Next Stage Living Moonee Ponds Pty Ltd v Ardmillan Place Nominees Pty Ltd

[2022] VSC 89

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT
COMMERCIAL LIST

S ECI 2020 02455

NEXT STAGE LIVING MOONEE PONDS PTY LTD (ACN 629 891 765)	Plaintiff
v
ARDMILLAN PLACE NOMINEES PTY LTD (ACN 009 717 515)	Defendant

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JUDGE:	Button J
WHERE HELD:	Melbourne
DATE OF HEARING:	20 September 2021 - 23 September 2021, 27 September 2021 - 30 September 2021, 4 October 2021, 13 October 2021 – 14 October 2021
DATE OF JUDGMENT:	28 February 2022
CASE MAY BE CITED AS:	Next Stage Living Moonee Ponds Pty Ltd v Ardmillan Place Nominees Pty Ltd
MEDIUM NEUTRAL CITATION:	[2022] VSC 89

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CONTRACT – Termination by mutual agreement or abandonment – Where parties negotiated to amend terms of contract prior to settlement but did not reach agreement – Where purchaser subsequently sought to settle under the terms of the existing contract – Whether conduct of parties constituted implied agreement to terminate existing contract – Whether conduct of parties constituted abandonment of existing contract – No implied agreement to terminate or abandon existing contract.

CONTRACT – Termination – Where contract provided for right to terminate after a sunset date if certain conditions not satisfied – Where completion had not occurred at the sunset date – Whether certain conditions were required to be met in the circumstances – Whether vendor had right to terminate where conditions required to be met ‘at completion’ were not satisfied at the sunset date but notices to complete had been served – Vendor had no right to terminate under contract.

CONTRACT – Repudiation – Where party erroneously alleged contract already terminated by mutual agreement or abandonment, or alternatively purported to terminate contract under specified clause – Whether party claiming contract terminated repudiated the contract – Whether repudiation accepted by counterparty – Contract repudiated.

CONTRACT – Assessment of damages – Where contract concerned sale of land, business and related assets – Where highest and best use of land would have required amendments to applicable planning scheme to allow for a more intense development, but approval of amendment to applicable planning scheme uncertain – Where expenses recorded in vendor’s operating accounts not all clearly referable to activities of business being sold – Whether market value of land and assets equal to the price stipulated in the contract – Whether land to be valued assuming certainty of amendment of applicable planning scheme with a discount to reflect planning risk or vice versa – Whether discount applied by expert sufficient – Whether business to be valued by normalising its accounts – Damages awarded.

CONTRACT – Mitigation – Where open offer to complete sale of land and assets for a discounted price, but on different financing terms, made before trial – Where different financing terms involved removal of vendor finance – Whether plaintiff unreasonably failed to mitigate loss by not accepting such an offer – Whether removal of vendor finance altered the contract such that it was not an offer made on substantially the same terms as the contract – No failure to mitigate.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	P L Ehrlich QC N O J Cozens R A Kornhauser	Madgwicks
For the Defendant	P G Willis SC N Kotzman	MinterEllison

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

Background: the Property, Business and regulatory context..................................................... 3

The Contract of Sale, ASA and Call Option Deed: Key terms................................................ 10

The Contract of Sale.................................................................................................................... 10

The ASA........................................................................................................................................ 17

Call Option Deed......................................................................................................................... 25

The witnesses.................................................................................................................................... 28

Lay witnesses............................................................................................................................... 28

Expert evidence in overview..................................................................................................... 31

The facts: what occurred between 26 November 2019 and 1 June 2020?............................... 33

Events leading up to the scheduled completion date of 29 November 2019..................... 34

26 November 2019: restructure within Next Stage and the nominations........................... 36

The ‘dry run’ meeting on 27 November 2019......................................................................... 39

Events following the ‘dry run’ meeting................................................................................... 43

Events on 29 November 2019, the scheduled completion day............................................. 46

Events leading up to Christmas 2019....................................................................................... 51

The January 2020 suite of proposed amendments................................................................. 60

Next Stage’s rejection of the 23 January 2020 suite of amendments and calling for settlement           63

After the Australia Day long weekend, the principals negotiate other options................ 66

February suite of proposed amendments................................................................................ 74

Negotiations leading to the March 2020 suite of documents............................................... 77

Events in April 2020.................................................................................................................... 80

Service of the Notices to Complete in May 2020, and Ardmillan’s response.................... 89

Were the Contract of Sale and ASA on foot at 18 May 2020?.................................................. 97

Legal principles: Termination by mutual agreement............................................................ 97

Legal principles: Repudiation................................................................................................. 101

The parties’ contentions........................................................................................................... 103

Next Stage’s arguments.................................................................................................. 103

Ardmillan’s arguments................................................................................................... 105

Period to 23 December 2019.............................................................................. 106

Period to 1 February 2020................................................................................. 108

Period to, and including, 15 April 2020.......................................................... 109

Analysis...................................................................................................................................... 110

Mutual termination......................................................................................................... 110

Repudiation...................................................................................................................... 118

Was it open to Ardmillan to terminate the ASA on 25 May 2020, relying on cl 2.4?........ 125

The parties’ contentions........................................................................................................... 125

Analysis...................................................................................................................................... 129

Priority Deed.................................................................................................................... 130

Notice to Residents.......................................................................................................... 135

Residual matters.............................................................................................................. 137

Did Ardmillan repudiate the Contract of Sale and the ASA by its letter of 25 May 2020? 138

