Masha Nominees Pty Ltd v Mobil Oil Australia Pty Ltd
[2006] VSC 15
•7 February 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 7020 of 2003
| MASHA NOMINEES PTY LTD & ANOR | Plaintiffs |
| V | |
| MOBIL OIL AUSTRALIA PTY LTD | Defendant |
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JUDGE: | Hargrave J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 8 - 10, 14 - 17, 21 - 23, 28 November, 1, 2 December 2005 | |
DATE OF JUDGMENT: | 7 February 2006 | |
CASE MAY BE CITED AS: | Masha Nominees Pty Ltd v Mobil Oil Australia Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 15 | |
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Contracts – uncertainty – whether clause in contract imposing an obligation to clean up environmental contamination at expiration of a lease void for uncertainty - commonsense, non-technical approach to be taken to construction of commercial contracts – construction open which accorded with what reasonable business people in the position of the parties would have understood the clause to mean – clause not uncertain.
Unique Lifestyle Investments Pty Ltd v Robertson [2005] VSC 347 at [88]-[94] applied.
Damages – Loss of Commercial Opportunity – principles to be applied – plaintiff deprived of sufficiently substantial opportunity to secure a profitable second lease – assessment of value of lost opportunity and prospect of it coming into fruition.
Sellars v Adelaide Petroleum (1994) 179 CLR 332 applied.
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr IG Waller with Mr H Redd | Ashley West & Co |
| For the Defendant | Mr WT Houghton QC with Mr PJ Booth | Blake Dawson Waldron |
TABLE OF CONTENTS
Introduction.................................................................................................................................... 1
Facts.................................................................................................................................................... 2
Uncertainty and Construction of Clause 7....................................................................... 52
Has Mobil breached Clause 7?.................................................................................................. 62
(1) Clause 7(a): Did Mobil comply with the Act during the term of the lease?............................. 63
(2) Clause 7(b): Did the ESA establish the level of contamination at the land?............................ 64
(3) Clause 7(b): Was Mobil obliged to clean up the land?............................................................. 70
Nuisance Claim.............................................................................................................................. 77
Causation Issues........................................................................................................................... 77
Mitigation Issues.......................................................................................................................... 79
Assessment of Damages.............................................................................................................. 81
(1) Relevant legal principles and issues......................................................................................... 81
(2) Loss of rent/licence fees............................................................................................................ 84
(3) Diminution in value of the land............................................................................................... 84
(4) Conclusions on amount of damages......................................................................................... 93
HIS HONOUR:
Introduction
In the period 1982 until 2004, the plaintiffs were the owners of land situate in Springvale Road, Springvale (“the land”). At the time the plaintiffs acquired the land, it was leased to the defendant (“Mobil”). At this time, Mobil was conducting a petrol station business on the land.
Mobil continued to lease the land from the plaintiffs, and to conduct a petrol station business on the land, until the lease expired in November 2000.
The lease contained provisions which required Mobil, at the end of the lease, to clean up any contamination at the land in certain circumstances. It is common ground that, at the end of the lease, there was some contamination at the land.
The plaintiffs allege that the extent of that contamination was such as to oblige Mobil, under the terms of the lease, to clean up that contamination so as to permit the land to be used for any “as of right” commercial use (“commercial uses”) permitted by a specified zoning under the Springvale Planning Scheme (“the applicable zoning”). Mobil contends that the relevant provision of the lease which requires clean up of contamination in certain circumstances is void for uncertainty. Alternatively, Mobil contends that the extent of the contamination at the land at the end of the lease was not of a level which required it to clean up that contamination.
To guard against the possibility that the relevant clean up provision of the lease is void for uncertainty, or that the extent of the contamination is not such as to require clean up under the lease, the plaintiffs have brought an alternative claim in nuisance.
The plaintiffs claim that, by reason of the failure of Mobil to clean up the contamination at the land as required by the lease, Mobil is obliged to pay them a licence fee for each day that Mobil failed to clean up, until the land was sold by the plaintiffs in November 2004. The extent of the licence fee claim is $575,735.99, together with interest thereon. Further, the plaintiff claims the difference between the price for which it sold the land in November 2004 and the value of the land at that time if it had been cleaned up by Mobil as required by the lease. The amount claimed in this regard is approximately $650,000.
In the event that the plaintiffs are able to establish a cause of action for breach of the lease, Mobil raises defences based upon breaks in the chain of causation, remoteness of damage and failure on the part of the plaintiffs to act reasonably in order to mitigate their damage. In addition, Mobil asserts that the plaintiffs’ claims are claims for loss of opportunity, which opportunity should be discounted to a substantial degree having regard to a number of vicissitudes which may have operated to prevent the plaintiffs from fully realising the lost opportunity.
The openings and evidence in the proceeding occupied 11 days. Some 22 witnesses were called. Most of them provided detailed witness statements. Others attended pursuant to subpoena. There was an eight volume Court Book and other exhibits outside the Court Book were tendered, including voluminous technical guidelines, policies and standards relevant to contamination of land issues. There was lengthy cross-examination of many of the witnesses. Further, there was substantial objection taken to the admissibility of evidence, especially evidence contained in witness statements which had been served prior to trial. Notwithstanding this, there was little dispute as to the facts.
Facts
For almost 20 years commencing in late 1981, Mobil operated a petrol station at the land. From 1982 until November 2000, it did so as lessee from the plaintiffs.
A lease from the plaintiffs to Mobil, which contained options for renewal, was due to expire on 12 November 1995. Under this lease, there was no provision which dealt expressly with Mobil’s environmental clean up obligations on the expiry of the lease term. In the course of exercising Mobil’s option for a further lease term of five years, Mobil’s solicitors proposed some amendments to the existing form of lease, with the intent that these amendments be contained in the new five year lease to operate from 13 November 1995.
With respect to Mobil’s clean up obligations at the expiry of the lease, Mobil’s solicitors proposed a clause to cover this issue expressly. The proposal was, in summary, that Mobil’s obligation would be limited to clean up to a level of contamination:
“... so as to permit any as of right ongoing use of the demised premises for service station purposes under the then existing zoning.” (Original emphasis; underlining added for further emphasis.)
There followed correspondence between the solicitors for the parties. In a letter dated 22 June 1995 the solicitors for the plaintiffs stated that the plaintiffs did not accept the proposed restriction to ongoing use for service station purposes.
By letter dated 26 June 1995 Mobil’s solicitors responded:
“Mobil has instructed us that it would be prepared at the expiration of the Lease to clean-up the premises so as to permit any as of right use of the premises under the present zoning which we understand is ‘office zone’ under the Springvale Planning Scheme. This would enable the Lessor to have the clean-up of the premises carried out by reference to other commercial uses permitted under this zoning and not necessarily for ongoing service station use. Would this be acceptable to the Lessors?”
The plaintiffs accepted the revised proposal from Mobil’s solicitors. As a result, a new lease for a five year period commencing 13 November 1995 was drawn-up and executed by the parties (“the lease”).
Clause 7 of the lease deals with contamination issues. As I have said, it is an entirely new clause from previous leases between the parties in respect of the land. Clause 7 provides:
“7(a) During the term of this Lease and any renewal the Lessee will comply with the requirements of the Environment Protection Act 1970 (the Act) in respect of the demised premises including satisfying any notices or orders issued under the Act.
(b)At the expiration or prior determination of the term of this Lease or any subsequent renewal (the handover date) the Lessee shall cause (at its own expense) an Environmental Site Assessment (ESA) to be undertaken to establish the level of contamination (if any) then existing at the demised premises. The Lessee shall thereupon at its expense clean up the demised premises to a level of contamination below the then current maximum allowable concentration set or adopted by the Environment Protection Authority so as to permit any as of right ongoing use of the demised premises under the zoning existing at the commencement date namely Office Zone under the Springvale Planning Scheme.
(c)The Lessee shall indemnify and keep indemnified the Lessor against all actions claims liabilities costs expenses or demands arising from or associated with any contamination disclosed by the ESA arising from the use of the demised premises as a service station.
(d)The Lessee shall be permitted to re-enter the demised premises for a period of 30 days following the Handover Date or such longer period as is reasonably required and at the Lessee’s cost carry out the works referred to in subclause (b) hereof and then make good any damage caused by such works to the reasonable satisfaction of the Lessor. Until the Lessee shall have fully complied with its obligations under this Clause 7 the Lessee shall pay a licence fee equivalent to the rent and other payments due immediately before the handover date calculated on a daily basis.”
The reference in cl. 7(b) of the lease to “as of right use” is a reference to the commercial uses which are permitted under the applicable zoning without the necessity to apply for a permit. These uses include a bank, a post office, a medical centre and an office. Other “as of right” uses under the applicable zoning were not commercial uses.
There are other clauses of the lease which are relevant. Each of them was contained in the previous form of lease for the period ending 12 November 1995. Clause 4(b) of the lease provides that the plaintiffs, as lessors, undertake:
“4(b)To permit the Lessee within thirty days after the end or sooner determination of the term hereby granted or any extension thereof to re-enter the demised premises and at the Lessee’s costs to remove therefrom all signs pumps for petroleum products and fittings and liquefied petroleum gas equipment from the demised premises and at the Lessee’s election either to remove or render useless for the storage of petroleum products or other liquids all underground tanks and fittings in or under the demised premises installed or to be installed or used in connection with the business of the Lessee and any replacements of the same and any parts thereof PROVIDED that if the Lessee does render any of such underground tanks or fittings useless it will do so in such a way that the cost of removal of the said tanks and fittings by the Lessors or any subsequent occupier of the premises is not unreasonable AND in effecting such removal the Lessee shall leave the demised premises and all other fittings and fixtures thereon in a clean, tidy and proper workmanlike manner and shall repair and make good any damage caused by such removal to the demised premises or the remaining fittings and fixtures and in particular and without limiting the generality of the foregoing to safely fill any holes caused by the removal of the tanks and repair any damage to any concrete apron footing or foundation upon the demised premises. In the event that the Lessee shall fail to repair or make good as aforesaid the Lessor shall be entitled to perform such works as he may reasonably consider necessary to so repair and make good and the reasonable costs thereof shall be recoverable from the Lessee on demand.” (Emphasis added.)
I note that cl. 4(b) does not impose any obligation on Mobil to clean up any contamination which may be found in the soil or groundwater at the land when the underground tanks and fittings are removed. I will hereafter refer to the underground tanks and fittings installed by Mobil at the land as, collectively, “the tanks”.
