Gimtack Pty Ltd v Cathie & the State of Victoria
[2001] VSC 88
•2 April 2001
| SUPREME COURT OF VICTORIA | |
| COMMON LAW DIVISION | Not Restricted |
No.5191 of 1995
| GIMTAK PTY LTD | Plaintiff |
| v | |
| IAN ROBERT CATHIE & THE STATE OF VICTORIA | Defendants |
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JUDGE: | Smith, J. | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 20, 21 – 22 February 2001 | |
DATE OF JUDGMENT: | 2 April 2001 | |
CASE MAY BE CITED AS: | Gimtak Pty Ltd v Ian Robert Cathie & The State of Victoria | |
MEDIUM NEUTRAL CITATION: | [2001] VSC 88 | |
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Lease – breach of lessee's covenants to paint, repair and reinstate – measure of damages.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Dr. C. Pannam Q. C. & Mr. M. Strang | Aitken, Walker & Strachan |
| For the Defendants | Mr. W. Lally Q.C. & Mr. M. Clarke | Victorian Government Solicitor |
HIS HONOUR:
The Claim
The plaintiff seeks damages for the breach of three covenants in the lease entered into between it and the first defendant on 18 December 1985.
(a) Clause 4.7(g)
"The Lessee shall at all times during the term at the lessees own expense and without any notice or demand from the lessor –
(a). . .
(d)maintaining in good order and condition all painted paper or otherwise treated or decorated external and internal portions of the demised premises and within the last three months of every third year of the said term as well as within the last three months of the final year of the said term to repaint re-paper or otherwise treat and decorate as before.
(b) Clause 8.2(a)
"The Lessee shall at the expiration or sooner determination of this lease peaceably surrender and yield up unto the Lessor the whole of the demised premises and every part thereof clean and free from rubbish and in a state of repair, order and condition which is in all respects consistent with the covenants on the part of the Lessee herein contained;
(c) Clause 8.2 (b)
If the Lessee shall not have done so as of right under any provision hereof the Lessee shall if required so to do by the lessor remove from the demised premises within fourteen days from the expiration or sooner determination of the term hereof any fixtures, fittings and floor coverings (to which such requirement shall relate) erected or installed by the Lessee during or prior to the term hereof and shall make good any damage whatsoever caused to the demised premises by such removal and if required by the Lessor shall re-alter any alterations made by the Lessee so that the demised premises shall be converted back to their original condition provided always that the Lessor may at its option itself cause any such fixtures or fittings to be removed and any such damage to be made good and any such alterations to be so altered and may recover the cost thereof as a liquidated debt payable on demand."
History of Proceeding
The Lessee vacated the premises on the expiration of the lease on 1 August 1994. The Lessor, shortly prior to that event served notice upon the Lessee to comply with the provisions of the lease including cl. 8.2(b). A dispute emerged, inter alia, as to what cl.8.2(b) required the Lessee to "re-alter".
The matter first came before me for trial on 27 March 1998. The course was adopted of identifying questions of construction of the lease which were then to be determined by me. The initial hearing of those questions concluded on 16 April 1998 and a preliminary judgment was delivered on 29 July 1998. On 6 August 1998 a reference was made to a referee, Mr. Gallagher on, inter alia, the factual question of whether there had been a breach of the above clauses. He reported on those questions by report of 21 May 1999 in which he found that the above three clauses had been breached. By a report dated 18 April 2000 he quantified the cost of works that should have been done by the defendants under the clauses as follows:
▪
Clause 4.7(g) – painting works
$179,000
▪
Clause .2(a) – repair works
$38,620
▪
Clause 8.2(b) – removal of fixtures
and fittings
$197,000
He also determined that 20 weeks would have been required to complete the work and there would have been four weeks preparatory work. The referee's reports on those matters were accepted. The matter has returned to me for determination of the quantum of damages.
Assessment of Damages – Parties' Positions
The plaintiff submits that there has been a breach of each of the above clauses and each had an impact on the value of the premises. Bearing that in mind, the plaintiff initially submitted that two approaches may be taken to the assessment of damages in the circumstances of the present case.
(a)Cost of works
This approach involves assessing the cost of making good the breaches of each covenant together with the rent that could not have been earned and the expenses incurred during the period needed to make good any such breaches. The plaintiff claims the amounts assessed by the special referee totalling $415,358 and loss of rent and outgoings incurred during a 25 week period of delay caused by the need to do the works totalling $202,778.
