to remove reference to tenants in arrears who were not one of the Food Court Tenants. The length of the complete versions of the Discovered Arrears Reports is not known. The Discovered Arrear Reports, as included in Part C of the Appeal Book, were as follows:
December 2016
(1)Pages 2, 3, 9 and 10 of a Tenant Arrears Report for December 2016, dated 20 December 2016: AB595-598. It showed the following Food Court Tenants to be in arrears in that month:
·Bel Cibo: $21,213.19
·Sushi Kuni: $19,742.56
January 2017
(2)An unnumbered page and page 10 of a Tenant Arrears Report for January 2017, dated 7 February 2017: AB599-600. It showed the following Food Court Tenants to be in arrears in that month:
·Bel Cibo: $2,523.95
·Sushi Kuni: $4,028.58
March 2017
(3)Page 2 of a Tenant Arrears Report for March 2017, dated 5 April 2017: AB601. It showed the following Food Court Tenant to be in arrears in that month:
·Bel Cibo: $8,969.49
April 2017
(4)Pages 4, 8 and 9 of a Tenant Arrears Report for April 2017, dated 5 May 2017: AB602-604. It showed the following Food Court Tenants to be in arrears in that month:
·Bel Cibo: $10,754.70
·Sushi Kuni: $15,708.59
May 2017
(5)Pages 2, 3, 7 and 8 of a Tenant Arrears Report for May 2017, dated 7 June 2017: AB605-608. It showed the following Food Court Tenants to be in arrears in that month:
·Burrito Bar: $5,278.50
·Bel Cibo: $7,882.23
·Sushi Kuni: $14,328.90
·Mumbai Blue: $2,961.01
It also showed the following Food Court Tenant to be in advance in that month:
·Dizzy Dukes: $13,750.02
June 2017
(6)An unnumbered page and pages 2, 3, 4 and 12 of a Tenant Arrears Report for June 2017, dated 1 June 2017: AB609-613. It showed the following Food Court Tenants to be in arrears in that month:
·Burrito Bar: $40.51
·Bel Cibo: $10,271.11
·Sushi Kuni: $23,614.79
·Mumbai Blue: $5,921.96
It also showed the following Food Court Tenant to be in advance in that month:
·Dizzy Dukes: $5,197.08
(7)An unnumbered page and pages 2, 3, 7 and 8 of a Tenant Arrears Report for June 2017, dated 6 July 2017: AB614-618. It showed the following Food Court Tenants to be in arrears in that month:
·Burrito Bar: $40.51
·Bel Cibo: $10,271.11
·Sushi Kuni: $19,214.79
·Mumbai Blue: $5,921.96
It also showed the following Food Court Tenant to be in advance in that month:
·Dizzy Dukes: $5,197.08
July 2017
(8)Pages 1, 2, 5 and 6 of a Tenant Arrears Report for July 2017, dated 15 August 2017: AB619-622. It showed the following Food Court Tenants to be in arrears in that month:
·Dizzy Dukes: $2,899.17
·Bel Cibo: $16,271.53
·Sushi Kuni: $21,088.72
·Mumbai Blue: $8,847.96
It also showed the following Food Court Tenant to be in advance in that month:
·Mass Nutrition: $5,041.67
·Kebab Express: $4,396.68
·Thai Me Down: $6,176.50
September 2017
(9)Pages 1, 2, 3, 6, 7 and 8 of a Tenant Arrears Report for September 2017, dated 5 October 2017: AB623-628. It showed the following Food Court Tenants to be in arrears in that month:
·Dizzy Dukes: $28,606.92
·Burrito Bar: $26,011.91
·Bel Cibo: $10,242.95
·Mumbai Blue: $10,759.64
·Redcliffe Noodle Kitchen: $5,606.34
It also showed the following Food Court Tenant to be in advance in that month:
·Sushi Kuni: $1,613.19
At some time before 28 August 2017, Mr McNaughton contacted Mr Stephen Schneider of Colliers by way of inquiry as to whether Colliers would manage the Centre for Elanor, should Elanor be the successful purchaser: J[86]. Without being asked to do so, Mr Schneider visited the Centre on 28 August 2017 at 3.40 pm and provided a report by email to Mr McNaughton at 4:16 pm. Under the heading “Retailer and Performance” he observed:
At 3:40 the Centre is very quiet, would think with school pick up the Centre would be busier
Woolworths looks fresh with new fitout - not very busy
Internal common area retailers - one vacancy next to What’s Hot
Donut King and lean green kitchen extremely quiet - no customers for 20 minutes
Sushi kiosk closing at 4pm
Juice kiosk closed - possible vacancy.
Level 1 commercial looks to be ok with traffic flow to that level
Good mix of food and services internally
External tenancies mainly food retailers.
All food retailers extremely quiet with a vacancy next to Thai restaurant
Restaurants not all trading - only opening for lunch and dinner
Potentially too much food - not enough traffic / customers to support the two precincts
Australia Post should be internal to pull traffic - post boxes could remain in current location.
The trial judge noted that Mr McNaughton “accepted in cross-examination that based on this information he was aware, during the due diligence period, that the Food Court Tenants were quiet, at least on the day and at the time of the inspection and that there were insufficient customers to support the two food precincts at the Centre”: J[87].
Mr McNaughton emphasised in cross-examination that Mr Schneider’s opinion about the insufficiency of customers for the food precincts was an opinion about the number of food customers at 3:40 pm on a Monday: AB2958.45 – 2959.1.
On 30 August 2017, Mr Hamilton and two of his colleagues, Ms Brunninghausen and Ms Levene, met with Mr Frenil Shah of CPRAM at the Centre for the purpose of a tenant-by-tenant review: J[88]. What was said at this meeting was a matter of significant contest.
Mr Hamilton’s account was supported by a contemporaneous file note which had been partly pre-prepared in anticipation of the meeting and partly completed during the course of the meeting by Ms Levene. The trial judge accepted Mr Hamilton’s account of what occurred at the 30 August 2017 meeting and rejected Mr Frenil Shah’s account. The trial judge found Mr Hamilton to be impartial and reliable and Mr Frenil Shah not credible. The trial judge accepted that Mr Hamilton asked questions about whether any of the Food Court Tenants were then in arrears and was not told that they were. The trial judge proceeded on the basis that Mr Hamilton did not ask about whether there was a history of arrears, but – as is explained later – this was based on a misunderstanding of the evidence that was in fact given.
At this point in time, neither Mr McNaughton nor Mr Hamilton had seen or been told anything which indicated that any of the Food Court Tenants were in, or had a history of, arrears.
On 7 September 2017, Mr Kwan provided draft calculations for the purpose of preparing a valuation for the Bank of Queensland, which showed a market value of $55.25 million: J[89].
On about 8 September 2017, Mr McNaughton met with Mr Baliva. They reviewed the documentation provided through the due diligence and the valuation figures from Mr Kwan. From these documents, they prepared a document entitled “ENN Board Transaction Due Diligence Checklist” and a document entitled “Investment Overview”. The Checklist and the Investment Overview made up the report to be provided to the board: McNaughton 1 at [79]; J[90]. The report was provided to the Elanor Board as part of an agenda with supporting documentation on either 8 or 9 September 2017.