Clause 5(f)(i) of the lease provides:
“... The underground tanks for the storage of petroleum products and... fittings... under the demised premises installed... in connection with the business carried on thereon... and any parts thereof shall unless the Lessee pursuant to clause 4(b) hereof shall elect to leave same on the premises (in which case the property in such tanks shall revert to the Lessor) remain the property of the Lessee.”
It appears that by May 2000, Mobil had determined that it would not renew the lease when it expired on 12 November 2000. Accordingly, Mobil commenced preparing itself to hand back the land to the plaintiffs at the expiration of the lease. Mobil’s preparations in this regard were coordinated by Gregory Bond, a Remediation Coordinator employed by Mobil. Mr Bond was the Mobil officer responsible for obtaining the Environmental Site Assessment (“ESA”) required to be undertaken by Mobil pursuant to cl. 7(b) of the lease.
However, it would appear that Mr Bond paid no regard to the terms of cl. 7(b) of the lease in commissioning the preparation of the ESA. As a result, the design of the ESA ignored the terms of cl. 7(b) of the lease. Clause 7(b) of the lease is directed at a clean up of any contamination in the context of the future use of the land for commercial uses permitted under the applicable zoning. Notwithstanding this, Mr Bond frankly conceded that he sought and obtained the ESA on the express understanding that the land would continue to be used as a service station. Mr Bond said that he reached this understanding “right from the start” in May 2000 as a result of being so instructed by Hayden Burge, who was at that time the Mobil Real Estate Coordinator responsible for all matters relating to the purchase and leasehold of Mobil properties in Victoria.
Mr Bond invited Handex Australia Pty Ltd (“Handex”) to submit a proposal for the preparation of the ESA. In an early proposal by Handex, 16 soil bores were recommended as part of the scope of work. However, Mr Bond requested Handex to revise its proposal, so as to provide for only 10 soil bores. Mr Bond said that he insisted that the number of soil bores be reduced because of his understanding of the Mobil Environmental Remediation Specifications. These are detailed specifications comprising some 161 pages including annexures. It is apparent that Mr Bond felt himself bound by these specifications in managing the remediation of petrol station sites being vacated by Mobil.
Mr Bond did not accept that cost was a main concern of his requirement that Handex reduce the number of soil bores to be drilled for the purposes of the ESA. He insisted that he was principally “following the spec”. However, I am satisfied that cost was a significant factor in the decision of Mr Bond to limit the number of soil bores to be drilled by Handex as part of the ESA. I do not accept Mr Bond’s attempts to downplay the significance of saving cost in his decision to limit the scope of works to be performed by Handex. Indeed, there is documentary evidence to this effect. In an internal Mobil e-mail dated 8 June 2000, Mr Bond stated in respect of quotations received by Mobil from Handex in respect of two sites, including the land:
“As discussed, I have received quotes from Ross Amato at Handex for ‘targeted’ ESA’s for two (2) Lease hand back sites in Springvale. I believe these estimates are significantly excessive, especially when you compare them to estimates from our other consultants interstate for similar size projects. I think we need to speak with Jason Lagowski about their method of estimating, especially in light of their claims of saving MOA[1] money and adding value.” (Original emphasis.)
[1]A reference to Mobil Oil Australia.
Further, when Mr Bond handed over responsibility for dealing with contamination issues at the land to his successor, he stated in the Job Overlap Form:
“no funds available. Min. spend criteria.”
I am satisfied that, in commissioning the ESA, Mr Bond was careful to ensure that the ESA was limited to that required by the specification and no more. In doing so, he was significantly influenced by the desire to save costs. In this regard, I note that the difference between the Handex proposal which included 16 soil bores, and the Handex proposal which was finally accepted and which contained 10 soil bores, was only $4,000 or thereabouts.
It is also relevant to note that the commissioning of the ESA was in circumstances where Mobil had no record of any previous environmental investigation of the land. Prior to seeking a proposal from Handex, Mr Bond sought from the Mobil library copies of “any historical remediation data/reports in archives or in the library” for the land. He was informed that no previous reports existed. I note that this was after Mobil had been conducting a petrol station on the land for approximately 19 years.
The scope of the ESA was further limited by the election of Mobil to leave the tanks in the ground, rather than remove them and “make good” any damage to the land occasioned by their removal as required by cl. 4(b) of the lease. As appears hereafter, the continued existence of the tanks in the ground prohibited testing for contamination in the immediate vicinity of the tanks.
Mr Bond said that the decision to leave the tanks in the ground was based on the general practice of Mobil in respect of any lease hand back, especially one where it was assumed that the site would continue to be used as a petrol station. As a result of Mr Bond’s understanding in this regard, he sought quotations for and subsequently commissioned Tanknology Australia to conduct a “tank and line condition report” in respect of the tanks. The testing was done on 5 and 6 July 2000 and the tanks were all reported as “tight”. “Tight” means that the tanks were below specified leak detection criteria. The report from Tanknology concludes with the following statement:
“The enclosed Test Results are valid at the time of testing only and make no warrantee (sic) as to future status.”
On 17 August 2000, Handex published the first draft of the ESA to Mobil. Thereafter, further drafts were sent to Mobil and were the subject of comment and input by Mr Bond. Each of the drafts disclosed that there was contamination of both soil and groundwater at the land. In general, Mr Bond’s comments on the draft reports were directed at ensuring that the ESA did not describe the contamination which was found as significant, and towards reducing the scope (and therefore cost) of the further investigations recommended by Handex in the draft ESA reports.
By letter dated 24 October 2000, Mobil informed the plaintiffs that it would not be seeking an extension of the lease at its expiration on 12 November 2000. The letter was received by Mr Harry Flicker, a director of the first plaintiff and the representative of the plaintiffs who had all of the material dealings relevant to this dispute. The letter was signed by Mr Burge.
It was common ground that this was the first notice by Mobil to the plaintiffs that Mobil did not intend to renew the lease. Given that Mobil had determined this course by, at latest, May 2000, Mobil demonstrated an extraordinary lack of consideration for the commercial interests of the plaintiffs by giving them such late notice. Although nothing turns on this from a legal viewpoint, it is indicative of the arrogant and high-handed manner in which Mobil has treated the plaintiffs throughout the events material to this dispute.
Further in this vein, even though Mobil had commenced its preparations for vacating the land as early as May 2000, the ESA was not available to be provided to the plaintiffs at the expiration of the lease, as required by cl. 7(b). The finalisation of the ESA was delayed due to Mr Bond seeking to make amendments to it so as to alter its conclusions and recommendations. In fact, the ESA was not completed until 15 December 2000, more than one month after the expiry of the lease.
In the meantime, on 21 November 2000, Mr Burge wrote to the plaintiffs’ real estate agent, George Kiper, by facsimile. Relevantly, the facsimile stated:
“All underground petroleum tanks are the property of the owner of the site. Mobil has conducted an environmental site assessment and we will provide a summary report as soon as our consultants issue their report.”
In writing this letter abandoning any claim to property in the tanks, Mobil seems to have again proceeded in the absence of any consideration of the terms of the lease. As appears above, the provisions of cl. 4(b) do not give Mobil an option to simply take or leave the tanks. Clause 4(b) provides that Mobil must either remove the tanks, in which case it must make good any damage, or “render” the tanks:
“... useless for the storage of petroleum products or other liquids... PROVIDED that if (Mobil) does render any of such underground tanks or fittings useless it will do so in such a way that the cost of removal of the said tanks and fittings by (the plaintiffs) or any subsequent occupier of the premises is not unreasonable...”
It was common ground that there was no evidence that Mobil had taken any steps to render the tanks useless, as required by cl. 4(b). On behalf of Mobil, it was submitted that the plaintiffs did not plead any issue concerning a breach of cl. 4(b) of the lease. Accordingly, Mobil was not on notice that it needed to lead evidence on this issue. However, this submission ignores the overwhelming inference from the facts, and the primary position adopted by Mobil in its dealings with the plaintiffs. As I have said, Mobil sought and obtained the ESA on the basis that the land would be used in the future for service station purposes. With this in mind, Mobil sought and obtained a tank and line condition report to confirm that the tanks and lines were “tight”. None of the experts who inspected the land and gave written reports or evidence made any reference to the tanks having been decommissioned in any way. Further Mobil participated in discussions with a proposed tenant of the land, Woolworths. Those discussions, which are referred to hereafter, were on the basis that Woolworths intended to use the tanks in the conduct of a petrol station business on the land by it. I find that the tanks were not rendered useless as required by cl. 4(b) of the lease.
The ESA was finally completed on 15 December 2000. Its author and project manager was Ross Amato. He was not called as a witness. The ESA was approved by Jason Lagowski, as acting managing director of Handex. Mr Lagowski did give evidence.
The ESA is a lengthy document with many annexures. It describes the results of field testing and analysis of soil and groundwater. Based on these results, the ESA contains an assessment by Handex of the risks associated with “the ongoing use of the site as a service station.” The ESA contains no assessment by Handex of the risks associated with the future use of the land for the commercial uses permitted under the applicable zoning. This defect in the ESA is a direct result of the failure of Mobil to appreciate the extent of its clean up obligation under cl. 7(b) of the lease and instruct Handex to prepare the ESA accordingly.
The ESA is based upon the results of testing from 10 soil bores and five groundwater monitoring wells. I have noted above that the number of soil bores and wells was limited by the direction of Mr Bond.
The soil bores and groundwater monitoring wells installed by Handex were principally targeted around the underground petroleum infrastructure comprised by the tanks. As I have said, this infrastructure includes the associated pipes and fittings for the transfer of petrol from the underground storage tanks to the petrol bowsers. However, due to the continued existence of the tanks underground, none of the soil bores or groundwater monitoring wells installed by Handex is in the immediate vicinity of the tanks. As appears hereafter, this had the effect of preventing Handex from testing the soil and groundwater which was likely to be the subject of the greatest contamination.
From the first draft of the ESA, it was apparent that the results of soil testing from soil bore number S2G6 (“soil bore 6”) established that soil at a depth of 2.5 metres was contaminated with benzene at a level which exceeds the minimum criterion for further investigation and assessment, on any view of the relevant or applicable environmental standards, guidelines or policies. This is significant, because benzene is a known carcinogen.
The ESA stated that the excessive contamination at soil bore 6 was the only soil sample which was detected to be above the contamination criteria adopted by Handex for the purposes of the ESA. Handex stated that:
“All other (soil) samples reported analytes below the adopted criteria.”