(b)Diminution in value
This approach involves assessing the diminution in value to the property resulting from the breaches. This is to be arrived at by determining the value that the property would have had if the covenants had been complied with and comparing that value with the value of the property in the state in which it existed on 1st August 1994 when the tenant vacated. The plaintiff claims a diminution of value of either $653,000 or $500,000. In addition the plaintiff argues that a similar amount is payable in respect of rental that could not be earned and outgoings incurred during the period required to make good the breaches.
The plaintiff also claims interest on the sum awarded under each approach.
In the course of final submissions, counsel for the plaintiff took the position that the primary approach in the circumstances of the present case should be the cost of carrying out the works.
The defendants, while accepting the referee's findings, argue that the plaintiff's approach to the assessment of damages is incorrect for a number of reasons.
(a)Breach of clause 4.7(g) They accept that the appropriate method of assessing damages for breach of this clause is the cost of painting or papering, decorating or treating, but argue that damages should not be awarded for this item because to do so would be unreasonable. They argue that the cost of the work is significantly disproportionate to the beneficial impact of the work on the value of the property and that the plaintiff did not intend to carry out the work and the work was not carried out. If, however, damages are awarded for breach of this clause on the basis of the cost of carrying out the works, they accept that the damages may be awarded for the loss of use of the premises which would have followed if the works had been carried out.
Counsel for the plaintiff submit that its own valuer had assessed breach of clauses 4.7(g) as having an impact of $50,000 on the value and that to award damages of $179,000 in respect of that claim would not be unreasonable. Counsel also argue that it is irrelevant that the work was not carried out.
(b)Breach of clause 8.2(a). The defendants concede that the amount of $38,620.18 found by the referee is recoverable together with damages for the loss of use of the premises which would have flowed from carrying out the repair work. The defendants make this concession on the basis that the costs of repairs are not disproportionate to (and on the evidence would have been approximately the same as) the impact on the value of the premises and concede that the fact that the works were not carried out does not prevent the plaintiff from recovering those amounts.
(c)Breach of clause 8.2(b). The defendants argue that damages are not recoverable for breach of this clause because the proper measure of damages for breach of such a clause is loss of value not the cost of carrying out the works and that, on the evidence, there was no impact on the value of the property. The defendants submit further that if a loss of value approach is taken then loss of rental and outgoings incurred during the carrying out of the works cannot be recovered because it would already be included in the valuation. They point to the evidence of Mr. Brown, a valuer called for the plaintiff, from which it was clear that he had taken the delay factor into account in determining an appropriate value figure. The defendants also submit that it would be unreasonable to award damages on a cost basis. The plaintiff contests these arguments.
The Law – Parties' Positions
As to the law to be applied, the parties are in broad agreement. In particular, they agree that it is relevant to apply the principles developed for assessing damages for breach of contract. They differ, however, in their emphasis and in their submissions on the law applicable to the assessment of damages for the breach of clause 8.2(b).
The plaintiff's starting point is the fundamental principle that the general object of an award of damages for breach of contract is to put the innocent party in substantially as good a position as if the contract had been performed "so far as a money can do it" (citing Baron Parke in Robinson v Harman (1848) 1 Ex. 850 at 858). The plaintiff emphasises the distinction between contractual liability and tortious liability arguing that in contract, the parties have given consideration for the due performance of the contractual obligations. The parties have agreed in advance as to what is to be done or not to be done in the future. Counsel also drew my attention to passages in the dissenting speeches of Lord Gough and Lord Millett in Panatown v McAlpine [2000] 4 All ER 97 where there is consideration of a contracting party's interest in the performance of the contract and discussion of the concept of damages to compensate for loss of the contracted performance.[1]
[1]At 123-127 and 160-165. For recent discussion of Panatown v. McAlpine (above) see Coote, "The performance interest, Panatown and the problem of loss" [2001] 117 LQR 81.