The Checklist recorded, amongst other things, that: the financial due diligence being undertaken by Mr Hamilton was a work in progress and that the valuation of the Centre by Mr Kwan was a work in progress, noting that “draft numbers received which support purchase price”.
The Checklist also recorded that: a demographic due diligence prepared by Location IQ was complete; council zoning and town planning investigations were complete; and architectural scheme proposals prepared by Bureau Proberts were complete.
The Investment Overview was a document prepared for the purpose of submission to prospective investors in the proposed management investment scheme: J[93]. It included the following statements:
ŸAcquired at a 7.7% fully leased yield (7% passing) representing a discount to prevailing market yields
…
ŸMedium development potential into a mixed use scheme given favourable zoning (27 m (9 storeys) across majority of 1.356 ha site), new transport infrastructure and picturesque coastal location
…
ŸForecast Total Return (if property were to be sold at end of year three and excluding any development potential of additional floor space given favourable planning regime):
Base IRR: 12.0% p.a
Target IRR: 14.0% p.a
…
ŸThe Manager will review exit/liquidity strategies within an investment horizon of approximately 3 years, subject to the Manager’s discretion
The trial judge emphasised that “an entire page of the document [was] devoted to the development potential of the site”: at J[94].
On being satisfied as to the extent of due diligence undertaken, the directors of Elanor executed a circulating resolution, the effect of which was to authorise officers of Elanor to enter into a Put and Call Option Agreement to purchase the property: J[4]; [91].
On 11 September 2017, Mr Kwan emailed new calculations to Mr McNaughton and Mr Baliva and Mr McNaughton responded: J[96], [97]. On 15 September 2017, being the end of the due diligence period, CBRE provided a draft due diligence report to Mr McNaughton: J[99].
On 15 September 2017, Alceon and Elanor entered into the Option Agreement: J[99].
On 18 September 2017, CBRE finalised and delivered its due diligence report to Elanor: J[100]. The trial judge recorded at J[102]:
[102]Section 5 of the report is a SWOT analysis. The strengths identified include the existing lease to Woolworths, the recently upgraded external casual dining precinct and the likely primary sector trade area population growth of 1% per annum forecast to 2036. Identified weaknesses include a reference to the fact that “several tenants” have experienced sales decreases of 5% or more in the past year. Under opportunities, it is mentioned that there is: “potential for strong population growth in the immediately surrounding area if DA approved apartment developments proceed”. Under threats it is said: “the trading performance of the new external restaurant precinct is unproven and it remains to be seen if it will provide the hoped for increase in sales and customer traffic.”
The trial judge recorded at J[103] that section 7 of the report addressed the 30 August 2017 meeting:
[103]Section 7 of the report comprises a tenancy review “based upon our review of the information provided in discussions with the Asset Manager”, which is a reference to the 30 August meeting. No issue is raised in that analysis with the performance of any of the Food Court Tenants, although they are dealt with in section 8: Review of Retail Sales Performance. The nine Food Court Tenants are mentioned with a high level of analysis by comparing occupancy costs per square metre and sales per square metre of the Centre as a whole with benchmarks published by Urbis. The result is that the occupancy costs and sales for the Centre are each lower than the benchmarks. Section 11 notes that CBRE “have been provided with an arrears report dated July 2017” which disclosed there “was a credit of $2,957.05 and there were no significant arrears dated 30 days or over”. That statement is incorrect: the report records arrears in that sum, not prepayments.
The trial judge recorded that section 12 of the report was concerned with tenancies at risk: J[104]. Sushi Kuni was the only Food Court Tenant mentioned, because of its occupancy cost ratio of 28.1%.
On 23 October 2017, Elanor exercised the Call Option: J[108]. As a result, Elanor and Alceon became contracting parties for the sale of the Centre pursuant to a Sale Contract dated 23 October 2017 for a price of $55,250,000, less certain adjustments to be made at settlement.
The trial judge noted that the respondents emphasised certain clauses in the Sale Contract. These were summarised at J[108] in the following way:
(1)The buyer acknowledges that it has not relied, and does not rely, on any representation or warranty of any nature made by or on behalf of the seller, the seller’s solicitor or the agent other than those expressly set out in this contract: cl 3(b);
(2)The buyer acknowledges that the seller has made available and disclosed to the buyer on or before the option date all relevant due diligence material: cl 5(a);
(3)The buyer acknowledges that subject to special condition 33, the seller makes no representation or warranty as to the accuracy or otherwise of the information contained in the due diligence material: cl 5(b)(i);
(4)The buyer acknowledges that the seller has not conducted its own independent inquiries and investigations into information in the due diligence material prepared by third parties: cl 5(b)(ii);
(5)The due diligence material may include statements, estimates and projections that reflect various assumptions which may or may not be correct and does not purport to contain all of the information the buyer may require: cl 5(b)(iv);
(6)The seller does not warrant or represent that any lease will be in force on settlement or that the provisions of each lease have been complied with: cl 10.4(c) and (d);
(7)The seller warrants to the buyer as at the option date and to the best of the seller’s knowledge, information and belief based on due inquiry, but without independent verification that the tenancy schedule is correct (as at the date of the tenancy schedule) in all material respects, the outstanding incentive schedule is correct (as at the date of the outstanding incentive schedule) in all material respects and that all questions and answers are given in good faith: cl 33.1.
The trial judge observed at J[109] that the respondents did not contend that these clauses operated to displace liability for misleading or deceptive conduct. Rather, the clauses were emphasised as part of the context within which the asserted misleading or deceptive conduct was to be viewed.
On 27 October 2017, Alceon’s solicitor provided to Elanor’s solicitor a copy of the Tenant Arrears Report for October 2017 together with an outstanding incentive schedule as at 31 October 2017: J[110]. Only one of the five tenants then in arrears was one of the Food Court Tenants, namely Burrito Bar which had an amount of $11,022.85 outstanding for less than 30 days.
The Sale Contract settled and Elanor became the registered proprietor of the Centre by transfer dated 1 November 2017: J[110].
Although not referred to in the trial judge’s reasons, Elanor’s business records revealed a history of continuing arrears in rent on the part of the Food Court Tenants from the time Elanor became the owner on 1 November 2017 until 30 June 2018. This was summarised in McNaughton 1 at [96] in the following table:
Tenant Amount Approximate shortfall Dizzy Dukes $117,840.98 Equating to approximately 6 months’ rent and other charges Burrito Bar $43,572.73 Equating to approximately 4 months’ rent and other charges Bel Cibo $79,801.59 Equating to approximately 7 months’ rent and other charges Kebab Express $44,503.71 Equating to approximately 8 months’ rent and other charges Mass Nutrition Redcliffe $44,527.75 Equating to approximately 7.5 months’ rent and other charges Sushi Kuni $37,940.00 Equating to approximately 3 months’ rent and other charges Mumbai Blues $44,444.18 Equating to approximately 6 months’ rent and other charges Thai Me Down $53,803.55 Equating to approximately 7 months’ rent and other charges Redcliffe Noodle Kitchen $49,299.02 Equating to approximately 6 months’ rent and other charges
Each one of the nine Food Court Tenants ultimately vacated or abandoned their leases and Elanor resumed possession: J[111]. The trial judge accepted Mr McNaughton’s evidence in this regard, which his Honour summarised at J[111]. Mr McNaughton’s evidence (McNaughton 1 at [94]) was:
[94]Since November 2017:
(a)The owner of Burrito Bar vacated and abandoned its premises at the Centre in January 2018. Elanor re-entered and took possession of its premises, terminating the lease. As at 30 June 2018 there was $43,572.73 in unpaid rent, outgoings, electricity, other direct recoveries and GST for those premises. At page 1456 of Exhibit BM1 is a copy of the Termination Notice dated 15 January 2018 [AB2191].