Next Stage’s damages claim......................................................................................................... 138

Was Next Stage itself ready, willing and able to perform?................................................. 138

Legal principles................................................................................................................ 138

The parties’ contentions.................................................................................................. 139

Analysis............................................................................................................................. 140

Expert valuation evidence....................................................................................................... 141

Overview........................................................................................................................... 141

The Court’s task in evaluating expert evidence.......................................................... 142

What was the value of the Vacant Land?..................................................................... 145

The opinions of Ms Burnet and Mr McAuliffe............................................... 145

The opinion of Mr Milner.................................................................................. 160

The parties’ submissions on the value of the Vacant Land.......................... 161

Analysis: the value of the Vacant Land........................................................... 167

What was the value of the Balance of Level 3?........................................................... 178

The opinion of Ms Burnet and Mr McAuliffe on the value of the Balance of Level 3     178

The parties’ submissions on the value of the Balance of Level 3................ 191

Analysis: the value of the Balance of Level 3................................................. 192

What was the value of the fee-related income streams of the Business?................ 195

Preliminary observation: limited difference in outcome with audited figures     195

Overview of Mr Meredith and Ms Burnet’s valuations............................... 196

The retirement village cashflows and accounts............................................. 199

Operating costs................................................................................................... 204

Experts’ views using the audited accounts.................................................... 205

The parties’ submissions on the value of the DMF....................................... 206

Analysis: the value of the DMF........................................................................ 208

What was the value of the vacant stock component of the Business?..................... 212

The experts’ approaches to the valuation of the vacant stock..................... 212

The parties’ submissions on the value of the vacant stock.......................... 214

Analysis: the value of the vacant stock........................................................... 214

Overall valuation....................................................................................................................... 215

Mitigation........................................................................................................................................ 216

The offers.................................................................................................................................... 216

The evidence.............................................................................................................................. 218

The parties’ contentions........................................................................................................... 225

Legal principles......................................................................................................................... 228

Analysis...................................................................................................................................... 230

Residual matters concerning the deposits and Next Stage’s caveat..................................... 236

Orders............................................................................................................................................... 236

HER HONOUR:

Introduction

1. On 5 August 2019, the plaintiff (Next Stage) and the defendant (Ardmillan) entered into a Contract of Sale of Real Estate (Contract of Sale) in respect of land known as 11‑45 Derby Street, Monee Ponds (the Property),[1] an Asset Sale Agreement (the ASA) and a Call Option Deed.  Next Stage was the purchaser under the Contract of Sale and the ASA.  Ardmillan was the vendor.  The Contract of Sale included provision for significant vendor financing.  The ASA provided for the transfer of a retirement village business being conducted by Ardmillan (the Business) and related assets. 

   [1]Lot 2 on Plan of Subdivision 801065F, certificate of title volume 12083 folio 704.

1. Deposits were paid and the Contract of Sale and the ASA were due to settle on 29 November 2019.[2] For reasons which are addressed in detail below, neither contract settled on the due date.  Initially negotiations were directed to the terms of a Priority Deed involving Next Stage’s mezzanine lender, but once the terms of the Priority Deed were resolved (which occurred relatively quickly), the negotiations were directed to changes Ardmillan considered necessary to accommodate Next Stage’s nomination of itself in its trustee capacity as the purchaser.  The negotiations were, in some respects, extensive; but failed to yield agreed revisions.  Several weeks after the negotiations ended, Next Stage served Notices to Complete on Ardmillan, seeking to bring on completion under the original contracts.  Ardmillan contended, in response, that the contracts were no longer on foot, or if they were, it was entitled to terminate them.

   [2]ASA cl 6.1; Contract of Sale cl 1.1 (definition of Settlement Date).

1. The parties are in dispute about many aspects of their failed transaction.  The key points in dispute are:

(a)         whether the Contract of Sale and the ASA were still on foot on 18 May 2020 (when Next Stage served its Notices to Complete) or had earlier been terminated by mutual agreement, or determined following repudiatory conduct by Next Stage, which was accepted by Ardmillan;

(b)       whether, if the contracts were on foot at that time, Ardmillan was entitled to terminate the ASA (with the Contract of Sale automatically terminating due to the contracts being expressly interdependent);

(c)        whether Ardmillan is entitled to retain the deposits paid by Next Stage under the Contract of Sale and the ASA;

(d)       if, as Next Stage contends, Ardmillan repudiated the Contract of Sale and the ASA in May 2020 (which repudiation it says it accepted):

(i)     whether Next Stage was itself ready willing and able to complete;

(ii)  whether Next Stage suffered loss or damage;

(iii)             the amount of Next Stage’s loss or damage; and

(iv)             whether Next Stage has, as Ardmillan contends, failed to mitigate its loss by not accepting offers made by Ardmillan to settle the transaction on particular terms.

1. Next Stage claims loss of bargain damages, which it calculates as the difference between what it contends to be the ‘true value’ of the Property and the purchase price under the Contract of Sale, and the difference between what it contends to be the true value of the assets it was to have acquired under the ASA, and the price payable under that contract.  It advanced an alternative claim to reliance damages.  Next Stage also claims repayment of the deposits. 

1. In evidence, the parties painted on a wide canvas, traversing their interactions and correspondence in great detail.  The chronology of events and interactions, while extensive, was largely uncontroversial.  Those events are set out below.  What was controversial was how these interactions are to be characterised, and the legal consequences that flow.  In particular, a central point of controversy was whether the parties’ dealings after the original date for completion resulted in an inferred agreement to terminate the original contracts, or were merely negotiations seeking amendments, which did not involve the termination of the original contracts or their repudiation.