The plaintiff argues that the only exception to the above fundamental principle is that the award of damages must not be unreasonable and argues that reasonableness depends in essence on the proportionality between the cost of compliance with the contractual obligation and the benefit in the fulfilment of the promise.[2]
[2]See: Bellgrove v Eldridge (1954) 90 CLR 613; Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344; James Hutton [1950] 1 KB 9; Joyner v Weeks [1891] 2 QB 31; Alucraft Pty Ltd v Grocon [1996] 2 VR 386; Eyre v Rea [1945] 1 KB 567; Westminster v Swinton [1948] 1 KB 524
The plaintiff submits that the mere fact that the premises were sold by the plaintiff in December 1995 and that the breaches will not be made good is not to the point. It argues that the cause of action had accrued at the time of breach and the sale does not affect it. The plaintiff relies on Decesare v De Blank Motors (1996) 67 SASR 28 at 31–5. Counsel for the plaintiff submits that the sale has no relevance to the issue of reasonableness. The plaintiff also relies on statements in Telecom and CPS Community Credit Co-op. v. Herbert Pty. Ltd. (1992) V.ConvR. 64-453 (at 65-281) that where it is shown that the premises are unlettable then it is not necessary to prove that tenants were in fact available. That having been said, the plaintiff submits that the evidence of its witness, Mr. Roebuck, an estate agent, indicates there were people interested in leasing the premises but the difficulty was the state of the premises. All that has to be proved, it is said, is that there was a market.
The defendants, while accepting much of the above argue that a difference in the law has emerged in dealing with breach of repair covenants in a lease on the one hand and breach of a reinstatement covenant such as that contained in cl. 8.2(b). In the case of repair covenants they accept the application of the above but emphasise the reasonableness requirement. Thus, in the case of breaches of cl. 4.7(g) and cl. 8.2(a), the measure of damages is the cost of the relevant works unless it would be unreasonable to use that measure. Relying upon Graham & Anor. v The Markets Hotel Pty Ltd (1943) 67 CLR 567 and statements in Joyner v Weeks (above) they argue that this rule is the general rule or the prima facie rule and one that will not be applied where it is not reasonable to do so.[3] I was referred also to cases where it is said these principles had been applied.[4] They also argue that it is relevant to reasonableness to determine whether the work in question has been done and whether the plaintiff intends to initiate such work.[5]
[3]Bellgrove v Eldridge (1954) 90 CLR 613.
[4]Alucraft Pty Ltd v Grocon Ltd (No 2) [1996] 2 VR 386 at p.389 and 396; and in Black Creek Deer Farm v ANZ (1996) V. Conv.R. 54-549 at p.56, 541-2), (also see D Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10 at p.12, Commonwealth v Silverton (1997) 130 ACTR 1 at p.23-24)
[5]Citing Alucraft at 396 and Ruxley at 372-3.
Counsel for the plaintiff submit that the cases where damages for cost of remedial works had been denied had been cases where the disproportion was extreme such as Ruxley. Here, counsel submit that other considerations come into play in any event. For example, the painting was going to affect the appearance of the building whether it be re-let or sold. It had a real impact on the situation of the owner.
In the case of breach of cl. 8.2(b), the defendants submit that the damages should be assessed according to the diminution in value resulting from the breach. They rely upon James v Hutton.[6] They argue that the rationale is that where there is breach of a repair covenant, damage can be assumed to have been suffered but this is not necessarily so where the covenant is one requiring the removal of fixtures and fittings.
[6]Footnote 2 above.
The plaintiff submits that there is no prima facie rule in respect of covenants to reinstate and that James v Hutton is not authority for the proposition asserted. James v Hutton concerned a lessee who, under licence, altered the shop front of the leased building having covenanted in the licence to restore the building, on request, to its original condition at the expiration of the lease. On the determination of the lease, the lessee was requested to restore the shop front and to reinstate the premises as they were before the licence was granted. The lessee failed to do so and the lessor sought damages being the cost of the restoration work. The circumstances were that the failure to restore the shop front had had no negative impact on the value of the premises and the plaintiff could point to no loss or damage though the plaintiff could point to a failure to comply with the covenant.
The defendants rely upon the following passages in the judgement of the Court of Appeal in James v. Hutton. After commenting that the general rule as to damages for breach of contract ought to be applied the Court commented
"To apply the rule as to the measure of damages for a breach of contract to deliver up a house in repair to this case is, in our opinion, wrong, for there is no true analogy between the two cases. If a tenant fails to deliver up a house in repair, the landlord must suffer some damage, at least so long as the house remains in existence. Instead of getting a house in a perfect state of repair he gets one which is dilapidated." [7]
[7]At 16.