(b)The owner of Thai Me Down wished to surrender the lease of its premises at Bluewater Square on 30 June 2018. No agreement was reached between the parties as to the terms of the surrender and accordingly at no time was a Deed of Surrender of Lease executed by the parties. As a consequence of its unremedied failure to pay rent under the lease, Elanor terminated Thai Me Down’s lease of its premises at Bluewater Square on 30 June 2019.
(c)Elanor terminated Sushi Kuni’s lease of its premises at Bluewater Square on 4 February 2019, as a consequence of its unremedied breach of the lease. At page 1457 of Exhibit BM1 is a copy of the Termination Notice dated 4 February 2019 [AB2192].
(d)Bel Cibo went into liquidation on 12 April 2019. On that date the liquidator gave notice to Elanor that he disclaims Bel Cibo’s lease of its premises at Bluewater Square. At page 1458 to 1460 of Exhibit BM1 is a copy of a letter from the liquidator to Elanor dated 2 May 2019 attaching a copy of the Notice of Declaimer dated 12 April 2019 [AB2221 – 2223].
(e)Elanor terminated Dizzy Dukes’ lease of its premises at Bluewater Square on 26 April 2019, as a consequence of its unremedied breach of the lease. At page 1461 of Exhibit BM1 is a copy of the Termination Notice dated 26 April 2019 [AB3219].
(f)Elanor terminated Mumbai Blues’ lease of its premises at Bluewater Square on 26 April 2019, as a consequence of its unremedied breach of the lease. At page 1462 of Exhibit BM1 is a copy of the Termination Notice dated 26 April 2019 [AB2220].
(g)Kebab Express ceased trading officially on 16 March 2020. Prior to that time it had been in breach of its lease. As at May 2021 it was in $230,600.34 in arrears. At pages 1463 to 1464 of Exhibit BM1 are copies of an Aged Debtors Report for Kebab Express showing its arrears [AB2307 – 2308]. I am not able to access arrears reports for Kebab Express produced prior to 1 September 2021. Elanor appointed a new centre manager at that time and as at the time of swearing this affidavit I no longer have access to the Colliers’ records. Colliers are the centre manager Elanor first appointed when it purchased the Centre.
(h)Redcliffe Noodle Kitchen surrendered its lease or about 20 June 2020 following numerous breaches of lease. At pages 1465 to 1479 of Exhibit BM1 is a copy of a signed Deed of Surrender and an aged debtors report as at May 2020 [AB2266 – 2280]. The Deed of Surrender shows the total amount payable by the tenant at the time of surrender of the lease as $76,718.68. The aged debtors report shows Redcliffe Noodle Kitchen in arrears of $73,187.48.
(i)On 19 March 2018, McAndrew Law acting for the owner of Mass Nutrition sent a letter to Chrissie Hoffman of Colliers on behalf of Elanor requesting Elanor agree to accept a surrender of the lease of Mass Nutrition’s premises at Bluewater Square. At pages 1480 to 1481 of Exhibit BM1 is a copy of the letter from McAndrew Law dated 19 March 2018. The lease was surrendered on 30 June 2018, pursuant to a Deed of Surrender of Lease. At pages 1482 to 1496 of Exhibit BM1 is a copy of the Deed of Surrender of Lease dated 7 November 2018 and the registered Surrender of Freehold Lease dealing number 719154203 [AB2193 – 2209].
THE ARREARS REPRESENTATION
Elanor’s case
The FASOC included:
19.Between about 18 August 2017 and 15 September 2017:
(a)Alceon and CPRAM provided Elanor and its representatives, including CBRE, access to a data room for the purpose of enabling Elanor to undertake a due diligence process in relation to the Property (Data Room);
(b)Elanor and its representatives undertook a due diligence process in relation the Property; and
(c)as part of the due diligence process, Elanor and its representatives were provided access to reports said to record arrears in the payment of tenancy and rental and other lease obligations in respect of the Property from December 2016 to July 2017 as part of the Data Room.
20.For the purpose of making documents available in the Data Room, Alceon and CPRAM had access to the MRI System maintained and operated by Savills, including reports from such system concerning tenants, payments made by them and rental and other arrears in respect of such tenants.
21.The Data Room contained copies of:
(a) leases for the Food Outlets;
(b) incentive deeds for Dizzy Dukes, Burrito Bar, Mass Nutrition, Kebab Express, Mumbai Blue, Thai Me Down, and Redcliffe Noodle Kitchen (Incentive Deeds);
(c) a document for each of the months between December 2016 and July 2017 titled “Tenant Arrears Report” (Tenant Arrears Reports).
22.The Tenant Arrears Reports did not identify any of the Food Outlets as being in arrears for any amount.
23.Other than the Tenant Arrears Reports for December 2016 and July 2017, no other Tenant Arrears Reports nor any other documents were provided recording tenancy arrears in respect of the Property for the period December 2016 to July 2017.
24.The Tenant Arrears Report recorded for the month of July 2017:
(a) identified the total arrears in respect of that month as $2,957.05; and
(b) did not identify any of the Food Outlets as being in arrears for any amount.
25.On or about 30 August 2017, Alexander Hamilton, Sophie Brunninghausen and Georgie Levene of CBRE, met with Mr Frenil Shah of CPRAM at the Property (30 August Meeting).
26.On 30 August 2017:
(a) Alexander Hamilton asked Frenil Shah about the trading and rental performance of each of the tenants of the Property; and
(b)in response Mr Shah did not identify any of the tenants of the Food Outlet as:
(i)having outstanding arrears;
(ii)receiving any abatements or incentives beyond those disclosed in the Incentive Deeds; or
(iii)having any issue in respect of their respective sales, their ability to pay rent or to satisfy their other obligations under their respective leases.
…
35.On 27 October 2017, Minter Ellison on behalf of Alceon provided Connor O’Meara on behalf of Elanor with copies of:
(a)a document titled ‘Tenant Arrears Report’ for the month of October 2017 (October Arrears Report);
(b)a document titled ‘Outstanding Incentive Schedule as at 31 October 2017’ (October Incentive Schedule).
Particulars
The documents were provided as attachments to an email from Alan Olcayto of Minter Ellison to Greg O’Meara, Elias Stephen, Despina Roussakis of Connor O’Meara.