1. By way of overview, for the reasons detailed below, I have reached the following conclusions on the principal issues (some terms are defined later in these reasons):

(a)        the Contract of Sale and the ASA were still on foot on 18 May 2020;

(b)       Ardmillan was not entitled to terminate the ASA (and consequently the Contract of Sale) under cl 2.4 of the ASA on 25 May 2020;

(c)        Next Stage was ready, willing and able to complete under the Contract of Sale and the ASA pursuant to its Notices to Complete;

(d)       the value of the Vacant Land was $26.87 million (being the value determined by the expert called by Next Stage, Ms Burnet, but subject to a downward adjustment to account for uncertainty regarding planning issues)[3];

(e)        the value of the Balance of Level 3 was $4.36 million (being the value determined by the expert called by Ardmillan, Mr McAuliffe, but adopting the larger floor area of the two figures used by the experts);[4]

(f)        the value of the Business was $8.7 million (being the sum of $3.74 million for the DMF component and $4.96 million for vacant stock, both figures adopting the opinions of the expert called by Ardmillan, Mr Meredith).

[3]As to the definition of the Vacant Land, see paragraph 11 below.

[4]As to the definition of the Balance of Level 3, see paragraph 11 below.

Background: the Property, Business and regulatory context

1. The site previously occupied by the Essendon and District Memorial Hospital comprised two titles and was sold by the Victorian Government in the early 2000s.[5] The hospital building was located on one of those titles (the Hospital Land).  The other title (being the Property), which fronts Derby St to the north, and York St to the west, was mostly vacant land. 

   [5]First witness statements of Marina Darling dated 15 October 2020 (Darling), [2].

1. The southern boundary of the Property abuts the northern boundary of the Hospital Land.  The hospital building fronted onto Holmes Rd, occupying the southern end of the Hospital Land.

1. Ardmillan originally acquired title to both the Hospital Land and the Property, but sold the Hospital Land to entities owned by Bain Capital Credit in 2017.  Before it sold the Hospital Land, Ardmillan had developed that property to include an aged care facility, a child-minding centre and retirement village apartments.  Ardmillan also developed some of the Property as retirement village units.  Ardmillan sold the aged care business trading as ‘Craigcare’[6] to the Bain entities along with the Hospital Land in 2017. Ardmillan did not sell the retirement village business (comprising both the independent living apartments (ILAs) and the independent living units (ILUs), trading as ‘Ardmillan’), but retained its occupation of level 3 of the hospital building (Level 3) pursuant to a 99 year lease (the Head Lease).  The Bain entity which was (at relevant times) the landlord under the Head Lease was Menzies Prop Co Pty Ltd (Menzies). 

   [6]The aged care business was operated on levels 4 and 5 of the hospital building.

1. The Head Lease included provisions enabling Ardmillan to call for a strata subdivision to separate Level 3, and to purchase the title to that property for $1.  That option had not been exercised by Ardmillan. 

1. As a result of these transactions, as at 2019, Ardmillan conducted the Business on both the Hospital Land (specifically on part of Level 3, where there were ILAs) and part of the Property, where it had established ILUs towards the western side of the Property.  The balance of the Property (ie, the portion not occupied by the retirement village units) remained vacant land.  I refer to that portion of the Property as the Vacant Land.  The portion of Level 3 that was not used for the Business was partly rented out and partly vacant. I refer to that portion of Level 3 as the Balance of Level 3. 

1. The Business operated on the basis that Ardmillan would lease retirement village apartments or units to residents, and the residents would lend the operator the value or price of the apartment or unit, with that amount constituting a resident’s ‘refundable ingoing contribution’ or ‘RIC’ in the industry shorthand.  When a resident leaves the retirement village, that person’s RIC is refunded, subject to agreed deductions.  RICs are governed by the Retirement Villages Act 1986 (Vic) (the RV Act), which creates a statutory charge over the land on which the apartment or unit is situated, to secure repayment of the RIC to the resident. 

1. While negotiations for the sale of the Property and the Business began in early 2018, it was not until 5 August 2019 that the Contract of Sale, ASA and Call Option Deed were executed. 

1. When development is in prospect, planning constraints often loom large.  This case is no exception.  Issues concerning the existing planning constraints, the likelihood of those constraints being amended to permit more intensive development, and the extent to which a purchaser of the Property would pay a price reflecting that potential, were significant issues informing the differing views of the land valuation experts.  While the points of difference between the experts on these matters are addressed further below, some aspects of the controls may be noted by way of general background.

1. The Property is subject to the Moonee Valley Planning Scheme.  The parties both addressed the value of that land, and the planning constraints affecting it, as at 1 June 2020.  At that time, the Property was zoned ‘Mixed Use Zone’ (MUZ).  The Hospital Land was also zoned MUZ and, together with the Property, was surrounded by land zoned ‘General Residential’.

1. The Property is subject to an Incorporated Plan Overlay (the IPO).  Schedule 7 to the IPO (IPO 7) included provisions specific to the ‘former Essendon and District Memorial Hospital’. 

1. Clause 43.03-1 of the IPO provided, inter alia, that:

A permit granted must:

·Be generally in accordance with the incorporated plan, unless a schedule to this overlay specifies otherwise.

·Include any conditions or requirements specified in a schedule to this overlay.

