Kingston Village Investment Pty Ltd v Polin (No 2)

[2004] VSC 305

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

No. 2022 of 2003
F5533

KINGSTON VILLAGE INVESTMENT PTY LTD (ACN 097 603 686)	Plaintiff
v
MARTIN POLIN	Defendant

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JUDGE:	Byrne J
WHERE HELD:	Melbourne
DATE OF HEARING:	18, 19 August 2004
DATE OF JUDGMENT:	27 August 2004
CASE MAY BE CITED AS:	Kingston Village Investment Pty Ltd v Polin (No 2)
MEDIUM NEUTRAL CITATION:	[2004] VSC 305

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Damages – breach of contract – lost opportunity to win profit – allowance for uncertainties – allowance for benefit retained.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R.M. Garratt QC and Mr G.J. Ahern	Heather M Masters
For the Defendant	Mr E.N. Magee QC and Mr Nicholas Frenkel	Gadens Lawyers

HIS HONOUR:

1. On 2 April 2004 I gave judgment following a trial of all issues in this proceeding other than quantum[1].  I concluded that the joint venture agreement entered into between the parties on 17 August 2001 for the development of the Kingston supermarket had been terminated on 1 April 2003 upon the acceptance by KVI of the repudiatory conduct of Mr Polin.  I include as part of this judgment the conclusions and reasons set out in my April judgment.  The quantification of the loss suffered by KVI as a consequence was stood over for separate trial which I have now conducted.  This is my judgment on that question.  In this judgment references to the KVI claim are to the claim as particularised in the further amended particulars of Loss and Damage filed on 18 August 2004.

   [1][2004] VSC 98

1. KVI formulated its claim for damages under two heads:  first, the value of the lost opportunity to earn profit from the joint venture;  and, second, the unpaid balance of an award in its favour made by Mr Park on 24 March 2003.  This second head, in the sum of $18,497.30, was not in issue. 

1. KVI calculated its loss of expected profit claim on two alternative bases:  first, on the basis that the development would include nine speciality shops and, second, that the development would include seven speciality shops.  The choice between these two developments represented the first issue for my determination. 

1. The venturers had on 11 December 2001 obtained from the local authority, Kingborough Council, a development permit for seven speciality shops.  In 2002, Mr Leadbeator proposed and Mr Altson agreed to change the design so as to incorporate two extra shops.  This was discussed with Mr Lewis, the representative of Mr Polin, and he indicated approval.  The proposal was put to Coles Myer as principal tenant, and it, too, agreed.  The proposal was then discussed with the council planning officers, but no decision was made by them. 

1. Two letters from Don Armstrong dated 22 March 2004 and 4 August 2004 were tendered in evidence.  Mr Armstrong is a Hobart solicitor experienced in planning matters.  He expresses the opinion that, assuming the height of the proposed extra shops did not exceed 10 metres, the council would, under the planning scheme, have been obliged to give permission subject to conditions.  In his later letter, Mr Armstrong expresses the view that the proposal was appropriate in terms of the master plan which came into force on 1 July 2004.

1. I conclude from this evidence, which was not challenged, that the venturers would have been able to enlarge the development to include the two extra speciality shops.  I am satisfied, too, that they would have modified the project in this way.

1. The starting point, then, for the loss calculation was KVI's contention that the development, including nine speciality shops, when completed in October 2003 would have had a sale value of $9M.  This figure was supported by the opinion of  a valuer, Stuart Fox, a director of m3property Pty Ltd, who gave evidence before me.  He estimated the net market income for the project to be $754,103 per annum and applied to this a capitalisation rate of 8.25%, to arrive at a figure, which he rounded down to $9M.  No expert evidence on this matter was called on behalf of Mr Polin.

1. The issue before me on this matter was as to the appropriateness of the 8.25% rate.  Mr Fox compared the subject property with six comparable sales, including two in Tasmania.  The capitalisation rates represented by these sales varied from 8.5% to 10.26%.  He was pressed to raise his rate for the Kingston supermarket project  in the light of these comparable sales, but he declined to do so.  He offered cogent reasons for adopting 8.25% and I accept his uncontradicted evidence as to this.