36.The October Arrears Report identified only one of the Food Outlets, being Burrito Bar, as being in arrears and for less than 30 days as at October 2017.
…
40.The passing base rent per annum and outstanding abatements in respect of the Food Outlets were stated in the Tenancy Schedule, the Outstanding Incentive Schedule and the October Incentive Schedule respectively to be as follows:
[Table omitted]
…
44.By reason of the matters pleaded in paragraphs 19 to 26 and 35, 36 and 40 above, Alceon and/or CPRAM represented to Elanor that:
…
(f)The Tenant Arrears Reports and the October Arrears Report were correct and complete statements of all amounts which had not been paid by the Food Outlet tenants in the corresponding month for that report from all previously rendered invoices and that all amounts in invoices rendered in the months prior to the month of the respective report had otherwise been paid in full by the tenants of the respective Food Outlets (Arrears Representations);
Particulars
The Arrears Representations are partly express, partly implied and partly oral.
(i)In so far as they are express, they are contained in the Tenant Arrears reports and the October Arrears Report.
(ii)In so far as they are implied, they arises [sic] from the circumstances in which the Tenant Arrears Reports and the October Arrears Report were provided and absence of any other document or information of a similar nature for different periods or difference [sic] tenants being provided.
(iii)In so far as they are oral, they arise from the matters and conversations pleaded in 25 and 26 above.
…
46A Further, or alternatively, by reason of the matters pleaded in paragraphs 19 to 26 and 35, 36 and 40, Elanor had a reasonable expectation that Alceon and/or CPRAM would have disclosed to Elanor if any of the Food Court Tenants were in arrears of more than 30 days during the period December 2016 to October 2017.
Put simply, Elanor’s case on misleading or deceptive conduct was that:
(a)the monthly Data Room Arrears Reports for the months December 2016 to June 2017 reviewed by Mr McNaughton did not suggest that the Food Court Tenants had arrears of rent (and one would expect them to show such arrears if those tenants did have arrears);
(b)the Tenant Arrears Reports for July 2017 reviewed by Mr McNaughton and Mr Hamilton did not suggest that the Food Court Tenants had arrears of rent (and one would expect them to show such arrears if those tenants did have arrears);
(c)neither Mr McNaughton nor Mr Hamilton saw any other documentation in the data room or otherwise recording arrears of rent in respect of the Food Court Tenants; and
(d)after Mr Hamilton reviewed the Tenant Arrears Report for July 2017, Mr Hamilton asked Mr Frenil Shah on 30 August 2017, in a tenant-by-tenant review, questions about current and historical arrears of each of the Food Court Tenants and was not told that there was any issue in that respect;
(e)in light of that conduct:
(i)the Data Room Arrears Reports conveyed that the Food Court Tenants did not have arrears in the period December 2016 to July 2017;
(ii)Mr Frenil Shah conveyed that the Food Court Tenants were not in, and did not have a history of, arrears in rent;
(f)further, in the circumstances, Alceon and CPRAM should have disclosed to Elanor if any of the Food Court Tenants were in arrears of more than 30 days during the period December 2016 to October 2017.
Summary of trial judge’s reasoning on misleading or deceptive conduct
The trial judge noted that, by the time of closing submissions, Elanor conceded that its claim could not succeed for Kebab Express, Thai Me Down and Mass Nutrition because there were no arrears for these tenants: J[154].
His Honour also stated that the claim framed by reference to the Tenant Arrears Report for October 2017 could not succeed because that report was provided shortly before settlement of the Sale Contract and could not have led Elanor into any anterior error inducing any of its decisions to acquire the Centre: J[154]. His Honour continued:
… Although Elanor conjunctively pleaded that in reliance on the conduct it entered the Option Agreement, exercised the call option and completed the Sale Contract, no evidence was led as to what recommendation would have been put to the board between 15 September 2017, when the Option Agreement was entered into, and 1 November 2017, when settlement of the Sale Contract occurred, relating to options to withdraw from the transaction. Nor was evidence adduced as to what steps would have been taken, including after the call option was exercised on 23 October 2017, about the likely risks that Elanor may have faced in seeking to withdraw, including litigation that it may have then faced …
No issue was raised on the appeal about this analysis.
Particular (i) to [44(f)] of the FASOC
As to what the trial judge referred to at J[155] as the “express representations”, his Honour’s preliminary conclusions can be summarised relevantly as follows:
(a)Initially, the data room only included Tenant Arrears Reports for March and April 2017. On or about 21 June 2017, additional reports were printed and uploaded to the data room for December 2016 and January, February, and May 2017.
(b)A further report for June 2017 was printed on 25 July 2017 and then placed in the data room: J[156]. The Tenant Arrears Report for July 2017 was printed on 25 August 2017: J[158]. Inferentially, this was placed in the data room on or before 28 August 2017: J[155].
(c)The March, April and June 2017 arrears reports did not identify any of the Food Court Tenants as being in arrears, indeed none of the Food Court Tenants are listed: J[156].
(d)It was “not necessary to interrogate the content of the December 2016, January, February, and May 2017 reports as Elanor accepts that these reports record the arrears position as at the date of printing, and not as at the close of each month and therefore ‘provide no additional arrears information’ in relation to those months”: J[156].
The conclusion at (d) was erroneous for two reasons.
First, Elanor’s position was not that the reports did not need to be considered by the trial judge. Its position was that – if it were true that the Tenant Arrears Reports for each of those months only reflected the arrears position as at the print date and noting that the reports were added to the data room at the request of another interested party – then what was the point of providing them when they should all state the same level of arrears given that they were all printed on the same day. Contrary to J[156], Elanor did not “accept that these reports record the arrears position as at the date of printing”.
Secondly, Elanor’s case was that Mr McNaughton reviewed each of the Tenant Arrears Reports in the data room on 21 August 2017 (not then including the Tenant Arrears Report for July 2017), understanding them to relate to the month for which the report was stated to apply, and did not see anything which caused him concern.
It follows that the trial judge erred in not considering each of the Tenant Arrears Reports. As noted earlier, none of the Data Room Appears Reports revealed any Food Court Tenant to have been arrears. Each of the Data Room Arrears Reports being made available to facilitate due diligence was a part of the conduct relied upon and had to be assessed in order to determine what the conduct as a whole conveyed.
The trial judge’s conclusions in relation to the Tenant Arrears Report for July 2017 can be summarised in the following way:
(a)Mr McNaughton viewed the Tenant Arrears Report for July 2017 “on 28 August and 30 October 2017”: J[155]. Mr Hamilton, and his assistants, also examined the Tenant Arrears Report for July 2017: J[157]. The July Arrears Report did not disclose arrears on the part of any of the Food Court Tenants: J[158].
(b)The July Arrears Report was ambiguous. His Honour explained this at J[161] in the following way:
In my view the July Arrears Report was ambiguous. If the report purports to be a record of all arrears to 31 July 2017, then what is the point of recording a last payment date and an amount thereafter? Further, what is the point of the date of 25 August 2017 and the time of printing, if objectively the document is a “correct and complete” statement of all amounts “which had not been paid” by any of the Food Court Tenants for amounts previously invoiced?