1. Clause 1 of IPO 7 provided that a ‘permit may be granted for the use of land that is not generally in accordance with the Incorporated Plan’.  Clause 2 set out applicable ‘Decision guidelines’, which required the responsible authority to consider various matters before deciding an application which was ‘not generally in accordance with the incorporated plan’.  Those matters included:

The consistency of the application with the objectives of the Incorporated Plan.

and

The effect on the amenity of the area as a result of the bulk, height, building setbacks, proposed hours of operation, traffic generation, carparking, lighting, overlooking, overshadowing and noise.

1. The ‘Incorporated Plan’ referred to in IPO 7 included a ‘Development Concept Plan’.  The Development Concept Plan included statements as to the purpose of the Incorporated Plan.  Those statements of purpose are of some significance in the dispute, so are set out in full:

Purpose

· To facilitate the use and development of the land for aged care, private hospital, medical and health facilities (including radiology and pathology) and medical centre purposes and associated uses, facilities and activities generally in accordance with the Incorporated Plan.

· To provide a range of retirement accommodation (including serviced apartments, dwellings, self-contained apartments, hostel accommodation, a nursing home, acute care and palliative care) in an attractive and comprehensively planned environment.

· To provide an appropriate mixed-use development including office, commercial, educational and recreational facilities and services related to the primary use of the site being health/retirement/aged-care and medical services.

· To provide appropriate communal facilities and services and facilities associated with the hospital and retirement accommodation uses.

· To provide a pleasant and safe environment for residents, patients and their visitors.

· To achieve appropriate standards of private open space, daylight, visual and acoustic privacy for residents of retirement housing.

· To minimise the visual impact of car parking, loading and other site facilities on the streetscape.

· To avoid any unreasonable adverse amenity impacts on surrounding residential properties.

1. As will be apparent, the stated Purpose of the Incorporated Plan focused on the provision of accommodation and related services to the aged, as well as general health/medical services.

1. The Incorporated Plan also included detailed statements concerning the proposed development of land to the north of the site (essentially the vacant land and the portion of the Property on which the ILUs were subsequently constructed).  Those statements included provisions about total numbers of dwellings, building heights and the locations within the site for more or less intensive development, as follows (emphasis added):

Proposed Development

Land to the north of the former Essendon Hospital's main building may be developed with a maximum of 70 dwellings, of which not more than 20 percent may be two storey, generally in accordance with the Development Concept Plan (Figure 1).  Any two storey dwellings must be located generally within the centre of the site and must not have abuttal to either Chester, York or Derby Streets or be adjacent the laneway on the eastern site boundary.

The existing five-storey hospital building may be extended upwards to a height no higher than the existing plant room structures, which is equivalent to two storeys in height, with the new plant room and lift motor room not exceeding an additional 6 metres in height and to the satisfaction of the responsible authority.  Every effort will be made to reduce the visual impact of the plant room and lift motor room.

The additional two storeys may be set back from the perimeter of the existing hospital building to the satisfaction of the responsible authority.  The building may be used for the following purposes:

·  Aged care facility

·  Private hospital

·  Hostel and nursing home

·  Medical centre and specialist consulting suites

·  Independent living units

·  Office and ·conference facilities related to health, medical and aged care uses.

·  Pharmacy

·  Associated communal, educational and re creational facilities

·  Retail premises and service facilities ancillary to the use of the building for health/medical/aged care uses.

·  Car parking

·  Childminding

1. Figure 1, to which reference was made in the Incorporated Plan’s statements concerning proposed development, is copied below:

1. The term ‘Independent Living Units’, used in Figure 1, was not defined.

1. The MUZ zoning and IPO were applied by Amendment C8, approved in August 2000.  In 2012, the local council, Moonee Valley City Council (Council), prepared and exhibited proposed Amendment C115.  That amendment sought to replace Schedule to the IPO with a new Schedule 8.  The proposal was explained in the Explanatory Report that accompanied the exhibition of Amendment C115:

Amendment C8 was approved in August 2000 which rezoned the land to Mixed Use Zone and applied the Incorporated Plan Overlay (IPO7) within the Moonee Valley Planning Scheme.  The original concept plan was implemented to facilitate the redevelopment of the former Essendon and District Memorial Hospital for aged care, health and medical facilities together with residential accommodation.

There have been many updates in State Policy since Amendment C8 was approved that has led to increased pressure for medium and higher density housing in already established areas with good access to public transport.

Development outcomes for the site are now different from when Amendment C8 was approved 11 years ago.  Due to the increase in residential development proposed on the site and the land is in single ownership, a Development Plan Overlay is now considered the most appropriate tool to guide the future development of the land.

1. The revised Development Plan proposed in 2012 would (in addition to addressing the upwards extension of the hospital building) have provided for more intensive development of the Property, including:

(a)        one to two storey dwellings to the north of the hospital building;

(b)       not more than four dwellings along Derby St and York St to be three storeys; and

(c)        a four storey building for residential purposes to the north-east of the hospital building.

1. After the exhibition of the proposed amendment drew 55 submissions, 53 of which were objections, the Council abandoned the amendment rather than referring to an Independent Panel.

The Contract of Sale, ASA and Call Option Deed: Key terms

The Contract of Sale

1. The Contract of Sale included Particulars of Sale, Special Conditions (SC) and General Conditions (GC),[7] in that order of priority. 

   [7]Stated to have been drawn in standard form from Part 2 of the standard form of contract prescribed by the former Estate Agents (Contracts) Regulations 2008; modified in some respects by the Special Conditions.