1. The remaining items leading to KVI's calculation of loss of expected profit, were not in issue.  I find, therefore, that, assuming the project went ahead as planned and was sold in October 2003 for $9M, the profit for the venturers would have been a $3,421,111.50.

1. I was then pressed on behalf of Mr Polin to discount this figure by 40% to allow for the uncertainties and risks of the development.  No evidence was offered to support this figure.  Counsel on behalf of KVI pointed out that the claimed profit figure itself dealt with these matters.  The two components of the sale price, net rental and capitalisation rate, both contain an allowance for uncertainties.  I accept that this is so.  I will make no further allowance for what I shall call normal uncertainties.

1. A particular uncertainty much relied upon by counsel on behalf of Mr Polin arises from the terms of the joint venture agreement.  It was submitted that in assessing damages, I should assume that the defendant would provide minimal  performance of his contractual obligations.  The agreement contains provisions which he might lawfully act upon to withdraw from the venture.  These are cl 6.4, which confers upon him the right to dispose of the Polin property prior to the exercise by KVI of its option under cll 3.1, 3.2 and 3.3 to purchase 50% of the Polin land, and cl 6.1 which permits him, after the exercise by KVI of its option, to dispose of his interest in the whole project.  In each case KVI is given a right of first refusal.  What was said was this.  Mr Polin had clearly indicated his reluctance to continue with the development.  It may be assumed, therefore, that he would seize the opportunity to withdraw at the earliest opportunity.  The consequence would be that the project would not proceed and no profit would be earned by KVI.  Accordingly, its lost opportunity to earn a profit was worth nothing. 

1. In response, it was first  put on behalf of KVI that Mr Polin, as a party in breach was not entitled to terminate the project.  This is, to my mind, no answer.  The courses suggested in the submission presently under consideration, do not involve termination; they suppose only that Mr Polin exercises his contractual rights.

1. Nevertheless, I reject the submission of counsel for Mr Polin.  I do so for the following reasons, at least.  There is no certainty or even probability that Mr Polin would have exercised his rights under cl 6 of the joint venture agreement.  He had been disenchanted with the project for well over twelve months before the termination.  During that time he had access to competent legal advice as to his rights.  Even so, he did not exercise them.  There is no reason to suppose he would after 1 April 2003 act differently.  Second, if he activated the provisions of cl 6, he would have been obliged to offer the Polin land or the project to KVI.  There is every reason to suppose that Mr Altson and Mr Leadbeater would have purchased the interest and continued the development without him.  In such an event they would have still won their profit.  I make no deduction for this contingency.

1. The make up of the items for construction cost and project cost is unknown to me.  The figures were presented to me as figures which had been agreed between counsel.  I must assume that, when these figures were agreed, this was on the basis that some contingency had been included.  The figures, after all, were estimates rather than hard figures for works actually performed.  The rental income figure is a known and agreed figure.

1. I conclude, therefore, on the evidence before me, that the expected profit of $3,421,111.50 is a realistic and reasonable estimate of the likely profit, having regard to the inevitable uncertainties of a project such as this.  The one-half share of KVI would therefore have been $1,710,555.75.

1. The remaining item of controversy arises from the fact that KVI still owns a one-half share of the Roberts land.  Counsel for Mr Polin submitted that I should deduct from the expected net profit the present value of this interest which, they contended, was $450,000.  The position of KVI was, first, that the true value of its interest was only one-half of the value of the Roberts land, which was $600,000 and, second, that the deduction should be only for the capital profit, which was $19,000.  This figure is arrived at as follows:

Present Value	$600,000
Less selling expenses	(12,000)
Less purchase price	(550,000)
$38,000
50%	$19,000

1. The debate about the present value of the Roberts land turned upon a conflict between the opinion of Mr Fox that the land was worth $600,000 and the fact that the moiety owned by Mr Polin was, on 12 July 2004, sold for $450,000 to Rockfam Investments Pty Ltd.  No opinion evidence was called to contradict that of Mr Fox. 