The Court then referred to the appropriate measure of damages for breach of a covenant to repair as being that laid down in Joyner v Weeks. Later the Court of Appeal stated:
"But, as we have already said, that case must be regarded as proceeding on the footing that the plaintiff must have suffered by the tenant yielding up the house out of repair. We see no ground here for assuming that the plaintiff in this case has suffered any damage at all. She has got back her shop, or would have done, if the premises had not been requisitioned, provided with a modern and convenient front, and there was no suggestion that the work had not been carried out properly."[8]
A little later the Court of Appeal stated:
"The official referee thought that not only did the plaintiff not intend to do this work, that it would be a sheer waste of money if the work were done, and as no evidence was given that the plaintiff has suffered any damage in fact, the court is not entitled, in our opinion, to come to the conclusion that she must have suffered damage by reason of the defendants not complying with her requirement." [9]
The Court went on to say that the plaintiff was entitled to no more than nominal damages.
[8]At 17.
[9]At 17.
As I read the decision, the Court of Appeal was doing no more than applying the general principle articulated by plaintiff's counsel in this case to the facts of the case in James v Hutton. It was not purporting to lay down a prima facie rule for all cases but was stating that in the circumstances of that case only nominal damages were recoverable, there being no loss. Obviously, in cases where there is a covenant requiring a tenant to restore premises to the condition they were in at the commencement of the lease and the tenant has made alterations or introduced fixtures and fittings, there will be instances where failure to comply with the covenant to restore will cause no detriment – for example, the alterations may have improved the value of the premises. It is going too far, however, to suggest that there is a prima facie rule that loss of value is the measure of damage.
It is relevant to note the following passage appearing in the judgment in James v Hutton between the two passages quoted above:[10]
"We do not for one moment suggest that it might not be possible for a Lessor in circumstances such as these to give evidence that she or her superior landlords at the end of the term desired to carry on or to let the premises for the purpose of carrying on a business for which the altered shop front would be inappropriate and the old one suitable. In that case she might well say that it is of value to her to have her shop back in its former condition and she would suffer damage, if the Lessee's covenant to restore was not carried out, . . ."
The only other authority to which I was referred was a passage in Dodd Properties (Kent) Ltd v Canterbury County Council (1980) 1 WLR 433.[11] The passage identifies different approaches in applying the general principles as to the assessments of damages in tort and suggests that value will be the relevant consideration if the plaintiff reasonably intends to sell the property in its damaged state. It does not assist the defendant's argument.
[10]At 17.
[11]At 451 and in particular at 456.
Accordingly, the plaintiff's position on this issue is to be preferred.
Relevant Facts
I referred to a number of relevant facts in my preliminary decision given on the liability questions that were then raised. It is sufficient for present purposes to note the following:
(a)The dispute between the parties arose in part because the plaintiff in the notice delivered pursuant to cl. 8.2(b) required alteration of the premises back to the state they were in when the premises were first let as at 1 August 1974 and not to the state they were in when the lease was renewed on 1 August 1984 or 18 December 1985. I ruled against the plaintiff on its interpretation of the clause and held that the relevant date was 1 August 1984.
(b)There were four buildings on the site when the lease expired identified as the north building, the south building, the drain laying building and the maintenance building. The latter two were of relevantly recent construction having been built during the first lease. The north and south buildings were approximately 60 years old at the time the tenant vacated. They were then in a bad state of repair and filled, particularly the south building, with partitions and other fixtures and fittings.
(c)All expert witnesses are agreed that the premises were not lettable in the condition in which they were left by the tenant. The plaintiff, however, intended to keep the buildings as an investment property and re-let them.
(d)On the departure of the defendants on 1 August 1994, the plaintiff attempted unsuccessfully to lease the premises through an agent, Mr. Roebuck. I am satisfied that the plaintiff, did not carry out the works because in part of their financial burden and was forced by its bank to sell the premises on 1 December 1995 for the sum of $1,447,000. It was common ground that this sale provided evidence of the market value of the premises as at 1 August 1994 in the condition in which the defendants left them because they were sold in that condition. The plaintiff submits that the impact of the plaintiff's financial position does not prevent the plaintiff receiving damages[12].
(f)On the evidence there were older style buildings that continued to be sold and let for commercial purposes in the relevant area.
(g)The premises had been committed by the defendants to a very specialised use, namely, a TAFE college. So long as they remained so configured they could only be used for that purpose. In addition, the premises were unattractive to owner/occupiers because of the state in which they were left by the Lessee. This excluded a range of potential purchasers. Realistically, in their then state, they were of interest only to a developer.
(h)The clear intention behind the clauses in question was to return the premises to the plaintiff at the end of the lease in a condition where the spaces were clear, repaired and painted and so in a condition to be relet. Compliance with cl. 8.2(b), however, required the removal of all internal electrical wiring and electrical fittings and the removal of toilets in the drain laying block. These would have required attention on any reletting.