1. Pursuant to the Contract of Sale, Ardmillan was to convey title to the Property to Next Stage at settlement (GC 10).  The conveyance was to be undertaken as an electronic conveyance (SC 2).  The Settlement Date was set as the ‘date and time of Completion under the [ASA]’ (SC 1.1 (defined terms), Particulars of Sale).  Pursuant to cl 6.1 of the ASA, Completion was to take place at 11:00am on the Scheduled Completion Date at MinterEllison’s offices ‘or at any other place or time as the parties agree’.  The Scheduled Completion Date was defined by cl 1.1 of the ASA as 29 November 2019 ‘or such earlier date as agreed between the Vendor and the Purchaser in writing’. 

1. Pursuant to GC 16.1, time was of the essence under the Contract of Sale.

1. The Contract of Sale provided for the payment of a deposit of $2,605,000 on the Day of Sale (being the day the Contract of Sale was executed) (GC 11.1, Particulars of Sale, SC 7.1).  The total Price was $26,050,000, inclusive of GST.  Allowing for the Deposit, the balance was to be funded by the payment by Next Stage of the Settlement Payment of $1,445,000, and the provision of a vendor loan by Ardmillan of $22,000,000 (GC 11, Particulars of Sale, SC 9, SC 14.2). 

1. The Contract of Sale provided for who would be entitled to the Deposit in the event that the Contract of Sale was terminated before Completion.  That provision was tied up in the clauses establishing the interdependence of the ASA and the Contract of Sale, as follows (SC 4):

4.1      Interdependence and termination

(a)This contract is interdependent with the Asset Sale Agreement until the Purchaser completes settlement of the Property under this contract contemporaneously with Completion and the Vendor is not obliged to transfer the Property under this contract unless Completion occurs contemporaneously.

(b)Prior to Completion, any default by a party under this contract of sale or the Asset Sale Agreement (the Documents) will also constitute a default under the other Document.

(c)Where a party validly terminates and with immediate effect, but subject to Special Condition 4.2:

(i)        the Asset Sale Agreement, this contract will also terminate; and

(ii)       this contract, the Asset Sale Agreement will also terminate.

4.2      Consequences of termination before Completion

On termination of this contract under special condition 4.1(c):

(a)       the accrued rights and remedies of a party are not affected;

(b)       if:

(i)the Asset Sale Agreement is terminated in accordance with clause 2.4 of that agreement and the Purchaser is not in breach of this contract or the Asset Sale Agreement, the Deposit is to be released to the Purchaser with any accrued interest; or

(ii)subject to Special Condition 4.2(b)(i), this contract is terminated for any reason other than the Vendor's default, the Deposit is to be forfeited to the Vendor with any accrued interest; and

(c)subject to special conditions 4.2(a) and 4.2(b), the parties are released from further performing their obligations under this contract. 

1. General Condition 18 provided that Next Stage ‘may’ nominate a substitute or additional transferee, but ‘the named purchaser remains personally liable for the due performance of all the purchaser’s obligations under this contract’.  The effect of this clause was modified by SC 8, which provided as follows:

8.1      No assignment by Purchaser

The Purchaser must not assign or otherwise deal with this contract or any right under this contract without the prior written consent of the Vendor.

8.2      Nomination by Purchaser

(a)Subject to a subsequent purchaser being a related entity of the Purchaser and approved by the Vendor, the Purchaser may nominate a substitute purchaser under general condition 18.

(b)If the Purchaser nominates a subsequent purchaser in accordance with Special Condition 8.2(a), the Purchaser agrees it will nominate the same entity under the Asset Sale Agreement.

1. The Contract of Sale also made provision for the performance of Next Stage’s obligations to be supported by guarantees.  General Condition 20 permitted (but did not require) Ardmillan to require ‘one or more directors of the purchaser to guarantee the purchaser’s performance of this contract if the purchaser is [as Next Stage was] a proprietary limited company’. The effect of GC 20 was largely, if not entirely, overtaken by SC 6 which:

(a)        required (by SC 6.1) each person signing the contract on behalf of Next Stage to ensure that the Ultimate Holding Company (as defined), and all directors and shareholders of the Purchaser (as defined) and the Ultimate Holding Company, executed the Guarantee; and

(b)       stipulated (by SC 6.2) that the Guarantee, defined as a guarantee in the form set out in Annexure A to the Contract of Sale, was to be delivered to Ardmillan or its lawyers on the Day of Sale, which was the day the Contract of Sale was executed (ie, 5 August 2019).

1. The form of Guarantee annexed to the Contract of Sale named Daniel Milentijevic, Joshua Balsim, Next Stage Living Group Pty Ltd, Deca Designs Pty Ltd and Trivett Property Partners Pty Ltd (Trivett) as the Guarantors.  It is fair to describe the terms of the Guarantee as heavily weighted in Ardmillan’s favour.  Amongst other terms, it provided that the guarantee and indemnity given thereunder would continue until Ardmillan had been paid all amounts owing under, or as a result of, the Contract of Sale (cl 6).  It did not provide any exit, as of right, consequent upon any change in the ownership of Next Stage.  Nor did it provide any exit, as of right, relieving the then-current directors of their obligations should they cease to be directors of Next Stage.  Nor did the Contract of Sale include any provision requiring Next Stage to provide, or permitting Ardmillan to call for, any fresh or replacement guarantees to Ardmillan in the event that the ownership or control of Next Stage changed after the Day of Sale.  The suite of contracts executed by the parties on 5 August 2019 did not contain any provision otherwise restraining the shareholders of Next Stage from selling their shares, or replacing the directors. 