As appears hereafter, this statement by Handex as to the extent of soil contamination had the capacity to be misleading. In order to explain this, it is necessary to note that not all soil samples are sent for analysis. First, the soil which is extracted from a soil bore is subject to field testing at regular depth intervals. This field testing is conducted by a photo-ionisation detector (“PID”) which gives a hydrocarbon reading in parts per million (“ppm”). Any PID reading in excess of 100 ppm is considered sufficiently high to justify sending a sample of soil taken from the soil bore at that depth to the laboratory for further analysis. In the case of the excessive contamination disclosed at soil bore 6 at a level of 2.5 metres, the PID reading was 950 ppm.
A soil sample from soil bore 5 taken at 5.1 metres yielded a PID reading of 1090 ppm. However, no sample from soil bore 5 at this depth was sent to the laboratory for analysis. As appears hereafter, Mobil was unable to explain this error by Handex in its testing procedures for the purposes of the ESA. As I have said, Mr Amato was not called to give evidence. Nor were the driller or geologist responsible for the field testing by Handex. I infer that their evidence would not have assisted Mobil’s case.
I find that it is more likely than not that if a sample of the soil from soil bore 5 at a depth of 5.1 metres had been sent to the laboratory for analysis, a further area of excessive soil contamination would have been revealed. This should have been obvious to Handex and been referred to in the ESA.
The ESA records that initial sampling of groundwater indicated that the groundwater was contaminated. As a result, Handex recommended that two further groundwater monitoring wells be installed in November 2000. This was done. These additional groundwater monitoring wells were in the vicinity of soil bores 5 and 6. Having regard to the excessive contamination disclosed by analysis of the soil sample from soil bore 6, and the elevated PID reading from soil in soil bore 5, it would have been prudent to take soil samples at the time of installing these additional groundwater monitoring wells. There was no dispute between the experts as to the desirability of this occurring. However, Handex took no soil samples when it installed the additional groundwater monitoring wells in November 2000.
Notwithstanding that Handex found at least one example of benzene contamination of both soil and groundwater, Handex nevertheless concluded that there were “minimal risks associated with the ongoing use of the site as a service station”. In reaching this conclusion, Handex was influenced by the fact that there was “considerable presence of sealed surfaces across the site (which) would be expected to limit risks posed by soil and groundwater contamination”. As I have said, this conclusion was based upon the understanding of Handex, as instructed by Mobil, that the proposed use of the land was “as an ongoing petrol station”. The ESA does not consider the suitability of the land for any other commercial use permitted by the applicable zoning, especially one which may involve the construction of commercial premises on the land.
Handex concluded the ESA by recommending that a further two groundwater monitoring events take place to ascertain whether the groundwater contamination was migrating away from the land and by noting:
“Whilst the current assessment has indicated limited adverse impact to soils and groundwater, there is a need to confirm hydrogeological conditions at the site prior to any new proposed works taking place.”
On the day before the ESA was completed and delivered to Mobil, Mr Bond made handwritten notes estimating the cost of removing soil in the vicinity of an area of contaminated soil which was identified from soil bore 6. Although the diameter of the instrument used to obtain this soil sample was less than 50 mm, Mr Bond prepared an estimate for soil removal for an assumed area of 24 square metres (4m x 6m) to a depth of 3.5 metres, a total of 84 cubic metres. This is significant, as it demonstrates that the identification of a sample of highly contaminated soil, so as to require clean up or remediation, will involve removing all of the contaminated soil in that area. In estimating the cost, assumptions must be made. When the work is performed, testing can be done and more precise delineation of the contaminated area will be possible.
Mr Bond’s estimate for the removal of this single “hotspot” of contaminated soil was $5,840, including a contingency of 10 percent. However, he concluded his estimate by writing “allow $6-7,000”. Presumably, this allowance was to cater for the possibility that his 10 percent contingency was insufficient to remove all of the contaminated soil revealed once the overlaying concrete was removed and remediation and associated further testing was undertaken.
In the meantime, on 24 November 2000, Woolworths (Victoria) Pty Ltd (“Woolworths”) submitted an offer to lease the land for a period of 15 years, with four options of five years each, for the purpose of conducting a “Plus Petrol” service station and convenience store (“the Woolworths’ offer”).
The Woolworths’ offer was revised on 27 November 2000 to increase the maximum annual rental increase (which was linked to the consumer price index) from four percent to five percent. The Woolworths’ offer was accepted by the plaintiffs, subject to formal documentation, on 27 November 2000.
The Woolworths’ offer stated that:
“It has been assumed that the existing leasehold improvements, including the existing tank farm, will remain when Woolworths take over the site. Should the leasehold improvements be removed from the site by the owner or the previous operator, Woolworths reserves the right to amend this offer.”
Further, the Woolworths’ offer was subject to formal approval from the Woolworths Property Committee and its Board, and the execution of documentation satisfactory to Woolworths.
On 11 December 2000, the Woolworths Property Committee, as delegate of the Woolworths Board approved the Woolworths’ offer. On 13 December 2000, Tim Macmillan, an assistant property manager of Woolworths, wrote to the plaintiffs’ real estate agent Mr Kiper of TBM.com. and advised Mr Kiper of the approval by the Board of Woolworths. Mr Macmillan continued:
“Accordingly, we now look forward to resolution of documentation in a short a timeframe as possible, and execution of documentation following agreement and settling of final legal issues.
Please liaise with Tom Dugdale, Mallesons Stephen Jaques, and myself with development of documentation.” (Emphasis added.)
There is no doubt that Woolworths were very keen to lease the land, and to do so at the earliest possible time. In December 2000, Woolworths were in the midst of establishing itself as a major petroleum retailer in Victoria and elsewhere in Australia. At the time, Woolworths was expanding its network of “Plus Petrol” sites at a rate of approximately 10 to 15 outlets each year. Steve Webb, a project manager with Claremont Project Management assisted Woolworths in identifying and developing petrol station sites. He described Woolworths’ attitude at the time as “go, go, go, go”.
Further, the position of the land close to a Woolworths’ “Safeway” supermarket suited the strategy of Woolworths to establish petrol outlets close to its supermarkets.
Woolworths’ solicitor, Mr Dugdale, sent the first draft of an agreement for lease and lease to Mr Kiper on 15 December 2000. Mr Kiper provided these draft documents to the solicitor for the plaintiffs, Ashley West of West & Co. By letter dated 22 December 2000 from Mr West to Mr Dugdale, Mr West noted that Woolworths was already in possession of the ESA and sought to achieve the position whereby no agreement for lease would be necessary and the parties would proceed directly to a lease. On behalf of the plaintiffs, Mr West proposed that Woolworths would “take over the site as is, and as assessed in the ESA”. This was unacceptable to Woolworths.
The urgency with which Woolworths approached the proposed lease of the land was further evidenced by the conduct of Mr Webb, the Woolworths project manager, seeking urgent advice from an environmental consultant over the 2000/2001 new year period. Mr Webb contacted Stephen Diomides on 30 December 2000 seeking an urgent “appraisal” of the ESA. Mr Diomides obliged. By letter dated 5 January 2001 to Mr Webb, Mr Diomides provided a report of his examination and review of the ESA. For present purposes, it is sufficient to note that Mr Diomides expressed the view in his report (“the Diomides report”) that the conclusions stated by Handex in the ESA understated “the very high levels of contamination found.” Mr Diomides recommended that the extent of the contamination revealed by the ESA be the subject of further investigation, accurate delineation and remediation by removal from the land.
On 19 January 2001, Mr Dugdale forwarded to Mr West a revised version of the agreement for lease and the proposed lease. It is apparent that Woolworths were extremely concerned by the comments in the Diomides’ report. Accordingly, the draft agreement for lease contained a clause requiring the plaintiffs to complete “the Landlord’s Works” within a 12 month period. In the absence of the Landlord’s Works being performed within this period, Woolworths reserved to itself the option to either complete the Landlord’s Works at the cost of the plaintiffs or to terminate the agreement for lease.
The Landlord’s Works are described in the “First Works Schedule” of the draft agreement to lease. Clause 2.3 of that schedule relevantly provides:
“Nature of Landlord’s Works
2.3 The Landlord’s Works comprise:
(a)testing or procuring the testing of the Premises (by soil tests and such other tests as the Tenant may reasonably require) for the presence of contaminants and contamination and for any breaches of Environmental Laws, and obtaining an environmental site assessment report.
(b)(if the environmental site assessment report obtained by the Landlord under clause 2.3(a) of this Schedule indicates that such works are necessary) removing or procuring the removal of all contamination from the Premises and remedying or procuring the remedying of all breaches of Environmental Laws in respect of the Premises so that the level of contamination at the Premises is in accordance with the Environment Protection Authority Victoria guidelines for the level of contamination at premises of the nature of the Premises and the requirements of all relevant Authorities, and so that there are no breaches of Environmental Laws in respect of the Premises; and
(c)(if any works are required under clause 2.3(b) of this schedule), then after such works are complete:
(i)testing or procuring the testing of the Premises (by soil tests and such other tests as the Tenant may reasonably require) for the presence of Contaminants or contamination, and any breaches of Environmental Laws; and
(ii)obtaining and giving to the Tenant a contamination report stating that the Premises comply with clause 2.3(b) of this schedule. If the Tenant does not elect to obtain a contamination report under clause 2.3(d) of this schedule, the report obtained under this clause 2.3(c)(ii) of this schedule. This report will be the Report to be attached to the Lease for the purposes of clause 17 of the Lease; and
(d)if the Tenant is not satisfied with the contamination report obtained under clause 2.3(c) of this Schedule, the Tenant may elect to obtain, at its own cost, a contamination report in relation to the Premises. If this contamination report reveals the existence of Contaminants or contamination or breaches of Environmental Laws that should have been remediated or rectified by the Landlord under clause 2.3(b) of this Schedule, the Landlord must comply with clause 2.3(b) and (c) of this Schedule as if the report obtained under this clause were the report obtained under this clause 2.3(d).[2] If there are any disputes regarding the report obtained under this clause 2.3(d) or a requirement to carry out additional works under this clause 2.3(d), the dispute must be referred to arbitration in accordance with clause 5 of this deed. If the Tenant obtains a contamination report under this clause 2.3(d) and the contents of this report are not rejected by an arbitrator pursuant to a dispute, this report will be the Report to be attached to the Lease for the purposes of clause 17 of the lease; and
[2]This reference to “this clause 2.3(d)” is, in my view, an error and was intended to be a reference to “clause 2.3(b)”.