Approach to the Assessment of Damages
[12]Alcoa v Herbal Produce (2000) 3 WLR 23 at 30
In light of the authorities and the circumstances of this case, I accept that the starting point for the assessment of damages is the cost of carrying out the work that should have been carried out by the defendant. That cost totalled $415,358. The issue that then must be considered is whether the reasonableness qualification operates to prevent the plaintiff recovering that amount.
Defence Case on Damages – the Value Issue
Central to the defence case was the evidence of their valuer Mr. Jones that there was no loss of value as a result of non-compliance with the three covenants and thus it was unreasonable to award damages on the basis of the costs of the works. He attributed no value to the north and south buildings because of their age and because, according to the referee's findings, the roofing was near the end of its life and was made of asbestos sheeting, as was some cladding. His view was that this material would have had to have been removed in the immediate to near future because it posed a health hazard. As to the drain laying building, his view was that it added value to the property as it stood but work had to be done to concrete in a large sand pit area that had been constructed for drain laying practice. Compliance with cl. 8.2(b) would also require removal of the only toilet facilities in the building. His view was that compliance with cl. 8.2(b) would have substantially reduced the value of the building. In all three buildings, he noted that electric wiring would have to be removed under cl. 8.2(b) and he argued that this also had a significant negative effect on the value of the premises. This also appears to be his adverse comment on the impact of compliance with the covenants so far as the maintenance building was concerned, it also being a building like a drain laying building constructed by the tenant in the 1980's.
Mr. Jones' opinion was that the best use for the property was to demolish the north and south buildings. Accordingly he approached his valuation task by assessing the value of the site area occupied by the north and south building on the basis of underlying land value, considering a term and reversion approach for those buildings and capitalising the estimated income over what he saw as the life of the buildings, the area then reverting to land value. As to the area involving the drain laying building he analysed the cost of replacing items removed in compliance with cl. 8.2(b), valued the building in the condition left by the Lessee by capitalising its rental value and compared that valuation with a value of the premises assuming compliance with cl. 8.2(b). He came to the conclusion that compliance with cl. 8.2(b) would have resulted in a loss of value of $96,000. As to the maintenance building he expressed the conclusion that, having regard to the configuration of the premises and the lack of building curtilage, it was likely that the building would have been demolished, as in fact it had been when he inspected the property. He, therefore, considered that it would have made little difference to the value of the site whether the building existed or not.
In the end he commented that the removal of fixtures and fittings and the repairing and making good of the north and south buildings would have only added marginally to the value of the property in that it may have reduced the cost of the inevitable demolition that he saw having to occur. He concluded that overall there was a slight benefit from non-compliance and therefore no loss.
Assessing the Evidence of Mr. Jones
My initial reaction to the expert evidence has been that, whatever elaborate arguments might be presented by them, it is difficult to avoid the commonsense conclusion that the condition in which the Lessee left the premises must have adversely affected the value of the property. The Lessee left gaping holes in roofs and left the interiors, particularly of the north and south building, in a mess. A viewing of such premises would have discouraged greatly any would be purchaser or tenant and caused them to offer much less than they would have done if presented with clean, clear, repaired and painted spaces even if without the internal wiring and the toilets in the drain laying building.
Turning to the evidence of Mr Jones, I suggest that his assessment of the value of the premises was flawed.
Firstly, it was coloured by the fact that he considered the potential future life of the premises on the basis of the condition they were in as left by the defendants. He did not consider the potential future life of the premises in the event that they had been repaired, painted and the extensive partitioning and other fixtures and fittings had been removed. He examined photos and videos showing the condition of the premises when the defendants left and I am satisfied that this encouraged him to view the north and south building, in particular, as being of no value. They showed that the defendant had left those premises in a shambles.
Secondly, Mr. Jones focussed on the property as a rental property only, in determining its market value. But in valuing the property, it was necessary to consider its value for the owner-occupier. Further, in assessing the value of the north and south buildings he also assumed it would have taken 18 months to find tenants and then assumed they would be let during alternative periods of five and nine years. I do not accept those times as reasonable estimates. On the evidence tenants would have been found in a significantly shorter time and the north and south buildings had longer lives than Mr. Jones was prepared to concede.