1. The Contract of Sale provided for procedures for the service of notices of default.  The provisions of GC 27 (which were in the standard form) were disapplied (by SC 12.1(a)) to certain categories of breaches, with a different notice of default procedure then set out in SC 12.1(b)-(d) permitting Ardmillan to terminate the Contract of Sale if the default was not rectified within the Relevant Period (being no less than five, but no more than 15, business days).  The clauses and obligations in respect of which breach would attract the bespoke termination regime set out in the balance of SC 12.1 were stipulated in SC 12.1(a) as follows:

(a)        SC 6.2 (which concerned delivery of the Guarantee on the Day of Sale);

(b)       SC 7.1 (concerning payment of the Deposit);

(c)        SC 9 (concerning payment, not only of the Purchase Price, but also repayment of the vendor finance, linked to SC 10.2 and Sch 3);

(d)       SC 25 (concerning the proposed development works, which are referred to further below);

(e)        SC 26 (limiting the extent to which Next Stage could deal with the Property without Ardmillan’s consent while any amount remained owing to Ardmillan under the vendor finance);

(f) from the Settlement Date, a material obligation under the RV Act, or under the Contract of Sale itself; and

(g)       the occurrence of an Insolvency Event (as defined).

1. Where there was a breach falling within any of these categories, Ardmillan could terminate the Contract of Sale in accordance with the provisions of SC 12.1(b)-(d), which were in the following terms:

12.1     Particular Obligations

…

(b)The Vendor may serve on the Purchaser a notice of default in writing (Notice of Default).  The Notice of Default must:

(i)        specify the breach or Insolvency Event;

(ii)specify the steps required of the Purchaser to rectify the breach or Insolvency Event, including:

(A)where applicable, stating the amount owing in relation to the breach; and

(B)stating the amount that the Purchaser must pay to achieve settlement were settlement to occur on the final day of the Relevant Period; and

(iii)give the Purchaser a reasonable time to rectify the breach or Insolvency Event, but such time must be no less than 5 Business Days and no more than 15 Business Days (Relevant Period).

(c)If the Vendor has complied with Special Conditions 12.1(a) and 12.1(b) and the Purchaser has not remedied the breach or Insolvency Event to the reasonable satisfaction of the Vendor within the Relevant Period, the Vendor may terminate this contract.

(d)For the purposes of this Special Condition 12, the nominated contact details for the Purchaser and the NSL Lender are contained in the Particulars of Sale.

1. Special Condition 12 also included further provisions concerning default as follows:

12.2     If Vendor terminates

If the Vendor terminates this contract under Special Condition 12.1, General Condition 12.2 and General Condition 28.4 will apply as if the Vendor had given notice under General Condition 27 and this contract had been terminated by notice under General Condition 28.2.

…

12.5     Other rights unaffected

Nothing in this Special Condition 12 limits the rights of the Vendor if the Purchaser defaults under this contract.

1. In respect of breaches not covered by SC 12.1(a), GC 27 and 28 set out a regime requiring service of a notice of default, and providing for the consequences to follow if the contract ends following service of a notice of default by either party.

1. Special Condition 10 made provision for the vendor financing.  Pursuant to that suite of provisions, if Next Stage wished to settle by funding the Balance Payment (defined to be $22,000,000) by using the vendor finance, it was required to grant a mortgage to Ardmillan in the form set out in Annexure B: SC 10.1(a).  Next Stage acknowledged that the mortgage, Call Option Deed and the Priority Deed[8] were all required to secure payment of the Balance Payment and performance: SC 10.1(b).

   [8]The Priority Deed was defined to have the meaning ascribed to that term in the ASA, which in turn referred to the form of priority deed set out in Annexure D of the Call Option Deed.

1. The vendor finance was for an initial period of 24 months from the Settlement Date, but Next Stage could request an extension to 36 months from the Settlement Date if (among other conditions) it had repaid at least $5,000,000 of the Balance Payment: SC 10.2.

1. The vendor finance was interest-free for the first 12 months after the Settlement Date, attracted an interest rate of 6.5% in the second year and, if the term were extended, 8.5% in the third year (adjusted in accordance with any changes in the benchmark bank bill swap rate): SC 10.3.

1. Next Stage was permitted to pay out the vendor finance early, but otherwise was obliged to make payments as required under Sch 3: SC 10.4. 

1. Schedule 3 required Next Stage to repay the vendor finance by making payments to Ardmillan whenever it sold (by loan/lease) any of the new ILAs (the Marimar apartments, which were then being constructed on Level 3), entered into any new residence/loan agreement for an ILU or ILA, or sold any part of the Property as vacant land.  The amounts required to be paid were specified as a percentage of the amount payable to Next Stage. 

1. Until such time as no part of the vendor finance remained outstanding, Next Stage was required to comply with SC 25 and SC 26.  Pursuant to those provisions, Next Stage could carry out Specified Development Works — being works substantially consistent with the Development Diagram set out in Sch 5 — without needing to seek further approval from Ardmillan (but did have to obtain Ardmillan’s approval before accepting any conditions imposed by the Council): SC 25(d) and (j).  Next Stage was, however, required to obtain Ardmillan’s approval for any development works outside the Specified Development Works (such works being Proposed Development Works) with the same condition also applying before agreeing to any conditions required by the Council: SC 25(c) and (j).  Ardmillan was required to consent to Proposed Development Works if Next Stage demonstrated that completion of the Proposed Development Works would not cause the value of the Property to decrease: SC 25(f)(ii).