(e)removing or procuring the removal of all improvements and other fixtures, fittings chattels, stock and things from the Premises other than the Improvements, and making good any damage caused by such removal; and
(f)ensuring that the Improvements are left on the Premises and are in good order and condition to the reasonable satisfaction of the Tenant. In particular, ensuring that the leaded petrol, unleaded petrol and LPG fuel tanks, pipes and lines forming part of the Improvements;
(i)are free from leaks, waste oil, kerosene, fuel or other liquid or other than water; and
(ii)contain sufficient levels of water so as to ensure that the tanks do not float out due to hydrostatic pressure from ground water; and
(g)if required by the Tenant, rectify any defects in the fuel tanks, pipes and lines disclosed by the testing of them by the Tenant as part of the Tenant’s Works; and
(h)ensuring that the surface of the Premises is in good order and condition, compacted, level and sealed and otherwise to the Tenant’s reasonable satisfaction;”
From the plaintiffs’ viewpoint, the requirement that they perform the Landlord’s Works presented them with a difficult decision as to whether to execute the proposed agreement for lease. On the one hand, the proposed tenant Woolworths was insisting upon a new environmental site assessment report being prepared and the removal of contamination from the land to its satisfaction. On the other hand, Mobil was insisting that no clean up was required and was refusing to carry out any remediation works.
In substance, the plaintiffs were placed in the position whereby they were being asked to expose themselves to an obligation to pay for the clean up of the land in respect of any contamination identified in a further environmental site assessment to the satisfaction of Woolworths. In respect of this, Mr Flicker recalls a telephone conversation with Mr Diomides in which he was advised that the cost of such a clean up could not be estimated but it could be as much as $1,000,000, or even more. Further, the plaintiffs faced the risk that the cost of clean up might include the cost of reinstalling or replacing the tanks.
It was submitted on behalf of Mobil that I should not accept the evidence of Mr Flicker of the telephone conversation which he had with Mr Diomides in which he was advised of the potential cost of clean up. It was submitted that I should reject this evidence because it did not appear in Mr Flicker’s witness statement, Mr Diomides gave no evidence about it and the telephone log kept by Mr Diomides, which was extensive, made no reference to such a telephone conversation. In my view, I should accept the evidence of Mr Flicker. I was impressed by Mr Flicker as an honest witness who was not given to reconstruction, exaggeration or evasion. Further, it accords with commonsense that, in the face of consistent refusal by Mobil to conduct any clean up at the land, Mr Flicker would give consideration to the cost to the plaintiffs of conducting a clean up themselves. This is especially so in circumstances where Woolworths had agreed in principle to lease the land on favourable commercial terms, subject to such a clean up taking place. The fact that there is no written record of the conversation with Mr Diomides is relevant but in no sense conclusive. It is likely that the gist of the advice given by Mr Diomides was enough to stifle any further consideration of the option of the plaintiffs arranging for the land to be cleaned up at their cost. In these circumstances, it is not surprising that there is no written record of the conversation.
A copy of the Diomides’ report (with references to Woolworths masked) was provided to Mobil in February 2001. This did not cause Mobil to alter its position. As a result, a meeting was arranged between the parties and their consultants to discuss the issues and see if the matter could be progressed or resolved. That meeting was held on 20 March 2001 at the offices of Mobil. By the time of the meeting, the concern about identifying Woolworths as the proposed new lessee was resolved. Accordingly, the meeting was attended by representatives of the plaintiffs, Mobil and Woolworths. Mr Diomides attended in his capacity as environmental consultant to both Woolworths and the plaintiffs.
The 20 March 2001 meeting was attended by the following persons:
· Harry Flicker -
Director of first plaintiff
· Ashley West -
Solicitor for the plaintiffs
· George Kiper -
Real estate agent of the plaintiffs
· Stephen Diomides -
Environmental Consultant for Woolworths and the plaintiffs
· Greg Bond -
Remediation Coordinator of Mobil
· Hayden Burge -
Real Estate Coordinator for Mobil
· James Hadwen -
Senior Project Manager employed by Handex
· Steve Webb -
Project Manager for Woolworths
· Ross Amato -
Handex Project Manager responsible for preparation of the ESA
· Piers Williams -
Mobil in-house Legal Advisor
All persons present at the 20 March meeting, with the exception of Mr Amato and Mr Williams, were called to give evidence.
The absence of Mr Williams was not explained. It is curious that he was not called, given that he was the Mobil legal representative present and witnesses recalled him taking notes of the meeting. Those notes are not in evidence. I infer that the evidence of Mr Williams would not have assisted Mobil’s case.
Attempts were made to explain the absence of Mr Amato. I found these explanations unsatisfactory. It was said it was not known where he was, but there was no evidence of any attempt to locate him.
Mr Amato was a relevant witness to much more than the 20 March 2001 meeting. He was the author of the ESA. However, Mobil called Mr Hadwen and Mr Lagowski to justify the ESA, its planning and implementation. I infer that the evidence of Mr Amato would not have assisted Mobil’s case on one or more of the issues where evidence from him was relevant.
The extent of the recollections of the meeting by those attendees who were called varied greatly. However, it is clear that the meeting lasted for approximately one hour and that the majority of the discussion was of a technical nature, during which the environmental consultants discussed the sufficiency of the ESA, whether further investigation was required to delineate the extent of contamination and whether Mobil had any (and if so what) responsibility to clean up any contamination at the land. Mr Burge summarised these discussions in the following terms:
“The essence of the situation was whether the site was suitable for on-going service station use. We claimed that it was. We acknowledged that there was contamination on the site, but it was no risk to human health, and it didn’t preclude its use for service station.”
Further, the evidence supports the following findings:
(1)The Mobil representatives agreed, at the conclusion of the meeting, to conduct further investigation to delineate the extent of contamination at the land. Specifically, Mobil agreed to install three additional groundwater monitoring wells, two off-site in Springvale Road and one on the land, and two further soil bores in the nature-strip in Springvale Road.
(2)There was some discussion about the possibility of Mobil giving an indemnity to the plaintiffs and/or Woolworths in respect of any contamination at the land. There was reference to a previous arrangement between Mobil and Woolworths in respect of a petrol station site in Patterson Lakes. However, no offer was made to provide such an indemnity and the discussions seem to have been of a conceptual kind only. In final submissions, Mobil did not rely upon any offer to indemnify the plaintiffs and/or Woolworths in respect of any contamination at the land.
(3)There was discussion concerning the state of the tanks. Mr Bond informed those present that the tanks had been tested in August 2000 and found to be tight.
(4)There was discussion about Mobil removing the tanks. Most witnesses could not recall this discussion. However, I am satisfied that there was some discussion on this issue.
Mr Burge said that he offered to remove the tanks and that this offer was declined. He could not recall who declined the offer and said “I don’t think there was great discussion about it”.
Mr Bond said that he recalled that there was “talk of removing the tanks”. To his recollection, this discussion was between Mr Burge and Mr Flicker. Mr Bond said that Mr Flicker said that he did not want the tanks removed because “he was negotiating with Woolworths, and I think he planned to utilise those tanks”.
Mr Diomides was asked whether he recalled any party making an offer to any other party at the 20 March meeting. He replied:
“I believe there was a very brief discussion, or an offer by Mobil to remove the tanks, or alternatively to give the tanks to Mr Flicker as the owner of the site, but to my recollection there wasn’t any response from Mr Flicker at that time.”
Mr Diomides was asked if he recalled any offer being made to remove soil as well as the tanks. He responded:
“No. My recollection was there was only reference to tanks, not to any clean up of soil.”
Although the Mobil witnesses were given every opportunity to give evidence of an offer to remove the packing sand and any contaminated soil around the tanks, none of them could recall that the offer by Mr Burge extended to the removal of any sand or soil. In final submissions, it was submitted on behalf of Mobil that any offer to remove the tanks necessarily carried with it an offer to remove the packing sands and any contaminated soil in the immediate vicinity of the tanks. Reference was made to expert evidence of Mr Mirkov and Mr Hadwen. However, that evidence established only that, before commencing any construction of a commercial building, it would be necessary to remove the tanks and any immediate contamination around the tanks.
In my view, the discussion concerning the removal of the tanks did not amount to a formal offer by Mobil. My clear impression from the evidence was that the discussion concerning the removal of the tanks was one of a number of issues discussed in an endeavour to resolve the dispute between the parties as to whether Mobil had any, and if so what, obligation to clean up contamination at the site. In my view, it is more likely than not that the discussion about removing the tanks was in the context of the environmental consultants discussing the need for further testing in order to establish the level of contamination at the land. However, as Mobil placed great weight in evidence and in final submissions on these discussions concerning the removal of the tanks, and for convenience, I will hereafter refer to the statement by Mr Burge that Mobil would remove the tanks as “the Mobil tanks offer”.
On 16 April 2001, Woolworths applied for and was granted a permit for “Plus Petrol” signage at the land in the event that it became the tenant.
By May 2001, the plaintiffs were becoming frustrated by the delays. Accordingly, the plaintiffs proposed that there be a statutory audit of the land under the Environment Protection Act 1970 (Vic) (“the Act”). By this time, Mr Diomides was actively giving advice to the plaintiffs. In order to obtain a statutory audit, he contacted Jonathan Crockett, an environmental auditor appointed under the Act.
It is apparent from the correspondence from Mr Crockett at this time that the plaintiffs were most concerned at the cost of a obtaining an environmental audit under the Act. Accordingly, in the first instance, Mr Crockett was engaged to review the ESA to advise whether it would be possible to complete a statutory environmental audit based upon the information contained therein. Mr Crockett advised the plaintiffs that the information contained in the ESA was insufficient to enable him to complete a statutory environmental audit.
In a report to West & Co dated 29 June 2001, Mr Crockett was critical of the level of investigation undertaken by Handex as to both soil and groundwater (“the Crockett report”). As to the assessment by Handex that “there appears to be minimal risks associated with the on-going use of the site as a service station”, Mr Crockett disagreed and stated as follows:
“5. Risk Assessment
The risk assessment is of a preliminary qualitative nature. It concludes that there is no unacceptable risk but also states that further investigation of groundwater is necessary. More work would need to be done both to confirm that the known contamination, which is well above guidelines, does not present an unacceptable risk and to confirm that the extent of contamination has been adequately delineated.
...
In my opinion, the conclusions in the Handex report are not adequately supported by the investigation carried out and the additional investigation recommended in the report has not been carried out. Thus I suggest that your client may have an adequate basis to request further investigation and if necessary some remediation before accepting that the site has been left in a condition suitable for ongoing use as a service station.”