(c)The “objective meaning of the two page July Arrears Report … must be considered in the context that it was a component of a large amount of information that was made available to Elanor during the due diligence period as contained in the data room”: J[165].
(d)The information in the data room included: “rental tax invoices for the period January until May 2017, tenant recovery letters for the financial year 2017, outgoings recovery records for the financial year 2018 and the monthly turnover data for the period March to July 2017”.
(e)Mr McNaughton and Mr Hamilton both “assumed the risk” that the information in the Tenant Arrears Report for July 2017 might not be accurate: J[163] and [164] read with J[166].
(f)Elanor “did not examine the detail of this documentation and made no attempt to reconcile amounts charged with amounts paid”: J[165]. The trial judge stated at J[165] that Elanor could have, but did not, make a number of inquiries. His Honour’s observations included:
(i)“The Savills records included detailed monthly reconciliations of amounts charged to and paid by each tenant and, although these documents were not made available in the data room, no request was made by Elanor or Mr Hamilton for the provision of this type of information”.
(ii)“Moreover, through the question-and-answer facility in the data room, Elanor could have asked a simple question to the effect: Is the July Arrears Report a correct and complete statement of all rental arrears for each tenancy to 31 July 2017?”
(iii)“Similarly, through that facility, Elanor could have sought clarification as to the difference between the print date and the last payment date on the July Arrears Report and the period to which it relates”.
(g)This aside, there was “considerably more evidence to the effect that Elanor was not lead into error by the July Arrears Report because it took the risk that one or more, or indeed all, of the Food Court Tenants may be in arrears and may not ultimately be complying with their payment obligations pursuant to the leases or whether the Food Court Tenants were in arrears was immaterial to its decision-making”: J[166].
The reference to “considerably more evidence” is a reference to J[220] to [238] under the heading “The overall contextual circumstances”, in which his Honour considered the “context” in which the alleged misleading conduct occurred. In this section, the trial judge was also critical of Elanor’s lack of inquiry – see: J[226], [229], [235], [238].
Particulars (ii) and (iii) to [44(f)] of the FASOC
His Honour dealt with the second and third particulars to [44(f)] of the FASOC by stating:
[167]The second Arrears Representation is pleaded as an implication: the circumstances in which the Tenant Arrears Reports were provided and the absence of any other document of a similar nature for different periods or tenants. This pleading is difficult to understand and was not elaborated upon in Elanor’s closing submissions. It does not add to the express representation said to be conveyed by the arrears reports and self-evidently the implication cannot be inconsistent with the objective meaning of those reports. In my view the implied representation contention takes Elanor’s case no further than the express representation case.
[168]Thirdly, there is the oral representation claim that is founded on what Mr Shah said and did not say during the 30 August Meeting. As I have found, Mr Shah did not identify any of the Food Courts Tenant as having arrears of more than 30 days during that meeting, but it does not follow from that finding that his conduct was, in all of the circumstances, misleading or deceptive or likely to mislead or deceive, which point I return to later in these reasons.
Paragraph [46A] of the FASOC
The trial judge dealt with [46A] of the FASOC under the heading “Did the respondents engage in misleading conduct by non-disclosure?” from J[172] to [176]. The trial judge explained the case in the following way:
[173]Paragraphs [19] to [26] of the FASOC concern the access granted by Elanor to the documents in the data room between 18 August and 15 September 2017, as well as the 30 August Meeting. The Tenant Arrears Reports for the period December 2016 to July 2017 are mentioned, and the July Arrears Report is emphasised. Paragraphs [35] and [36] reference provision of the October Arrears Report and the October incentive schedule provided to Elanor’s solicitor on 27 October 2017. As I have explained, the October documents are simply irrelevant to the decision-making of Elanor to enter into the Sale Contract, and no attempt has been made to lay out a case in the evidence as to what would have been done to end that contract in the event that relevant information had later been disclosed and that Elanor had been misled. Paragraph [40] is a reference to the passing base rent per annum in the tenancy schedule and to the outstanding incentive schedule, each as attached to the Sale Contract.
The trial judge rejected that case in one paragraph at J[174] stating:
[174]Elanor fails to explain how these documents gave rise to a reasonable expectation that the fact of arrears of more than 30 days by any of the Food Court Tenants between December 2016 and October 2017, would have been disclosed to it. The fact is that Elanor had the benefit of the due diligence material and period of investigation, was itself a sophisticated investor and engaged Mr Hamilton as an experienced person in the undertaking of due diligence assessments, particularly for shopping centres. It was open to Elanor throughout the due diligence period to seek more documents and to ask specific questions. Relevantly, it did neither.
As to this, of course, Elanor had asked specific questions of Mr Frenil Shah on 30 August 2017, but was not informed that any of the Food Court Tenants were in arrears.
The principles
In Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8; 97 ALJR 388 at [80] and [81], Kiefel CJ, Gageler, Gordon, Edelman and Gleeson JJ set out the four steps involved in determining whether a person has breached s 18 of the ACL. That case concerned representations to members of the public, but the steps are relevantly the same where the target audience is more confined. The steps are:
(a)First, identifying with precision the “conduct” said to contravene s 18. The first step requires asking: “what is the alleged conduct?” and “does the evidence establish that the person engaged in the conduct?”
(b)Second, considering whether the identified conduct was conduct “in trade or commerce”. There is no issue in the present case that the conduct was “in trade or commerce”.
(c)Third, considering what meaning that conduct conveyed to its intended audience. Where the pleaded conduct is said to amount to a representation, it is necessary to determine whether the alleged representation is established by the evidence.
(d)Fourth, determining whether that conduct in light of that meaning meets the statutory description of “misleading or deceptive or ... likely to mislead or deceive”, that is, whether it has the tendency to lead into error.
In relation to the third and fourth steps the High Court stated at [82] (footnotes omitted):
The third and fourth steps require the court to characterise, as an objective matter, the conduct viewed as a whole and its notional effects, judged by reference to its context, on the state of mind of the relevant person or class of persons. That context includes the immediate context – relevantly, all the words in the document or other communication and the manner in which those words are conveyed, not just a word or phrase in isolation – and the broader context of the relevant surrounding facts and circumstances …
It is wrong only to analyse the separate effect of each piece of conduct asserted to give rise to a representation without analysing whether the representation was conveyed by the whole of the conduct assessed in context: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; 149 CLR 191 at 199; Butcher v Lachlan Elder RealtyPty Limited [2004] HCA 60; 218 CLR 592 at [39] (Gleeson CJ, Hayne and Heydon JJ); Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; 250 CLR 640 at [52]. Examining only isolated parts of the conduct “invites error”: Butcher at [109] (McHugh J); approved in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304 at [102].
Ground 4 of the notices of contention
It is convenient at this stage to deal with ground 4 of the respondents’ notice of contention which contends that Elanor had failed to prove, in respect of the Food Court Tenants that, “… as at 1 November 2017 those tenants were ‘at risk’” by reason of the facts that:
(a)The tenants had not been paying any rent for some while; and
(b)The tenants’ tenancies were likely to end imminently.