1. While the vendor finance remained outstanding, Ardmillan also had the further protections afforded by SC 26, which prevented Next Stage charging, encumbering, leasing, licensing or otherwise parting with possession of the Property without Ardmillan’s consent (other than in respect of land lots facing Derby Street, with some conditions): SC 26(b) and (c)(ii). 

1. The bespoke termination regime contained in SC 12 also applied in respect of the vendor finance repayment obligations, as well as the obligations contained in SC 25 and 26: SC 12.1(a)(i)(C)-(E).

1. Given the importance that Next Stage’s nomination — of itself in a trustee capacity — in combination with the existence of the vendor finance, it is worth pausing to list the protections in Ardmillan’s favour under the Contract of Sale while the vendor finance remained on foot:

(a)        the Vendor’s Mortgage, the Call Option Deed[9] and, ‘if applicable’, the Priority Deed;

[9]As detailed below, the Call Option Deed permitted Ardmillan to elect to re-purchase the Assets if Next Stage (or any NSL Lender) breached various provisions.

(b)       the bespoke termination regime under SC 12.1;

(c)        the repayment obligations established by Sch 3; and

(d)       controls on Next Stage’s ability to develop outside the parameters of Specified Development Works embodied in Sch 5.

The ASA

1. The ASA was entered into alongside the Contract of Sale, on 5 August 2019.  By the ASA, Ardmillan undertook to sell, and Next Stage undertook to buy, specified ‘Assets’ (the Assets).  The Assets comprised listed assets (other than Excluded Assets, as defined) associated with the conduct of the Business, being the retirement village business conducted by Ardmillan from the Property and certain leased land under the name ‘Ardmillan Retirement Living’.  Two of the listed assets are of particular relevance to the present dispute:

(a)        the Marimar Contract, being a development services agreement between Ardmillan and Marimar Projects Pty Ltd (Marimar); and

(b)       the Leases, defined as meaning the Head Lease and the Property Subleases where:

(v)       the Head Lease was a lease between Ardmillan Apartments Management Pty Ltd (Ardmillan Apartments) and Menzies as Head Landlord and the registered proprietor of the ‘Menzies Land’, which included Level 3 of the hospital building; and

(vi)      the Property Subleases comprised two 99 year leases between Ardmillan and Ardmillan Apartments (referred to as the ‘Level 3 Commercial Sublease’ and the ‘Level 3 RV Sublease’).

1. Certain conditions precedent are of central importance to the proceeding.  Clause 2 provided as follows:

2.1      Conditions

The sale of the Assets contemplated by this agreement and Completion is conditional on the satisfaction or waiver (in accordance with clause 2.2) of the following conditions:

Condition	Party entitled to benefit
1	Each of the following documents is duly executed by all parties to it: (a)       the Property Sale Contract; (b)       the Call Option Deed and           the Power of Attorney; (c)       the Priority Deed; (d)      the Level 3 Commercial           Sublease Deed of           Assignment; (e)       the Level 3 RV Sublease           Deed of Assignment; and (f)       the Marimar Deed of           Novation.	Vendor and Purchaser
2	The Purchaser providing to the Vendor a signed Notice to Residents in respect of each Village Resident as at the Completion Date together with the Purchaser’s authority that such notice may be sent to each Village Resident by the Vendor immediately following Completion.	Vendor
3	The Purchaser obtains and delivers to the Vendor on or before Completion a signed and completed deed of release in a form approved by the Vendor in respect of all Security Interests over the assets of the Purchaser or its Related Bodies Corporate signed by the holders of the relevant Security Interests (other than Permitted Security Interests).	Vendor

2.2      Waiver of Conditions

A Condition may only be waived in writing by a party entitled to the benefit of that Condition (as set out in the table in clause 2.1) and will be effective only to the extent specifically set out in that waiver.

2.3      Conduct of the parties

Each party must use all reasonable endeavours within its own capacity to ensure that each Condition is satisfied as soon as reasonably practicable after execution of this agreement and in any event before 5.00pm on the Sunset Date.

[The Sunset Date was defined as ‘the date that is nine calendar months after the date of this agreement’.]

2.4      Failure of Condition

If a party has complied with its obligations under clause 2.3, it may terminate this agreement by giving notice in writing to the other parties if:

(a)       a Condition is or becomes incapable of being satisfied; or

(b)each Condition is not satisfied, or waived in accordance with clause 2.2 by each party entitled to the benefit of that Condition, before 5.00pm on the Sunset Date.

2.5      Effect of termination

On termination of this agreement under clause 2.4:

(a)       clauses 15 and 16 continue to apply;

(b)       accrued rights and remedies of a party are not affected; and

(c)subject to clauses 2.5(a) and 2.5(b), the parties are released from further performing their obligations under this agreement.

1. Pursuant to cl 4.1, the Purchase Price for the Assets under the ASA was the sum of five amounts:

(a)        the Holding Fee, which was $30,000 paid to Ardmillan by Next Stage prior to entry into the ASA;

(b)       the Deposit, which was $365,000 (pursuant to cl 4.5, payable on the date of the ASA);

(c)        the Completion Amount, which was $3,555,000 (payable on Completion, in accordance with cl 6.3(a)(i));

(d)       the Vacant Stock Adjustment Amount (calculated under cl 4.2(a) and payable on Completion, in accordance with cl 6.3(a)(ii)); and

(e)        the Marimar Adjustment Amount (calculated under cl 4.2(b) and payable on Completion, in accordance with cl 6.3(a)(iii)).