As a result of further discussions between Mr Diomides and Mr Crockett, in July 2001 Mr Flicker authorised Mr Diomides to approach the Environment Protection Authority (“the EPA”) and seek to have the EPA intervene in the matter by the service on Mobil of a clean up notice under the Act in respect of the land. After initial telephone contact with the EPA, Mr Diomides prepared a letter for Mr Flicker to send to the EPA on behalf of the plaintiffs. In that letter, Mr Flicker referred to the history of the matter, enclosed copies of the ESA, the Diomides’ report and the Crockett report and concluded:
“Whereas Handex in their report have chosen to use the term ‘limited adverse impact to soils and groundwater,’ Diomides & Associates have advised that they believe that this choice of words tends to understate the very high levels of contamination found.
Given Mobil’s failure to adequately delineate the extent of contamination caused or to conduct any clean up of the contamination, we urgently request the Authority to intervene in this matter, to examine the attached documents, to resolve whether or not the contamination caused by Mobil in this case contravenes EPA laws and/or regulations, and if appropriate, to serve an EPA Notice on Mobil requiring them to adequately assess and clean up the contamination.
We are negotiating with another operator to take over the site but they will not proceed while the above matters are not resolved, causing us economic hardship whilst this matter awaits resolution.”
As appears hereafter, it was not until January 2003 that the EPA finally issued a clean up notice to Mobil in respect of groundwater at the land. This delay by the EPA was in the face of repeated approaches by or on behalf of the plaintiffs to have the EPA deal with the matter promptly.
In the meantime, another issue arose between the plaintiffs and Woolworths. The issue related to the tanks. By this time, it was apparent that the tanks may need to be removed in order to clean up the contamination at the land. Mr Flicker, on behalf of the plaintiffs, was concerned that this may expose the plaintiffs to the substantial cost of installing new tanks, or at the very least reinstalling the old tanks, in accordance with the draft agreement for lease. Accordingly, on 22 May 2001 the plaintiffs proposed to Woolworths that, if the tanks needed to be removed as part of the clean up of any contamination at the land, then the parties would renegotiate the agreement for lease. This was unacceptable to Woolworths.
However, as Woolworths was keen to secure the land, given its expansion plans for its Plus Petrol network and the desirable location of the land in the vicinity of a Safeway supermarket, Woolworths proposed that the draft agreement for lease be amended so as to provide that if the tanks were removed Woolworths would install new tanks at its own cost and, as a result, the annual rent payable under the proposed lease would be reduced by 9 percent of the total costs to Woolworths of installing the new tanks (“the Woolworths tanks offer”). The Woolworths tanks offer was initially put by Woolworths in an e-mail from Mr Dugdale to Mr West on 20 July 2001.
There was some delay by the plaintiffs in responding to the tanks offer. Mr Flicker and Mr West were cross-examined to the effect that this delay was because the plaintiffs were considering other opportunities to lease the land. They denied this and I accept their denial. The delay was caused, in part, by the fact that it was the practice of Mr Flicker to travel to Israel around the middle of each year and, in addition, Mr West took holidays in late August or early September. In any event, the issue was an important one from the viewpoint of the plaintiffs and they were entitled to give it detailed consideration. This is especially so when the question of whether the tanks would require removal was uncertain at this time. Woolworths were not insisting that the tanks be removed, only that they required the tanks to be reinstalled or replaced if they were required to be removed as part of the Landlord’s Works under the proposed agreement for lease.
In the event that the tanks were required to be removed, the agreement for lease does not specify that the landlord must install new tanks. It appears from the proposed agreement for lease and correspondence that Woolworths may have been content for the landlord to reinstate the old tanks or tanks of similar quality without leaks or other defects. However, there is some cause to doubt this. After the meeting of 20 March 2001, Mr Webb telephoned Mr Diomides. Mr Diomides recorded in his phone log that he told Mr Webb that the tanks were 20 to 25 years old and may need to be replaced. Mr Diomides records that Mr Webb responded that Woolworths wanted to lease a complete service station with “viable tanks” and said words to the effect that a test which showed the tanks were “tight” today could show that the tanks were leaking tomorrow.
I infer from this that it is likely that, had the tanks been removed as part of a clean up of the land, Woolworths would have insisted that the plaintiffs install new tanks to replace them.
By 11 September 2001, it would appear that Woolworths was becoming anxious at the delay in finalising the agreement for lease. In an e-mail from Mr Dugdale to Woolworths, Mr Dugdale summarised the situation at this time:
“The only outstanding issue of any real substance is in relation to the fuel tanks. I confirm that:
1. under the original agreement, the site was to be leased with the existing tanks;
2. as a result of the need for remediation, the tanks may need to be removed. Accordingly, the landlord suggested that if the tanks were removed, Woolworths could have the option to either end the agreement or endeavour to negotiate a suitable amendment to the commercial terms with the landlord;
3. in an endeavour to obtain certainty, we advised the landlord’s solicitor that we would accept that if the tanks were removed, the rent would decrease by 9% of the costs of installing replacement tanks. The landlord is still to respond to this suggestion.”
Mr West finally responded to the tanks offer by e-mail dated 20 September 2001 to Mr Dugdale. Mr West stated in his e-mail:
“Dear Tom,
It would appear that all points of contention have been negotiated save for the matter of the tanks.
The latest update from Steve [Diomides] is that further tests were ordered by the EPA, and that Steve was waiting to speak to the EPA to determine what the current position is and what (if any) formal notices have been served.
Our clients are happy to sign the agreement/lease immediately, save that if the tanks have to be removed due to the Auditor’s recommendation in order to comply with any order of the EPA, then the matter should be renegotiated by the parties. Since no-one (whom Steve [Diomides] has asked anyway) can determine an approximate value to replace the tanks, to renegotiate would seem a fairer option of the parties.
Regards
Ashley West
West & Co.”
Mr West said that he intended his e-mail to be a rejection of the Woolworths tanks offer. Mr Dugdale said that he understood Mr West’s e-mail to be a refusal of the Woolworths tanks offer.
By e-mail dated 20 September 2001, Mr Dugdale forwarded a copy of the e-mail from Mr West to Woolworths, and stated:
“From the tone of the e-mail, it would appear that we are still the preferred tenant for the site.
I agree with the landlord’s solicitor that the situation regarding the tanks is the only outstanding issue. Should I agree to his suggestion (and perhaps include a requirement for both parties to act reasonably and in good faith in the negotiations to tighten up the requirement to negotiate), or should I insist on making our position completely secure by agreeing to the rent reduction now rather than leaving it open for negotiations in the event that the tanks are removed?”
No agreement was ever reached between the plaintiffs and Woolworths concerning the tanks. In an e-mail dated 10 January 2002 from Mr Dugdale to Barry Cloke (who had by this time replaced Mr Macmillan), Mr Dugdale noted that he was still to receive instructions from Mr Cloke’s superior, Terry Ludlow, in response to his e‑mail of 20 September 2001.
By a letter of 8 November 2001 from Mr West to Mr Dugdale, Mr West stated the position of the plaintiffs at this time:
“We refer to our e-mail to you of 20 September 2001 and note no reply to date.
Since your client could sign the existing agreement/lease and be able to renegotiate or withdraw if unable to renegotiate, there does not seem to be anything preventing the final amendment and signing of the Agreement.”
This was the last correspondence from Mr West to Mr Dugdale. It demonstrates that the plaintiffs were prepared to sign the draft agreement for lease, including the obligations to perform the Landlord’s Works, subject only to amendment to deal with the situation if the tanks needed to be removed as part of the clean up of contamination at the land.
Mr Dugdale said that he received no further instructions from Woolworths in response to his e-mail of 10 January 2002. Mr Cloke said that, in response to Mr Dugdale’s e-mail of 10 January 2002, he instructed him to stop negotiating with the plaintiffs because they had rejected the Woolworths tanks offer. Mr Dugdale did not recall this instruction. However, as late as 5 July 2002, Mr Kiper spoke with Mr Cloke and was told that the Woolworths’ file for the land was still open and that Woolworths would like to be advised on the progress of the clean up of contamination at the land. Mr Kiper confirmed this conversation in a letter dated 5 July 2002 to Mr Flicker. Although Mr Kiper referred in evidence and in his letter to a conversation with “Mr Gary Cook, Property Manager at Woolworths” I infer that this was a mistaken reference to Barry Cloke. As I have said, Mr Cloke succeeded Mr Macmillan as the property manager at Woolworths responsible for the opportunity to lease the land. It is likely that Mr Kiper had not dealt with Mr Cloke before, and this explains his mistake. In my view, notwithstanding Mr Cloke’s evidence, Woolworths did not lose all interest in leasing the land in January 2002. It is more likely that it chose to wait and see what action was taken by the EPA in respect of contamination at the land.
The evidence does not establish when Woolworths finally lost patience and determined to look elsewhere for a suitable site for a petrol station adjacent to its Safeway supermarket in Springvale Road, Springvale. However, it appears that when an alternative opportunity presented itself, Woolworths determined to proceed and accept that alternative opportunity. Mr Diomides learned of this when, in January 2003, he contacted Mr Webb to tell him that the EPA had finally issued a clean up notice.
In the meantime, the plaintiffs maintained their position that Mobil was obliged to clean up the contamination at the land. Mobil continued to deny any responsibility to do so. The plaintiffs, through Mr Diomides, continued to press the EPA to intervene.
In August 2001, Handex reported on the results of a groundwater monitoring event at the land in June 2001 (“the June 2001 groundwater report”). This monitoring event was in accordance with its recommendations in the ESA. The results revealed increased benzene contamination at monitoring well 2 (“MW2”) from 800 μg/L in July and November 2000 to between 1500 and 2600 μg/L in June 2001. Despite this increase, Handex reported that “concentrations of groundwater contaminants observed at MW2 have remained approximately constant over the sampling events”.
However, as with the ESA itself, the June 2001 groundwater report was the subject of significant input from Mr Bond of Mobil. In particular, a previous draft of this report had referred to there being “significant groundwater contamination” at the land. Mr Bond directed that this be removed from the final report. Handex complied.
On 22 August 2001, Mr Bond and Mr Lagowski met with representatives of the EPA. The EPA representatives raised a number of concerns about the contamination at the land. One of the EPA representatives at this meeting, and who had the conduct of the matter for some time thereafter, was Michael Rehfisch.