Had the information in the Savills tenant arrears reports been made available to Elanor during the due diligence period, it would have revealed that as at a print date of 15 August 2017 (with the heading July 2017) four tenants, Bel Cibo, Sushi Kuni, Mumbai Blues and Dizzy Dukes, were all in arrears. Of those four tenants, Bel Cibo and Sushi Kuni had an extensive history of arrears of rental. Mumbai Blues had never been other than in arrears and Dizzy Dukes had gone from a period of being in arrears as at a print date on 1 June 2017, to being in advance on 7 June 2017 and 6 July 2017 before once again falling into arrears as at 15 August 2017. On that basis, Mr McNaughton’s consideration of an “at risk” tenant as being those having difficulty paying rent or other charges and fees, having current or historical arrears, or who may fall into arrears in the future would have excluded them in his process of arriving at an offer, the second of which it may be recalled, was made on 16 August 2017.
It follows that ground four of the notices of contention fail.
The “real value” of the Centre as at 1 November 2017
In a matter such as this where the acquisition of property is induced by misleading and deceptive conduct, in determining the amount of loss sustained for the purposes of s 236 of the ACL, an approach of subtracting the real value of the asset at the date of purchase from the price paid is a common approach, sometimes referred to as the rule in Potts v Miller (1940) 64 CLR 282: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 at [35].
Although dealing with a fraud case and the acquisition of shares, in Potts v Miller (at p 289) Starke J described the rule as being “[t]he measure of damage in a case in which a person is induced by fraud to take up shares is the difference between the amount he subscribed or paid for the shares and the real value - not the market value - of the shares on allotment”.
Dixon J explained the rule in the following terms (at p 298):
The reason given for the rule is that, if, after the date of purchase, the thing which the plaintiff was induced to buy loses in value owing to accidental or extrinsic causes, that loss is not the reasonable consequence of the inducement. “It is not enough to say that but for the misrepresentation or fraud the purchaser would never have bought, and therefore would not have lost the thing bought. To recover back the whole price, if the thing had any value when bought, he must be in a condition to rescind the bargain and replace it, which here the plaintiff is not, as it is not in his power to make the company take back the shares, or in the power of the company to resume them.
If a man is induced by misrepresentation to buy an article, and while it is still in his possession it becomes destroyed or damaged, he can only recover the difference between the value as represented and the real value at the time he bought. He cannot add to it any further deterioration which has arisen from some other supervening cause” (per Cockburn C.J. in Twycross v. Grant).
This reasoning makes it necessary to distinguish between the kinds of cause occasioning the deterioration or diminution in value. If the cause is inherent in the thing itself, then its existence should be taken into account in arriving at the real value of the shares or other things at the time of the purchase. If the cause be “independent,”“extrinsic,”“supervening” or “accidental,” then the additional loss is not the consequence of the inducement.
(Citations omitted)
In HTW Valuers, the High Court observed: at [35], [36] that the rule was not inflexible or rigid and that “[o]ne key qualification of the rule which prevents it from being inflexible is that the test depends not on the difference between price and ‘market value’, but price and ‘real value’ or ‘fair value’ or ‘fair or real value’ or ‘intrinsic value’ or ‘true value’ or ‘actual value’ or what the asset was ‘truly worth’ or ‘really worth’ or ‘what would have been a fair price to be paid … in the circumstances … at the time of the purchase’. This distinction is sometimes difficult to draw, but it is old and fundamental.” (Citations omitted).
The High Court identified a second qualification to the rule: at [37], referring to Dixon J (at p 299) in Potts v Miller which is that “[t]he distinction between a value which answers one of the tests just stated and market values means that market values – the prices actually obtainable in market sales – may be disregarded if they are ‘delusive or fictitious’ because they are the result of ‘a fraudulent prospectus, manipulation of the market or some other improper practice on the part of the defendant’”.
As to the assessment of compensation or value being informed by matters known at a later date, the High Court noted another matter to which Dixon J referred in Potts v Miller (at p 299) in relation to the value of shares where his Honour said “… looking back from subsequent events to the earlier state of the company it may appear that at the time the shares were taken the assets of the company did not correspond in value to the money paid”.
The High Court continued: at [39], [40]:
In the same way, in Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281, 291-296 this Court pointed out that, in many fields of law, assessments of compensation or value at one date are commonly made taking account of all matters known by the later date when the court's assessment is being carried out. … The limpid words of Lord MacNaghten about the duty of an arbitrator in determining compensation are far too well known to escape repetition [Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426, 431]:
Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?
The significance of Kizbeau Pty Ltd v W G & B Pty Ltd is that it endorsed that approach in relation to s 82 of the Act when the court is assessing damages by comparing the price and the real value of the asset at the date of the acquisition.
Finally, although the court is entitled to take into account events after the date of acquisition, it must distinguish among possible causes of the decline in value of what has been bought.
Although the reference in the passage quoted above is to s 82 of the Trade Practices Act1974 (Cth) it is of equal application to s 236 of the ACL.
The primary judge noted, correctly, that whereas Potts v Miller guides the approach to the assessment of damages under s 236, nonetheless the correct approach is to assess an amount for damages that best accords with the remedial purpose of the ACL: Murphy v Overton Investments Pty Ltd [2004] HCA 3; (2004) 216 CLR 388. To that extent, the rule in Potts v Miller is not to be regarded as the test pursuant to s 236 ACL: HTW Valuers at [35].
Accordingly, in this matter an issue for determination by the primary judge was the “real value” of the Centre. The valuers addressed the “market value” of the Centre as at 1 November 2017 which was the date of settlement. As the authorities which I have referred above make it clear, that is not the test.
The Sale Contract was entered into on 23 October 2017. Whereas in a matter such as this one might ordinarily assess damages as at the date the contract, in this case nothing turns on the difference between the two dates.
Before the primary judge, Elanor had submitted that the “real value” of the Centre should be assessed by assuming all nine Food Court tenancies were vacant since Kebab Express, Thai Me Down and Mass Nutrition were all part of the same precinct in the Centre and ultimately, each of them failed.
As an alternative submission before the primary judge, Elanor had submitted that it was open to his Honour to “readily assess the net present value” of the lost income for the three tenancies and apply it to Mr Kwan’s schedule of calculations.
Dealing with the alternative submission first, the primary judge did not accept that submission on the basis that although a court should do the best it can on the evidence, that does not permit a court to assess damages where an applicant has failed to adduce the evidence necessary to prove the case, citing Keys Consulting Pty Ltd v CAT Enterprises Pty Ltd [2019] VSCA 136 at [69]-[70].
So much so may be accepted although it is not the case that Elanor failed to adduce evidence such that Keys Consulting is not on point.
Mr Kwan had assumed nine Food Court tenancies were vacant, along with five other tenancies.
Certainly, whether the Savills tenant arrears reports or the July arrears report are considered, there were four tenants “at risk” as at 31 July 2017.
Although the valuers assessed the market value, that does not necessarily mean that the value of the Centre at which each valuer arrived does not reflect the “real value” of the centre.