1. The position with respect to the Rockfam sale is this.  Mr Polin in December 2003 sold the Polin land to Rockfam for $4.5M.  The Roberts land had been purchased by KVI for $550,000 in May 2001.  Under the terms of the joint venture agreement, Mr Polin was to contribute 50% to this price and KVI was to hold the land as to 50% in trust for him.  This was done.  By an agreement dated 12 July 2004, Mr Polin sold his equitable interest to Rockfam for $450,000.

1. It was put to Mr Fox that this represented a compelling comparable sale.  He rejected this.  The consequence of the fact that each of KVI and Rockfam is a tenant in common in equity is that their respective interests are not readily marketable to a purchaser other than the co-tenant.  This must have a depressing effect on the market value.  Why Rockfam paid $450,000 for Mr Polin's interest is a matter of speculation.  It was suggested that this was a collusive sale to lock KVI in to its holding.  It was, for this reason, put that Rockfam paid more than the true value.  As to this I make no finding.  I do, however, accept that Rockfam was a buyer with a special interest in the Roberts land for it required this land to maximise the development potential of the balance of the project site which it owned.  It seems likely that, for this reason, it was prepared to pay a higher price than another buyer. 

1. The conclusion of Mr Fox is that the proper value of the whole of the Roberts land calculated in accordance with conventional valuation principles was and is $600,000.  There was, as I have mentioned, no contrary opinion offered.  I accept his evidence.  On the evidence before me, I find that, as at October 2003 and now, the interest of KVI in the Roberts land was worth $300,000.

1. The second issue under this item was one of principle.  That KVI should give credit for its retained interest in the Roberts land, I accept.   The submission put on behalf of KVI assumed, as I have, that the project had been developed and sold and that the venturers had received the $9M sale proceeds.  When this sum was applied in payment of the expenses of the development, it was said, KVI would have the amount of $275,000.00 (being 50% of the amount that it actually paid for its interest in the Roberts property) and the amount of about $1.7M (being its 50% share of the net profit of the project), an aggregate sum of about $1.975M.  So much cannot be disputed on the findings I have made.

1. The purpose of the award of damages is to put KVI in the same financial position as if the project had been completed and sold.  As no sale has occurred, the argument goes, KVI has not recouped its expenditure of $275,000 for its half interest in the Roberts land, which it still holds. If the market value of the Roberts land had not increased (and accordingly remained $275,000), KVI’s retention of its half interest would mean that it would need to recover nothing in addition to its net profit of $1.7M in order to be put in the financial position in which it would have been if the project had been completed and sold.  In such a case, KVI’s right to recoupment of its expenditure of $275,000 would be matched by the value of its interest in the Roberts land which it would not otherwise have retained.  Accordingly, counsel submitted, the deduction should represent only the increased value of the Roberts land. 

1. I am not persuaded that this is correct.  The assumed fact is that the venturers sold the Kingston supermarket project upon its completion in October 2003 and took their profit.  This would have the consequence, so far as is here relevant, that KVI would have a fund of about $1.7M, representing its profit after it had recouped its cost of acquiring the Roberts land.  What in fact happened was that the project was not sold;  KVI retained its interest in the Roberts land.  Its position is identical to that supposed except for the fact that KVI still has an asset which I have found to be worth $300,000.  I must therefore bring to credit the full value of that asset.

1. The consequence of this is that, subject to interest, the losses suffered by KVI as a result of the breach of contract by Mr Polin are $1,429.053.05, made up as follows:

A.       Loss of expected profit	1,710,555.75
Less land retained	(300,000.00)
1,410,555.75
B.        Unpaid portion of Mr Park's award	18,497.30	$1,429.053.05

1. It was said that interest upon the part A. losses runs from the date of writ and that upon the part B. losses runs from 24 March 2003.   I invite counsel to agree this item and to bring in a minute of the judgment which is to be given in the light of these and my earlier reasons.

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