On the same day, Mr Rehfisch wrote to Mr Bond and summarised the concerns of the EPA, as expressed during the meeting. Although the focus of the EPA concerns was groundwater contamination, the letter referred to concerns about soil contamination also. In this regard, Mr Rehfisch stated in his letter:
“Further to the meeting, EPA indicated that there are a number of issues that require resolution before considering the need for further assessment and/or monitoring at the site. The issues are as follows:
·Demonstrate the adequacy and representativeness of the sampling and analysis program for the site. Specifically, EPA notes that the current groundwater flow direction may indicate scope for further investigation of groundwater between the bore SV2MW2 and SV2MW5. Additionally, it appears that field screening for hydrocarbons in soil from S2G5 may not have been confirmed by chemical analysis;
...
·Provide details of any tank integrity testing performed at the site, and any other information on potential sources for the hydrocarbon in soil at the site.
EPA believes the above information is important to assist in confirming the nature, extent and magnitude of any risk presented by the site. EPA’s requirements regarding ongoing management of the site will be formulated taking this into account.”
In oral evidence, Mr Lagowski acknowledged that there was discussion at the meeting with EPA representatives concerning soil contamination and, in particular, the failure of Handex to analyse the soil sample taken from soil bore 5 (S2G5) with a PID reading of 1090 ppm. As a result, Mr Lagowski made a note for himself to look at the field notes for soil bore 5 and investigate why the sample was not sent for analysis. However, Mr Lagowski said that he could not recall whether he in fact did so. The only evidence of the instructions given by Mobil to Handex in response to the EPA letter of 22 August 2001 is a facsimile from Mr Bond to Mr Lagowski of Handex. Mr Bond simply forwarded the EPA letter to Handex with the request to “please review their letter and formulate response”.
Handex drafted the Mobil response to the EPA letter. That response ignored the EPA’s expressed concerns regarding soil contamination and, in particular, concerning the failure of Handex to send off the soil sample taken from soil bore 5 for analysis. The response was prepared by Mr Hadwen. He said in cross-examination that the EPA’s concerns about soil contamination were overlooked by him, given the focus of the EPA’s concerns about groundwater contamination. In this regard, I note that it was accepted by the parties that this focus by the EPA on groundwater was not unusual given the capacity for groundwater contamination to migrate to other sites outside of the subject land.
Further, the Handex response was clearly directed towards the continuing use of the land as a petrol station site. It did not consider any other commercial use permitted by the applicable zoning. This is apparent from the terms of the response and was acknowledged by Mr Hadwen in cross-examination.
The Handex response concluded with a statement of intention on the part of Mobil to conduct further groundwater monitoring events and, depending on the results, “a site specific risk assessment for on-going service station use may be required”. Further, the Handex response referred, for the first time, to the intention of Mobil to prepare a groundwater management plan to review “trigger scenarios” and “possible remedial options for long-term management of the groundwater at the site”.
Handex concluded its response in the following terms:
“Mobil have indicated an on-going commitment to management of the existing impacts to groundwater at the site. Handex will undertake these works in accordance with Mobil’s and EPA’s requirements. In the interim, Handex considers that the site is suitable for on-going use as a service station.” (Emphasis added.)
On 31 October 2001, Mr Williams, as legal adviser to Mobil, responded to a demand from Mr West, on behalf of the plaintiffs, for payment of licence fees. Mr Williams stated:
“Mobil’s position is that the conditions under the lease have been complied with and that there is nothing to prevent your client from using the premises as a service station.
This has been the case throughout the period in which your client is claiming that it is entitled to a licence fee.
Accordingly, Mobil denies that it is liable in any way to pay a licence fee to your client.” (Emphasis added.)
This response confirms the continuing misunderstanding on the part of Mobil, and its legal advisers, that its only obligation under the lease was to clean up contamination so as to permit the premises to be used as a service station.
On 28 November 2001, Mr Hadwen of Handex forwarded a draft plan for the management of groundwater contamination at the land to Mr Rehfisch of the EPA. There was no reference in the draft plan to any continued investigation or management in respect of contaminated soil at the land.
Handex published a further groundwater monitoring event report in April 2002 (“the April 2002 groundwater report”). This followed the installation of a further groundwater monitoring well in March 2002 which had been installed at the suggestion of the EPA. Once again, this report was the subject of significant input and alteration by Mr Bond of Mobil. In particular, Mr Bond directed, and Handex accepted, the deletion from the final report of references in the draft report to a number of specified potential risks arising from the contaminated groundwater at the land, so that the statement concerning risk was limited to the bland statement:
“Risk:
·Given the current conditions at the site, the risk posed to human health is minimal.”
At about this time, Mobil was asked by Handex to complete a “customer satisfaction questionnaire”. Mr Bond completed the questionnaire. He stated that he was not satisfied with the quality of the “project submittals” by Handex. Mr Bond expanded upon this response in the “additional comments” section of the questionnaire. He wrote:
“Draft report needed significant rewriting to be in accordance with Mobil Spec.
Also, QRA[3] not what was required to submit to EPA.”
[3]Qualitative Risk Assessment.
Mr Bond signed this questionnaire on the same day that he forwarded the April 2002 groundwater monitoring report to the EPA.
In the meantime, things were moving slowly with the EPA. It may be that, to some extent, the delays were caused by the initial refusal of VicRoads to allow soil bores or groundwater wells to be drilled in the footpath, nature-strip or road adjacent to the land. It appears that the EPA became involved to facilitate this occurring.
On 8 May 2002, Mr Rehfisch wrote to Mr Bond:
“Please provide a strategy ASAP for further delineation works at this site – with a view to progressing a proposal for delineation and clean up of polluted groundwater to the extent practicable.”
In July 2002, Handex published a further groundwater monitoring event report in respect of the groundwater contamination at the land (“the July 2002 groundwater report”). This report contained a qualitative risk assessment, which included the following statement:
“Potential receptors at risk from impacted groundwater include off-site groundwater users and on-site workers, should the impacted groundwater be extracted or should the groundwater be exposed during site works.” (Emphasis added.)
Further, Handex recommended in the July 2002 groundwater report that a Groundwater Management Plan be formulated “to outline remedial works and ongoing monitoring works”.
The report concluded:
“Based upon the findings of this GME,[4] Handex considers the site is suitable for ongoing use under its current Business 2 zoning, subject to implementation of a Groundwater Management Plan.” (Emphasis added.)
[4]Groundwater Monitoring Event.
Later in July, Handex published a “Groundwater Management Plan”. That plan did not deal with any soil contamination issues. The qualitative risk assessment contained within the Groundwater Management Plan concluded:
“It is considered that the only risk from the current status of groundwater contamination at the site exists to onsite workers potentially contacting groundwater during any site redevelopment/ excavation works.” (Emphasis added.)
The Groundwater Management Plan specified certain “trigger levels” of contamination which would, if revealed by ongoing monitoring, act as a trigger for “contingency action”. There were two forms of trigger levels specified. First, if benzene concentrations exceeded 300 μg/L in any monitoring well not then reporting benzene concentrations above that level. Second, for wells already reporting benzene concentrations above 300 μg/L, “a trigger for contingency action will be a sustained increase in benzene concentrations”. The focus on benzene was accepted by all of the environmental consultants and auditors who gave evidence as being the form of hydrocarbon contamination with the potential to cause the most serious adverse effect upon human health. This is because benzene is a known human carcinogen.
Once a trigger event occurred, the contingency actions specified in the Groundwater Management Plan included notification to the EPA and the formulation of a “Remedial Action Plan... (if necessary)”. If a Remedial Action Plan was necessary, then it was to be implemented following discussions with the EPA.
Following the completion of the July 2002 groundwater report and the Groundwater Management Plan, Mr Bond left the employ of Mobil. At the time, he completed a “Job Overlap Form” recording the current status of the matters for which he was responsible, including any responsibility of Mobil in relation to the land. In this document, Mr Bond gave a pithy summary of the history of his involvement with the land:
“CURRENT ISSUES OR PROJECTS UNDERWAY: UPCOMING EVENTS:
- ESA complete for lease handback
- no PSH. Dissolved phase plume downgradient of tank farm
- site fit for ongoing use as a S/Stn. Owner & their consultant (Diomides & Assoc) disagree.
- Owner had hoped for Woolworths to take over lease, but deal fell through
- have been unable to delineate plume off-site in Springvale Rd due to services and access refusal from VicRoads
- Owner has gone to EPA to try and get resolution
- EPA gained VicRoads approval for us to delineate with temporary wells only
- EPA require clean-up to extent practicable and on-going management until protection of beneficial uses is restored
- no funds available. Min. spend criteria
- delineation complete. GME and GMP issue to EPA and awaiting approval/comments
- suitable milestone to handover to new consultants if further work required by EPA”
This summary by Mr Bond is indicative of his general approach to the issues concerning the land. As far as he was concerned, the ESA had been completed for the purposes of a “lease hand back” so that the land was “fit for ongoing use as a S/Stn”. It is apparent that Mr Bond did not understand, or chose to ignore, the terms of cl. 7(b) of the lease which required Mobil to clean up the land so as to permit commercial uses under the applicable zoning. Further, as I have said, Mr Bond’s summary establishes that he understood at all relevant times that Mobil wished to spend the minimum amount possible in relation to contamination issues at the land. The attempt by Mr Bond in cross-examination to explain his note “no funds available. Min spend criteria” as being limited to the need for his successor to apply for further funding, in accordance with Mobil internal procedures, was not credible and I reject it.
Finally, Mr Bond’s summary is relevant because it records that, by August 2002, Mobil were seeking to engage another consultant to replace Handex. This would appear to be the result of Handex ceasing to be on the Mobil panel of preferred environmental consultants to perform environmental site assessments and related work. At about this time, I.T. Environmental (Australia) Pty Ltd (“IT Environmental”) appear to have replaced Handex as a panel member to whom Mobil would direct such work. From this time on, IT Environmental advised Mobil concerning its environmental obligations in respect of the land.
It was not until 7 November 2002 that Mobil provided the plaintiffs with a copy of the Groundwater Management Plan. This was despite the fact that the plaintiffs had been asking for a copy of it for months. Mobil withheld the Groundwater Management Plan from the plaintiffs and their advisors for the stated reason that it was awaiting legal advice as to whether it should release it. This was typical of the shabby way in which Mobil treated the plaintiffs throughout the dispute. No justifiable reason for seeking legal advice on this issue was put forward. I infer that Mobil was looking for a legal reason to deny the plaintiffs access to the Groundwater Management Plan, because of the perception by Mobil that it may harm it in its dispute with the plaintiffs or that the plaintiff might use the Groundwater Management Plan to make further complaints to the EPA.