Next, in assessing the value of the property, Mr. Jones did not consider what in my view was the most comparable property – 1–25 Raglan Street, Preston, a property relied on by one of the plaintiff's valuers Mr. Brown. Mr. Brown's description of this property in his report was as follows:
"Older style, industrial complex which essentially sold with vacant possession. Majority of low older buildings were demolished, although some have been retained. Older building was replaced with more modern buildings similar to the subject. Good comparison and an analysis of this sale indicates $143 per square metre of land area and $253 per square metre of gross building area. In my view, this location is not as good as the subject due to the subject's ability to obtain exposure to a relatively busy road."
The land at 1-25 Raglan Street was 12,971 square metres and the building area 7,302 square metres. The property was sold in September 1994, close in time to the departure of the Lessee from the subject premises, for an amount of $1,850,000. The figure of $143 per square metre for the land area reflects the price paid for the site which had on it older buildings which the purchaser intended to demolish. The land in the present case was 12,905 square metres in size. Mr. Brown in his report commented:[13]
"In my view the most comparable sale is 1-25 Raglan Street which is comparable in terms of date (September 1994), land area (12,970 square metres) and site coverage being in the order of 56% slightly less than the subject. Given this fact the value in my view lies at the upper end of the range."
Having regard to that property, and some six other properties listed which he had used for comparison purposes, he expressed the view that the value of the property was in the order of $140 - $150 per square metre indicating a value for the property as a whole, on a comparable sale basis, of $1,800,000 to $1,950,000.
[13]Page 11.
In view of the evidence of the market for old buildings in the area and in view of the action taken by the person who purchased the property in keeping the north building, I do not accept that the buildings did not have a future life. The demolition of the south building by the purchaser was done in circumstances where the mess of partitions and fixtures and fittings in the south building were still present. It is understandable that the purchaser chose in that situation to clear the site. It does not follow that, if the defendants had removed the fixtures, fittings and partitions, repaired the roof and painted the building, a purchaser would have demolished it. The buildings had no structural defects. I therefore disagree with Mr. Jones' view that the north and south buildings were at the end of their economic life.
The defendants raised an issue as to the roofs on the north and south buildings, the replacement of which would have cost $660,000. I am satisfied that while those roofs were at or near the end of their life, as found by the referee, and would over time have required replacement, they did not have to be replaced immediately. With repairs, they would have been immediately waterproof once the holes left in the roofs by the defendants had been covered. I accept the evidence of the plaintiff's valuers, Mr. Brown and Mr. Cunningham, the latter having direct knowledge of the state of the premises after the defendants left, that immediate replacement of the roofs was not required and the sheeting could have been replaced over time. In particular the fact that the sheeting was asbestos cement did not require immediate attention, it having been in place during the 20 years of occupancy by a TAFE and no health issues having apparently arisen in those 20 years. In any event, as and when the work was done, the value of the buildings would have increased.
I am also of the view that Mr. Jones was incorrect in attaching the significance that he did to the removal of the wiring that would have resulted from compliance with the covenants. The wiring in question was the internal wiring, wiring installed for the specialised purposes of the TAFE and, for the most part, of little value to any future owner or tenant.
Other aspects of his evidence may also be criticised but it is sufficient to state that, for the foregoing reasons, I do not accept the critical aspects of the evidence of Mr. Jones, evidence that was central to the primary argument of the defendants.
Evidence of the Plaintiff's Valuers
The plaintiffs called two valuers – Mr Brown and Mr Cunningham.
(a)Mr. Brown. He valued the property as at 1 August 1994 assuming that various re-instatement works required by the above clauses had been completed to a satisfactory standard. As to the selling price achieved in December 1995 of $1,447,000 he noted that the purchaser had had to deal with the fact that the property included all the fit out left by the previous tenant and had not been repaired or painted. His view was that the sale price was at the low end of the value having regard to its state at the time of the sale. Its state he said limited the market to the developer/purchaser rather than an occupier or an investor looking for lettable premises. In his approach to valuing the premises, assuming the clauses to be complied with, he relied principally on searching for comparable sales. He did other calculations, however, including one in which he capitalised what he considered to be the likely rental of the premises if left in the condition in which they should have been left by the defendant. He arrived at a figure of $2,100,000. He said also that his view was that if $179,000 worth of painting was not done the assessed value would be reduced by $50,000. He saw a direct relationship between the impact of the lack of repair work on the value, namely $40,000. As to the failure to comply with cl. 8.2(b), he assessed that as affecting the value of the property by approximately $400,000.