It is in that context that Mr Kwan’s assumption concerning the nine Food Court tenancies assumed importance. The primary judge found that the assumption had not been made out, however, the assumption by Mr Kwan as to the number of vacant Food Court tenancies is not an all or nothing proposition.
In the event a court arrives at a factual finding which differs from the assumptions made by an expert, but does not in any way affect or compromise the method by which an expert such as a valuer arrives at their opinion, that does not mean that the evidence adduced by the expert is of no utility. In this matter, it is not a question of there being a challenge to the method adopted by Mr Kwan, rather it is the application of different inputs to those which Mr Kwan assumed.
It is important to bear in mind that the approach taken to the assessment of damages is not the same approach as when considering reliance. It is not a question of whether Elanor would have paid a lesser sum or not entered into the transaction. It is a calculation, as best as the Court can do on the available evidence of the “real value” of the Centre.
Unlike HTW Valuers, this was not a matter in which there was a significant risk to the Centre identified in the form of external competition which had not been disclosed.
Certainly, there was evidence that:
(a)Two tenants, Bel Cibo and Sushi Kuni had been in arrears since December 2016;
(b)The casual dining precinct had recently been upgraded and that the other seven Food Court Tenants had commenced trading from May or June 2017;
(c)Mr Frenil Shah had ensured that arrears had been brought up-to-date prior to settlement (save as to Burrito Bar);
(d)In the period between 1 November 2017 and 16 March 2020, each of the Food Court Tenants either vacated or abandoned their leases with Elenor resuming possession. Specifically:
(i)Burrito Bar abandoned its lease in January 2018;
(ii)Thai Me Down’s lease was terminated on 30 June 2019 for breach of lease;
(iii)Elanor re-entered the premises and terminated Sushi Kuni’s lease on 4 February 2019 for non-payment of rent;
(iv)Bel Cibo was placed in liquidation on 12 April 2019 at which time the liquidator disclaimed its lease;
(v)Dizzy Duke’s lease was terminated by Elanor on 26 April 2019 for unremedied breach of lease;
(vi)Mumbai Blues lease was terminated on 26 April 2019 for unremedied breach of lease;
(vii)Kebab Express ceased trading on 16 March 2020 following a period of time in which it had been in breach of its lease;
(viii)Redcliffe Noodle Kitchen surrendered its lease on or about June 2020 following breaches of lease; and
(ix)Mass Nutrition surrendered its lease on 30 June 2018.
It is apparent from the above that two Food Court Tenants failed within eight months of settlement, five Food Court Tenants failed within 20 months, and the remaining two Food Court Tenants failed within 32 months.
There was no evidence that Elanor mismanaged the Food Court Tenants after settlement or in any other way contributed to the failure of the Food Court Tenants.
Against that evidence, is information included on p 21 of the Investment Memorandum provided to potential investors that, “[o]n an industry basis, Food retailing along with Cafes, restaurants and take away food services, continue to outperform” on retail sales growth by industry according to the Australian Bureau Statistics.
The Investment Memorandum continued, “Bluewater Square has a large proportion of Food Catering retailers and is therefore well-placed to benefit from this ongoing spending trend. Further, the Manager sees a strong opportunity to re-mix the Centre offering (e.g. fruit shop, chicken shop all, seafood, bakery, etc)”.
Putting aside the management opportunities to re-mix the Centre offering, on an objective basis, the evidence discloses that as at 1 November 2017, the Food Court component of the Centre had positive prospects, notwithstanding its relatively recent renovation and new tenants.
The issue therefore is whether in determining the “real value” of the Centre, the Court should accept Mr Kwan’s assumption of nine vacant Food Court tenancies or proceed on some other lesser number, given the primary judge’s factual finding that there were three Food Court tenancies in arrears at 31 July 2017, or four vacant Food Court tenancies as I have concluded should have been found by the primary judge.
Elanor asks the Court to find that the real value of what it purchased should be ascertained in light of the subsequent events which showed that the price paid for the purchase of the Centre was not its true value.
When the available evidence is considered, whereas seven of the Food Court Tenants failed within 20 months of settlement, two continued for approximately 32 months to June 2020, which was in the COVID era. Nonetheless, the two remaining Food Court Tenants were in significant arrears of rental at the time their leases were terminated.
It seems to me that in the light of the information from the Australian Bureau of Statistics published in the Investment Memorandum, the failure of the Food Court Tenants was, to use the words of Dixon J in Potts v Miller at p 298, “‘independent’, ‘extrinsic’, ‘supervening’ or ‘accidental’” such that “the additional loss is not the consequence of the inducement”.
Unlike the position in, for example, HTW Valuers there was no evidence that the redeveloped Food Court faced a significant risk from the start such that it was inherent in the asset being purchased. On the contrary, Mr Hamilton’s evidence, which was accepted by the primary judge, was that that he could not identify whether a tenant was at risk of falling into arrears from one or two months of trading and that it may take up to a year to make a judgment on that question.
Accordingly, although the issue is finally balanced, it is a step too far to say that the subsequent events comprising the failure of the Food Court Tenants were inherent in the Centre.
It is for these reasons that I am not prepared to determine the real value of the Centre on the basis of there being nine vacant Food Court tenancies as at 1 November 2017.
I have had the advantage of considering Bromwich and Thawley JJ’s reasons dealing with the value of the Centre as at 1 November 2017 and their Honours’ analysis of the difference between the two experts.
I agree with their Honours’ reasons as to the approach to be adopted in ascertaining the value of the Centre as at that date, although because I do not accept there were nine Food Court vacancies, for the reasons I have explained above, I differ slightly in the quantum of Elanor’s loss.
Further, although I agree with Bromwich and Thawley JJ’s observations about Mr Kwan’s below the line deductions, I do not agree with their Honours’ observations that Mr Goran’s allowance is too low because their Honours proceed on the assumption there were nine Food Court vacancies.
Both the Savills tenant arrears reports and the Hellen Report as varied by the Joint Report and as further adjusted in these reasons to reflect the removal of Mr Neil Shah’s annotations, showed four tenants in arrears as at 31 July 2017. Adopting Bromwich and Thawley JJ’s figures but allowing for four vacancies instead of nine and using a capitalisation rate of 7.25% to reflect the vacancies and the rate agreed by both valuers, the calculation becomes:
Estimated value before below the line adjustments $52,474,347
Less ongoing capital expenditure - year 1 $50,000
Other capital expenditure forecast - year 1 $500,000
Leasing fees, letting up allowances and incentives (4 tenancies) $186,666$51,737,681
It follows that as at 1 November 2017, the real value of the Centre was $51.74 million such that Elanor has suffered a loss of $55.25 million - $51.74million = $3.51 million. If the agreed adjustment of $650,000 for the rental guarantee is deducted, Elanor’s loss becomes $2.86 million.
It follows that ground five of the notice of appeal, which contends that the primary judge erred in finding Elanor suffered no loss, succeeds.
The remaining notice of contention grounds
Alceon’s four grounds in its notice of contention fail.
CPRAM’s notice of contention contains two further grounds.