In particular, I infer that Mobil was concerned to withhold from the plaintiffs, if it could, the results of the qualitative risk assessment in the Groundwater Management Plan and the reference to trigger levels and contingency actions, as set out above.
In this regard, it must be recalled that Mobil is a member of a group of companies comprising one of the largest petroleum retailers in the world. It was dealing with two private companies which had invested in real estate for the purposes of obtaining an income. The plaintiffs had no expertise in petroleum contamination or environmental laws. The plaintiffs were in a position where they needed to engage expert advice at considerable cost to themselves in order to deal with contamination issues of which they had no understanding. This must have been obvious to Mobil.
Mobil’s concerns that the plaintiffs would use the contents of the Groundwater Management Plan to Mobil’s disadvantage were well founded. Within a week of receiving the Groundwater Management Plan, Mr Diomides spoke with Mr Rehfisch at the EPA and wrote to him by urgent facsimile dated 15 November 2002. In his facsimile, Mr Diomides was highly critical of the Groundwater Management Plan and, in particular, the lack of any specific remediation action plan in the event that groundwater contamination levels exceeded the trigger levels.
In December 2002, Michael Rehfisch handed over the EPA file on the matter to Jennie Slatter. Ms Slatter forwarded a draft clean up notice to Mobil for its comment. Pursuant to s. 62A of the Act, on 16 January 2003, the EPA issued a clean up notice to Mobil in respect of the land (“the clean up notice”). The clean up notice dealt with groundwater only. It made no reference to soil contamination. As I have said, this issue was ignored by Handex in its initial response to the concerns expressed by the EPA in August 2002, and the EPA seems to have failed to follow-up on its initial concerns in this regard.
However, to attribute a value to such a chance the court might have to engage in a degree of speculation, speculating as to the likelihood that a profitable contract would be available, what the likely profits would be and the likelihood that the plaintiff would secure the contract against competition by others.”
[40](1991) 174 CLR 64 at 104.
In Sellars[41] Mason CJ, Dawson, Toohey and Gaudron JJ stated that the principle allowing recovery of damages for deprivation of a commercial opportunity:
“... should be ascertained by reference to the court’s assessment of the prospects of success of that opportunity had it been pursued.”
[41](1994) 179 CLR 332 at 355.
In Sellars[42] Brennan J stated:
“Provided an opportunity offers a substantial, and not merely speculative, prospect of acquiring a benefit that the plaintiff sought to acquire or of avoiding a detriment that the plaintiff sought to avoid, the opportunity can be held to be valuable.”
[42](1994) 179 CLR 332 at 364.
There was no dispute about the applicable legal principles. It was submitted on behalf of the plaintiffs that the opportunity which it had lost was “a certain opportunity to secure a profitable second contract”,[43] so that damages should be assessed on the basis that the plaintiffs have been deprived of the whole of the benefit of the proposed lease to Woolworths.
[43]Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 104.
The Court’s assessment as to the value of the lost opportunity to lease the land to Woolworths is capable of being relevant at two levels. This is because there are two limbs to the plaintiffs’ damages claim. First, the plaintiffs seek as damages either the amount of rent which Woolworths would have paid under a lease prior to the sale of the land in November 2004 or the amount of licence fees payable by Mobil under cl. 7(d) of the lease for the period between the expiration of the lease and the sale of the land in November 2004. The quantum of these two alternative claims is, if a lease to Woolworths is treated as a certainty, almost identical. However, if the Court assesses the lost opportunity to lease the land to Woolworths as less than certain, then damages for loss of rent could be significantly less than the claim for licence fees. Furthermore, as the licence fees are amounts accruing due under the terms of cl. 7(d) of the lease, a judgment for the plaintiffs based on non-payment of licence fees may give the plaintiffs a higher entitlement to interest on its damages award. This is because the plaintiffs have consistently made demand for licence fees from an early time.[44] Having regard to these matters, in the event of success on their claims the plaintiffs have elected to have a judgment under cl. 7(d) of the lease. It follows that the Court’s assessment of the prospect of a lease being concluded with Woolworths if Mobil had complied with its clean up obligation under cl. 7(d) is not relevant to the first limb of the plaintiffs’ claims.
[44]See Supreme Court Act 1986 (Vic) s. 58.
However, the position is not so straightforward with respect to the second limb of the plaintiffs’ claim. Under this limb, the plaintiffs claim as damages the difference between the actual sale price obtained by them on sale of the land in November 2004 and the sale price which it is alleged could have been obtained if Mobil had complied with the clean up obligation. The Court’s assessment of the prospect that the plaintiffs would have secured a lease to Woolworths, and on what terms, is relevant to this limb of the damages claim.
(2) Loss of rent/licence fees
As I have said, on the first limb of their claim the plaintiffs have already elected for a remedy calculated by reference to cl. 7(d) of the lease. Accordingly, there being no dispute as to the arithmetic, there will be judgment for the plaintiffs in the sum of $575,735.99 and interest. As to the calculation of interest, upon which I will hear the parties further if no agreement is reached, I note that the plaintiffs have demanded payment of licence fees from an early time.
By a letter dated 28 December 2000, Mr West informed Mr Burge of Mobil:
“In accordance with clause 7(d) of the Lease, the Landlords require the continuing payment of rent until the Lease is complied with.”
Mr Burge understood this as a claim by the plaintiffs for the licence fee referred to in cl. 7(d) of the lease, which is equivalent to the rental payable under the lease at the date of its expiration. At regular intervals from this time, the plaintiffs, through Mr West, continually demanded from Mobil that it pay the licence fee until the land was cleaned up in accordance with cl. 7(b) of the lease. In future correspondence, there was no confusion as to the description of the licence fee, and it was so described in the demands made.
(3) Diminution in value of the land
The parties each called one expert valuer to give evidence. Their opinions were diametrically opposed on all but one issue. The experts agreed that, if the land was valued on the basis that it was leased to Woolworths on commercial terms, the fair market value of the land could be ascertained by applying a capitalisation rate of 8 per cent on the passing rent. On this basis, if the passing rent was taken as being in accordance with the rent which would have been payable by Woolworths under the proposed lease, without any adjustment by reason of a need to install new tanks, a value of $1,870,000 is established.
However, if I am to consider valuation of the land on the basis that it was leased to Woolworths, it is in my view appropriate that I consider and make findings on two matters. First, as to the likely commercial terms which would have been agreed between the plaintiffs and Woolworths if Mobil had complied with the clean up obligation. This is necessary to identify the opportunity which has been lost. Secondly, I will proceed to assess the prospect of whether a lease to Woolworths on those terms would have proceeded at all.
In considering these questions, a number of matters must be taken into account. In my view, the principal factors to be considered are:
(1) What was the extent of the interest of Woolworths in leasing the land?
(2) To what standard was Mobil required to clean up the land?
(3) Within what time was Mobil required to clean up the land?
(4) To what standard did Woolworths require the land to be cleaned up?
(5)Would the commercial terms of a lease to Woolworths have remained the same if Mobil removed the tanks?
(6)What were the uncertainties which might have caused Woolworths to refuse to lease the land?
I will consider each of these factors separately.
As to the extent of Woolworths’ interest in leasing the land, I find that it was extremely high. The evidence of this has been set out in the factual narrative contained in this judgment. In summary, Woolworths was at the time expanding its chain of petroleum retail outlets at a rapid pace, described by Mr Webb as “go, go, go, go”. The extent of Woolworths’ interest is indicated by the fact that, notwithstanding the contamination issues at the property, Woolworths remained interested in leasing the land until at least January 2002. This was more than one year after the expiration of the lease and the agreement, subject to contract, of the commercial terms of the proposed lease.
As to the standard of clean up, I have held that Mobil was required to clean up the contamination at the land so as to enable it to be used for the commercial uses permitted under the applicable zoning. I have found that the clean up obligation extended to the removal of the tanks, cleaning up any contamination such as that found in soil bore 6 and in the vicinity of the tanks and then, under the make good obligation, re-installing or replacing the tanks or tanks of at least similar quality.
As to the time within which Mobil was required to clean up, cl. 7 of the lease makes it abundantly clear that Mobil could not take its time. Clause 7(b) requires an ESA to be prepared “at the expiration” of the lease and that Mobil “shall thereupon” clean up the land. Clause 7(d) provides that Mobil is to have access to the land for a period of 30 days following the expiration of the lease “or such longer period as is reasonably required” (emphasis added). Such access is for the purpose of carrying out the clean up works and to “then make good any damage caused by such works to the reasonable satisfaction of [the plaintiffs]”. Until Mobil has complied with all of these obligations, Mobil is obliged under cl. 7(d) to pay the licence fee. All of these factors, together with commercial commonsense, indicate that Mobil was required to clean up the land within a reasonable time of the expiration of the lease. In this regard, a reasonable time must take account of the right of the plaintiffs to utilise the land as soon as reasonably practicable for the commercial uses permitted by the applicable zoning.
The evidence of Mr Samardjiev is relevant to the reasonable time required to perform clean up works at the land. Mr Samardjiev gave evidence that he was aiming to get permits for the demolition of all buildings on the land and to clean up the contamination, including removing the tanks, in time to allow United Petroleum to install its own tanks, backfill and compact the soil and redevelop the land for the purpose of commencing trading in about February 2006. At the earliest, Mr Samardjiev’s efforts in this regard could have commenced in early October 2005. The evidence of Mr Samardjiev supports a finding that it was possible for all of these works to be carried out within a period of four months. I find that a reasonable time for Mobil to comply with the clean up obligation and the make good obligation was no more than six months after the expiry of the lease. This allows, in order to cater for contingencies, a further two months in addition to the timeframe against which Mr Samardjiev said he was working to satisfy the requirements of United Petroleum. Accordingly, the clean up and make good obligations of Mobil should have been complied with by 13 May 2001 at the latest.
There is evidence as to the standard to which Woolworths required the land to be cleaned up. That standard is to be found in the Landlord’s Works referred to in cl. 2.3 of the schedule to the draft agreement for lease. Clause 2.3(b) of that schedule provided that the plaintiffs were required to remove or procure:
“... the removal of all contamination from the [land] and remedying or procuring the remedying of all breaches of Environmental Laws[45] in respect of the [land] so that the level of contamination at the [land] is in accordance with the Environment Protection Authority Victoria guidelines for the level of contamination at premises of the nature of the [land] and the requirements of all Australian Authorities and so that there are no breaches of Environmental Laws in respect of the [land].” (Emphasis added.)