(b)Mr Cunningham. His evidence was that the premises were not lettable in their then condition in August 1994 and if they had been converted to clear spaces there would have been an increased probability of finding tenants. The drain laying building created problems for a prospective tenant or buyer because of the doubts about the work involved in removing the structures and dealing with the sandpit in the building. In the south building the problem was assessing the cost of removing the internal structures and whether it would be better to demolish the building or recycle it. An owner occupier would have been deterred because of the re-instatement work required as would an investor because of the appearance of the building and the amount of reinstatement works required. In its then state, the only significant class of potential purchaser were developers. Mr. Cunningham valued the property by considering other commercial properties and arriving at a rental figure which he capitalised using a yield figure of 12.5% - the same as that used by Mr. Brown in his checking capitalisation exercise. This exercise produced an assessment of $2,698,500 assuming the works identified by Mr. Gallagher were carried out. He also did an exercise using a unit value of $210 per square metre arriving at a figure of $2,700,000. He considered that that figure would be reasonable on a comparable sales basis. His concern with the state of the premises on 1 August 1994 was that the presence of Lessee's partitions, fixtures and fittings rendered the property useless for industrial warehousing or light manufacturing purposes. Their removal and the subsequent reinstatement was the single most important issue he thought and fundamental to the property's value. As to the property and its value in its condition as at 1 August 1994, he put a value of $2,121,500 on it. In arriving at that figure he subtracted from the value the cost of toilets, electrical fit out, painting, repairs and the cost of fixing the flooring in the drain laying building.
I note that Mr. Cunningham was in the unique position of having inspected the property on a number of occasions from 1985 to 29 January 1996. He inspected the property for valuation purposes on the last date. He also relied on videos and photographs used by the other valuers.
The defendants criticised the capitalisation approach taken by both the plaintiff's valuers on the basis amongst other things that they had used a 12.5% capitalisation rate without factoring in the reality that the buildings were old and therefore had only a short term future as lettable premises. There was a considerable debate between counsel and the witnesses on this issue and Mr. Jones produced further elaborate calculations designed to show the effect of that alleged failure. In my view the buildings had a significantly longer life than he was prepared to concede. Mr. Cunningham gave evidence that he had taken the age of all the buildings into account, including the more modern buildings, and the need to replace the roof over time in determining his capitalisation at the rate of 12.5%. Mr. Brown also gave evidence that he had made allowance for such matters in his assessment of the value in that he had had regard to the age and condition of the building in that exercise. I accept their evidence. They were also challenged on the basis that they failed to make adequate allowance for the fact that to make the premises lettable it would be necessary to do additional work and provide materials. I accept their evidence as to how they had taken those matters into account. I also accept the evidence led for the plaintiff on the significance of the wiring issue. In particular, I accept that the wiring the defendants had installed, and which had to be removed, would have been of minimal benefit to any prospective occupier who wanted to use the premises as a warehouse – particularly that in the north and south buildings.
Reasonableness – The Comparison of Cost of Works with Value
While a number of issues were raised by the defendants to suggest that the valuations of the plaintiff's experts could be qualified to some extent, the defendants did not succeed in my view in their primary objective which was to demonstrate that the premises value lay in its land and not its buildings. They also failed to demonstrate that the value of the property, if the defendants had complied with the covenants, would have been no more than the price realised in December 1995. On the contrary, in my view the plaintiff established that there was substantial value in the buildings. They were structurally sound. They would require work on them during their lives but there was a market for older buildings and in my view, provided they had been repaired, the fixtures and fittings removed to provide clear space and the buildings painted, they would have added to the value of the land. An additional matter to note is that the buildings occupied a percentage of the land greater than that which would have been allowed for the construction of any new warehouses or other commercial buildings in the municipality. I accept that this meant that the buildings carried with them a value to any purchaser because a purchaser could, with care, replace the buildings with modern buildings occupying the same footprint as the old buildings on the site. For a purchaser this was something of real value, something that Mr. Jones did not adequately take into account.
The actual valuation of the property is difficult. It is sufficient, however, for present purposes that I should indicate that I accept on the basis of Mr. Brown's evidence that the property would have been worth at least $1,800,000 if one assumes that the covenants had been complied with by the Lessee. Thus the overall impact of the breaches of covenant on the value of the land was close to the amount that was required to be spent on the works. Thus there is, in my view, no basis upon which the defendants can challenge the plaintiff's primary position that damages should be assessed on a cost of work basis. Looked at overall, that approach is a reasonable one.