Ground five in CPRAM’s notice of contention
Ground five asserts:
That, in the event that the appeal is upheld and an award of damages is made, the appellant’s claim against the second respondent was an apportionable claim for the purposes of Part VIA of the Competition and Consumer Act 2010 (Cth), and that pursuant to section 87CD of that Act, it would be just to limit the proportion of any such award of damages for which the second respondent is liable to a proportion that has regard to the extent of the second respondent’s responsibility for the appellant’s loss, by having regard to the fact that the first respondent received all of the purchase monies paid by the appellant, and the second respondent was merely an agent of the first respondent.
There is no issue that Elanor’s claim against CPRAM is an apportionable claim for the purposes of s 87CB of the ACL such that s 87CD is engaged.
Section 87CD provides:
87CD Proportionate liability for apportionable claims
(1)In any proceedings involving an apportionable claim:
(a)the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant’s responsibility for the damage or loss; and
(b)the court may give judgment against the defendant for not more than that amount.
(2)If the proceedings involve both an apportionable claim and a claim that is not an apportionable claim:
(a)liability for the apportionable claim is to be determined in accordance with the provisions of this Part; and
(b)liability for the other claim is to be determined in accordance with the legal rules, if any, that (apart from this Part) are relevant.
(3)In apportioning responsibility between defendants in the proceedings:
(a)the court is to exclude that proportion of the damage or loss in relation to which the plaintiff is contributorily negligent under any relevant law; and
(b)the court may have regard to the comparative responsibility of any concurrent wrongdoer who is not a party to the proceedings.
(4)This section applies in proceedings involving an apportionable claim whether or not all concurrent wrongdoers are parties to the proceedings.
(5)A reference in this Part to a defendant in proceedings includes any person joined as a defendant or other party in the proceedings (except as a plaintiff) whether joined under this Part, under rules of court or otherwise.
In order for the s 87CD to have any work to do, CPRAM must be a concurrent wrongdoer within the meaning of s 87CB(3), being “… a person who is one of two or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim.”
In assessing the liability of a concurrent wrongdoer, the legislation provides that a claimant can recover from each wrongdoer only that proportion of the loss and damage claimed, the Court considers just having regard to the particular wrongdoer’s responsibility for the damage or loss: s 87CD(1).
In approaching s 87CD, the Court has regard to the particular wrongdoer’s responsibility for the damage or loss: Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10; (2013) 247 CLR 613, [16] (French CJ, Hayne and Kiefel JJ). See also Shrimp v Landmark Operations Limited [2007] FCA 1468; 163 FCR 510 (Besanko J); Latteria Holdings Pty Ltd v Corcoran Parker Pty Ltd [2014] FCA 880; 224 FCR 519 (Mortimer J as her Honour then was).
CPRAM submits, correctly, that Alceon received all of the purchase monies paid by Elanor, and that it was Alceon’s agent. Nonetheless, CPRAM’s role in the contravening conduct was not limited to merely passing on information, e.g. Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661. As the analysis of the impugned conduct shows, Mr Frenil Shah played an active role in that conduct by making the oral representations in his meeting with Mr Hamilton and others on 30 August 2017. Further, he was in a position as portfolio manager for CPRAM in relation to the Centre and was responsible for the oversight of day-to-day management and administration of the Centre, financial analysis and reporting, as well as direct liaison with the tenants. It is clear that he played an active role in the misleading and deceptive conduct such that it is appropriate CPRAM, of which he is a Director, bears some responsibility.
As to the level of that responsibility, whereas it is the case that the data room tenant arrears reports and the July arrears report did not show any Food Court Tenant in arrears, in Mr Frenil Shah’s position with the day-to-day management of the Centre, the issue of any tenant, whether Food Court are otherwise, being in arrears of rent or other payments must have been the focus of his attention. A face-to-face meeting between Mr Hamilton and Mr Frenil Shah was the opportunity for Mr Hamilton to understand if there were any issues with any of the tenants. Mr Frenil Shah misled Mr Hamilton, who was seeking information at a day-to-day management level.
In all the circumstances, I consider it appropriate that CPRAM should bear 30% responsibility for the damages with Alceon being apportioned 70%.
Grounds six and seven of CPRAM’s notice of contention
Grounds six and seven of CPRAM’s notice of contention seek apportionment against CBRE and Elanor’s failure to take reasonable care to identify any misleading or deceptive conduct respectively.
As to CBRE, Mr Hamilton made such enquiries as he was able to make. The tenant arrears reports made available to him showed no Food Court Tenant in arrears and he was misled by Mr Frenil Shah at his meeting on 30 August 2017.
I am not satisfied that CBRE should bear any responsibility for the loss suffered by Elanor such that ground six of CPRAM’s notice of contention should be dismissed.
The assertion in ground seven of CPRAM’s notice of contention, that Elanor failed to take reasonable care to identify any pleaded misleading or deceptive conduct, including failing to determine when the Food Court Tenants had actually commenced trading, and whether any of them had a history of rental arrears, relies on s 137B of the which provides:
137B Reduction of the amount of loss or damage if the claimant fails to take reasonable care
If:
(a)a person (the claimant) makes a claim under subsection 236(1) of the Australian Consumer Law in relation to economic loss, or damage to property, suffered by the claimant because of the conduct of another person; and
(b)the conduct contravened section 18 of the Australian Consumer Law; and
(c)the claimant suffered the loss or damage as result:
(i) partly of the claimant’s failure to take reasonable care; and
(ii) partly of the conduct of the other person; and
(d)the other person did not intend to cause the loss or damage and did not fraudulently cause the loss or damage;
the amount of the loss or damage that the claimant may recover under subsection 236(1) of the Australian Consumer Law is to be reduced to the extent to which a court thinks just and equitable having regard to the claimant’s share in the responsibility for the loss or damage
In all the circumstances, it is difficult to know why it is alleged that Elanor failed to take reasonable care to identify the matters in ground seven. It was entitled to take the documents provided in the data room at face value and it engaged CBRE (Mr Hamilton) to carry out financial due diligence. The information with which it was provided from the data room was misleading and Mr Frenil Shah misled Mr Hamilton. It is inconceivable that the type of exercise engaged in by the expert accountants would be undertaken by a prospective purchaser.
If any criticism can be levelled at Elanor it is that the recommendation to the board was given before CBRE’s final financial due diligence report was provided to Elanor, but it was sometime after the financial due diligence report was provided that Elanor exercised its option.
In the circumstances, Elanor did not fail to take reasonable care such that it did not share in the responsibility for the loss or damage.
It follows that ground seven of the notice of contention fails.
CONCLUSION
The appeal should be allowed.
Elanor is entitled to damages of $2.86 million together with interest on that sum from 1 November 2017.
In view of the apportionment I have determined, Alceon is to pay to Elanor the sum of $2.002 million together with interest on that sum from 1 November 2017.
CPRAM is to pay the sum of $858,000 together with interest on that sum from 1 November 2017.
Save for those figures, I agree with the orders proposed by Bromwich and Thawley JJ.
I certify that the preceding four hundred and fifty-six (456) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Sullivan. Associate:
Dated: 18 September 2024
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