[45]The “Environmental Laws” are defined in the draft lease annexed to the proposed agreement for lease as “all laws and regulations, environmental protection policies, and directions, standards and guidelines of any authority (and any other like bodies) regulating or otherwise relating to the environment…”
In my view, the standard of clean up required by Woolworths was no higher than the clean up obligation. Although the term “Environmental Laws” is widely defined, I do not think that this alters the situation. Woolworths were very keen to lease the land, and it is unlikely that any strict interpretation of “Environmental Laws” on its part would have caused it to withdraw from the proposed lease if Mobil had complied with its clean up obligations. In particular, I note that the standard of clean up required by Woolworths was “in accordance with the [EPA] guidelines for the level of contamination at premises of the nature of the [land]”. The reference to premises of the nature of the land, indicates that the extent of clean up required by Woolworths was so as to permit the land to be used for a service station. That was its immediately preceding use and was the proposed use by Woolworths. Accordingly, the standard of clean up required by Woolworths was of a lesser extent than that required to be done by Mobil to comply with the clean up obligation.
Further, under cll. 2.3(f) and (g) of the schedule to the draft agreement for lease, Woolworths required that the tanks remain at the land and be in working order and free of leaks and other defects. As I have said, having regard to the fact that Mobil assigned ownership of the tanks to the plaintiffs, Mobil was required to reinstall or replace them in accordance with its make good obligation under cl. 7(d). Had it done so, a question arises as to whether this would have satisfied Woolworths, or whether it would have sought to alter the commercial terms of the proposed lease.
On the one hand, Mobil cannot be heard to say that the tanks were not in working order and free of defects, as required by Woolworths. Mobil asserted throughout the trial that the tanks had been tested and found to be “tight” and, in final submissions, maintained the submission that I should find that the tanks were in fact “tight” at the expiration of the lease.
On the other hand, the removal of the tanks by Mobil would have provided Woolworths with an opportunity to insist upon new tanks being installed by the plaintiffs. On no view of the make good obligation, could Mobil have been required to pay for the cost of installing new tanks.
In this regard, it must be remembered that the tanks were over 20 years old and were made of steel. Corrosion was likely. Later in the day of the 20 March 2001 meeting, Mr Webb telephoned Mr Diomides. Mr Diomides’ telephone log records the following conversation:
“20/3/01Steve Webb rang late pm after meeting. I advised him of discussions at subsequent meeting with site owner and that tanks may be 20 to 25 years old and may need to be replaced. Mobil took option of giving USTs to site owner but toward end of meeting offered to remove tanks if owner prefers. Steve Webb indicated that Woolworths want to be leasing a compete (sic) service station with viable tanks. ‘Positive tank test today may result in negative result tomorrow.’”
I find that it is probable that, as a result of Mobil removing the tanks in order to comply with the clean up obligation, there would have been a renegotiation of the commercial terms of the proposed lease to Woolworths. Although it occurred after the six month period within which I have found Mobil was obliged to comply with the clean up and make good obligations, the evidence establishes that, when the issue of possible removal of the tanks was raised by the plaintiffs,[46] Woolworths responded seeking compensation.[47] Soon after, Woolworths made the Woolworths tanks offer.[48] The response of the plaintiffs was to continue to insist that, if the tanks were removed during clean up works, the plaintiffs and Woolworths could renegotiate the commercial terms.
[46]22 May 2001 letter from Mr West to Mr Dugdale.
[47]6 July 2001 e-mail from Mr Dugdale to Mr West.
[48]20 July 2001 e-mail from Mr Dugdale to Mr West.
I find on the balance of probabilities that, upon Mobil removing the tanks as part of the clean up works, it is more probable than not that the plaintiffs and Woolworths would have reached agreement on revised commercial terms. The effect of that agreement would most likely have been to impose the cost of installing new tanks on the plaintiffs. This could have been done by the plaintiffs agreeing to pay for the installation of new tanks, or by agreement being reached as to a revised rental, such as that contemplated by the Woolworths tanks offer. Accordingly it is necessary to take this likelihood into account in considering the value of the opportunity which has been lost by the plaintiff.
Whether that agreement would have involved the plaintiffs paying for the new tanks or Woolworths paying a reduced rental is a matter of speculation. However, the fact that the plaintiffs rejected the Woolworths tanks offer indicates that they were not disposed to accept a reduced rental which involved Woolworths seeking to recoup the cost of the tanks, and interest thereon, over the 15 year period of the lease. In my view, it is most likely that the plaintiffs would have elected to pay for the cost of new tanks, rather than accept a reduced rental.
The Woolworths tanks offer involved a reduction of the annual rent by 9 per cent of the cost of installation of new tanks. The only credible evidence as to the cost of installation of new tanks was an internal Woolworths’ estimate of $250,000.[49] It appears that the Woolworths tanks offer was based upon this estimate, and would have had the effect of Woolworths recouping the cost of the tanks, together with a margin for interest, over a 15 year period. On my calculations, the Woolworths tanks offer involved an annual rent reduction of $22,500 over 15 years.[50] This would have involved the plaintiffs in receiving $337,500 less rent over this period.
[49]Mr Samardjiev gave an uninformed estimate, but said he did not know how much new tanks would cost.
[50]$22,500 is 9 per cent of $250,000.
Accordingly, I am of the opinion that the value of the land should, for the purposes of the second limb of the plaintiffs’ damages claim, be assessed on the basis that the Woolworths lease was in place on the commercial terms agreed between the plaintiffs and Woolworths in November 2000. As I have said, on this assumption, there is no dispute between the experts as to the appropriate capitalisation rate to apply to the passing rent. The result is that, for the purposes of considering the second limb of the damages claim, I will adopt a value for the land in November 2004 of $1,870,000. This exceeds the sale price to United Petroleum by $669,000. However, the sum of $250,000 for the cost of new tanks must be deducted from this amount, leaving a total of $419,000.
I have no doubt that Mr Flicker would have attempted to obtain from Mobil a contribution towards the cost of new tanks at the land. However, I am not satisfied that there is any realistic possibility that Mobil would have agreed to contribute any amount towards the purchase of new tanks. It was not obliged to do so and its conduct throughout the dispute indicates that it would have been most unlikely to make any payment which it was not legally obliged to make.
There remains for consideration my assessment of the prospect that the Woolworths’ lease would not have proceeded at all. After all, the draft agreement for lease was never signed and the issue concerning compensation to Woolworths for the cost of new tanks may have proven a sticking point which could not be resolved by negotiation. However, in assessing the value of the opportunity which has been lost, I have already assumed against the plaintiffs that they would have been required to pay for new tanks if a lease to Woolworths was to proceed. Accordingly, it is not in my view appropriate that I further discount the plaintiffs’ damages by reason of this contingency.
The question remains as to whether I should nevertheless reduce the damages because of the prospect that, for some other reason, the proposed lease to Woolworths might not proceed. In this regard, I note that in final written submissions Mobil relied upon “two possible reasons for the lease to Woolworths not proceeding”. First, it was submitted by Mobil that Woolworths may have withdrawn from the proposed lease because of the state of contamination of the land. Mobil accepted that, if it was in breach of the clean up obligation, it was responsible for, and could not rely upon, this contingency. Secondly, it was submitted on behalf of Mobil that Woolworths may have withdrawn because there was no agreement between the plaintiffs and Woolworths as to the financial consequences if the tanks were removed as part of the clean up of the land. As I have said, I have taken this matter into account in assessing the value of the opportunity which the plaintiffs have lost. It seems to me that it would be doubly penalising the plaintiffs if I were to take this matter into account further in assessing the prospect that the lease to Woolworths might not have proceeded at all.
However, the fact remains that the draft agreement for lease was never signed. There are no certainties in commercial life. Although Woolworths was extremely keen to lease the land, it was open to it to change its mind. It seems to me that I should make a small reduction to the damages recoverable by the plaintiffs to take account of this general commercial risk. In doing so, I take account also of the impression which I gained from the evidence, and from observing Mr Flicker in the witness box, that he is a man who drives a hard bargain, and this may have resulted in Woolworths refusing to proceed. Accordingly, I will further reduce the damages by an amount of 10 per cent to take account of this possibility. This will have the effect of reducing the plaintiffs’ damages for diminution in the value of the land by a further $41,900, leaving a figure of $378,900.
The plaintiffs put their claim for damages for diminution in the value of the land on an alternative basis. It was submitted on behalf of the plaintiffs that, if the land was valued in November 2004 on the basis of vacant possession, a value of $1,810,000 would be applicable. If this value were to be adopted, the plaintiffs’ damages on this account may be considerably larger than I have found. However, I would still need to consider whether another tenant could be found on the same commercial terms as if the Woolworths’ lease had proceeded and, in that regard, to have given consideration to the state of the tanks. Although Mobil may have been required to reinstall the existing tanks as part of its make good obligation, or to replace them with tanks of a similar age which tested as “tight”, I am not satisfied that another petroleum retailer would have agreed to lease the land for 15 years, at the same rent which Woolworths agreed to pay, with tanks in that condition.
In any event, the plaintiffs do not have a right to elect the basis upon which damages will be assessed. It is a matter for the Court to determine the correct measure of damage, on the basis that the plaintiffs are to be put in the position they would have been had the contract been performed.[51] Given my view that, if Mobil had performed the clean up obligation, the plaintiffs would have leased the land to Woolworths on the revised commercial terms discussed above, it is inappropriate to assess damages on the basis that the Woolworths’ lease did not proceed. Indeed, this would be contrary to the whole tenor of the plaintiffs’ case, which was that it has been deprived of the opportunity to lease the land to Woolworths.
[51]Commonwealth v Amann Aviation (1991) 174 CLR 64 at 136; Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87 at 100.
It is accordingly unnecessary for me to consider the conflict in the evidence of the expert valuers as to the value of the land in November 2004 if it was sold with vacant possession.
(4) Conclusions on amount of damages
As stated above, the plaintiffs are entitled to recover:
(1)a liquidated amount of $575,735.99 for licence fees due under cl. 7(d) of the lease; and
(2)in respect of diminution in the value of the land, the sum of $378,900 as damages for breach of the clean up obligation under cl. 7(b) of the lease.
These amounts total $954,635.99. There will be judgment for the plaintiffs for this amount, together with interest.
I will hear the parties as to interest and costs.
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