Other Issues
There remain, however, specific questions posed by defendants, namely, whether
(a)the cost of the works required under cl. 4.7(g) was in itself out of proportion to the effect it would have on the value of the property and
(b)the cost of removing fixtures and fittings in compliance with cl. 8.2(b) was out of proportion to the benefits it would confer on the value of the property.
As to the former, Mr. Brown gave evidence that in his view the impact on the value of the property of expending $179,000 in painting would have been an increase in value of $50,000. The defendants argue that this was plainly disproportionate and that, therefore, it would be unreasonable to require the defendants to reimburse the plaintiff in the sum of $179,000. In my view that argument should be rejected. True there is a considerable difference between the two figures but an impact of $50,000 on the value of the property was not insignificant and the painting would have conferred considerable intangible benefits upon the Lessor. The premises would have looked much better and thus more attractive to any prospective tenant, it being the common expectation of the parties that the object of the exercise was to have the premises left in a condition where they could be let immediately.
As to the cl. 8.2(b) aspect, Mr. Brown was asked to consider overnight the impact of those works on the value of the property. The following day he gave evidence that the effect of the work being done would have been to increase the market value by $400,000. He considered the work itself would have improved the value by about $200,000 and he allowed $100,000 for the removal of the risks that would face any would be purchaser or would be tenant that the assessment of the cost of the works would be inadequate or that the works would take longer than the estimated time. He also included an allowance that any would‑be purchaser would make for the period during which the work would have been done and during which the person would not receive rental. I accept Mr. Brown's evidence. There is no disproportion on those figures between cost and impact or value.
There is a further issue to bear in mind. The defendants argue that in determining reasonableness one compares only the impact on the value of the property of the breach of covenant as compared to the cost involved. In my view, this is too narrow an analysis. There were intangible benefits to be conferred upon the plaintiff by the defendants complying with the covenants. They included the plaintiff being saved the time, trouble and inconvenience of carrying out the works and the advantage to the plaintiff of having clear, repaired and painted spaces to offer on the market as soon as the defendants left or shortly thereafter.
It seems to me that to award the plaintiff the cost of carrying out the works and the allowance for rental foregone and outgoings borne during the period during which those works might have been carried out would be to award fair and reasonable compensation and place the plaintiff, so far as money can do so, in the position the plaintiff would have been in if the defendants had performed the covenants.
Finally, the fact the works were not done appears to me to be immaterial nor is the fact that the property was ultimately sold. In any event, as I have found, the failure to carry out the works and the selling of the property were a consequence of financial considerations which had been affected by the breaches.
Claim for Rental and Outgoings
There remains the question of the appropriate amounts to allow for the lost opportunity to rent, and the outgoings incurred, during the period in which the work would have needed to be done as a result of the defendant's breaches.
The referee found that the time that would have been taken to carry out the combined works was 24 weeks. The plaintiff seeks an amount of $5,942.30 per week loss of rent for 25 weeks totalling $148,557.50. The defendant argues that the weekly figure is too high and it should be $4,099.61 per week and the period is 24 weeks and not 25. I accept that the 24 weeks is the period to be allowed in light of the referee's findings. The plaintiff's rental figure is based on the evidence of Mr. Brown. Opposed to that evidence was the evidence of Mr. Jones that produced a figure of $4,099.61 per week. Mr. Brown's values are supported by the evidence of Mr. Roebuck an experienced agent in the region and by Mr. Cunningham an experienced valuer in the region and I consider I should accept the figure put forward by the plaintiff.
The other item to be assessed is compensation for the outgoings that would have been incurred by the plaintiff during the period of time in which the works would have been done after the departure of the Lessee from the premises. They comprise land tax, rates and water. There was an issue about the amount claimed for the water but not for the amount claimed in respect of land tax and rates. The amount claimed in respect of the water rate relates to the amount charged during the relevant period of 24 weeks from 1 August 1994. The defendants argued that as they were obliged to pay only excess water rates under their lease the claim should be confined to excess water rates. The plaintiff relied on expert evidence that it was common in commercial leases in that area at that time to require the tenant to pay the whole water rate. In all the circumstances, the plaintiff should not be confined to the excess water rate and should be awarded compensation in the amount claimed but for only the 24 week period. Adjusting the amounts claimed to cover a period of 24 weeks, the amount to be awarded as compensation for lost opportunity to rent is $142,615.02 and the compensation to cover outgoings borne over the 24 week period is $54,488.64 making a total of $197,103.66.
I will invite the parties to agree upon the amount of interest payable on the total sum to be awarded for damages.
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