1. Each component amount of the Purchase Price was inclusive of GST: cl 14.2.

1. The two adjustment components, both payable on Completion, are relevant to the issues in dispute.  They were addressed in cl 4.2 as follows:

4.2      Adjustment of the Purchase Price

(a)The Vacant Stock Adjustment Amount is the amount equal to the aggregate Market Value of all Vacant Stock as at the Completion Date, as notified to the Purchaser pursuant to clause 5.6(a); and

(b)The Marimar Adjustment Amount is the amount equal to the aggregate amount of all payments made by the Vendor to Marimar in connection with the Marimar Contract in respect of:

(i)services provided and works carried out in the period prior to Completion; and

(ii)monthly progress payments paid by the Vendor before Completion in respect of services to be provided or works to be carried out in the period on or after Completion, as notified to the Purchaser pursuant to clause 5.6(b).

(c)The Estimated Marimar Contract Payments are provided as an estimate only of future payments to be made in connection with the Marimar Contract.

1. Pursuant to cl 6.1, Completion was to occur on the ‘Scheduled Completion Date’, defined as ‘29 November 2019 or such earlier date as agreed between the Vendor and the Purchaser in writing’.  While the potential for Completion on an earlier date was accommodated by the definition of ‘Scheduled Completion Date’, the potential for a later Completion was addressed by cls 6.6 and 6.7:

6.6      Scheduled Completion Date

The date on which Completion is required to take place in accordance with clause 6.1 is referred to in clause 6.7 as the 'Scheduled Completion Date', which expression includes any later date set for Completion in accordance with clause 6.7.

6.7      Completion obligations breached

If on the Scheduled Completion Date the Purchaser has not complied in any material respect with any of its obligations under clause 6.3, the Vendor is entitled, at its discretion:

(a)to defer Completion to any subsequent Business Day falling not more than 10 Business Days after the Scheduled Completion Date or any later date set for Completion in accordance with this clause (in such event, this clause will apply to the Scheduled Completion Date so deferred);

(b)if applicable, to waive the requirement for the Purchaser to fulfil those obligations, in whole or in part, and following such waiver to complete the sale and purchase of the Assets;

(c)so far as practicable, to complete the sale and purchase of the Assets; or

(d)      to serve a Notice of Default on the Purchaser under clause 16.

1. As would be expected, both Ardmillan and Next Stage were obliged to deliver various items at Completion.  The items Ardmillan was to deliver included the following (cl 6.2):

(a)all of the Assets by leaving them at the Property or the properties the subject of the Leases;

(b)a Priority Deed duly executed by the Purchaser and NSL Lender if the Purchaser has entered into any financing or security arrangement with an NSL Lender;

(c)the original Level 3 Commercial Sublease Deed of Assignment and Level 3 RV Sublease Deed of Assignment;

(d)to the extent obtained before Completion, the original Head Lease Variation Deed and Head Lease Assignment Deed duly executed by Ardmillan Apartments Management and any third party signatories;

(e)the original Marimar Contract and the Marimar Deed of Novation, duly executed by the Vendor and any third party signatories; …

1. At Completion, Next Stage was obliged to pay Ardmillan the Completion Amount and the two adjustment amounts referred to above (cl 6.3(a)).  In addition, Next Stage was also obliged to deliver to Ardmillan, at or before Completion (cl 6.3(b)):

(i)copies of any counterpart, document, confirmation, evidence, consents and waivers required to be duly executed or provided by the Purchaser, its Related Bodies Corporate and NSL Lender under clause 2; and

(ii)counterparts of any document to be delivered by the Vendor at Completion to which the Purchaser or any of its Related Bodies Corporate is a party, duly executed by the Purchaser and and/or any of its Related Bodies Corporate.

1. As may be seen, the combination of cl 6.2(b) and 6.3(b)(ii) obliged Next Stage to deliver, at or prior to Completion, a duly executed copy of the Priority Deed if it had entered into ‘any financing or security arrangement with an NSL Lender’.  The term ‘NSL Lender’ was defined to have the meaning given to it in the Call Option Deed.  That deed defined the term as follows:

NSL Lender means any third party:

(a)       approved by Ardmillan in writing to:

(i)lend funds to NSL for the purpose of funding payments to Ardmillan under the ASA and Property Sale Contract or in respect of the Proposed Development Works; or

(ii)       whom NSL wishes to grant security over NSL’s assets; and

(b)who has executed a Priority Deed as a Second Creditor (as that term is defined in the form of Priority Deed).

1. The interdependence between the Contract of Sale and the ASA was addressed by cl 6.5, in the following terms:

6.5      Interdependence

(a)This agreement is interdependent with the Property Sale Contract until the Purchaser takes possession of the Property under the Property Sale Contract contemporaneously with Completion and the Vendor is not obliged to grant and the Purchaser is not obliged to accept possession of the Property under the Property Sale Contract unless Completion occurs contemporaneously.

(b)Prior to Completion, any default by a party under this agreement or the Property Sale Contract (the Documents) will also constitute a default under the other Document.

(c)Where a party validly terminates the Property Sale Contract, this agreement will also terminate with immediate effect. 

1. As is apparent from the extract above, cl 6.7 specified that, if on the Scheduled Completion Date, Next Stage had not complied in any material respect with any of its obligations under cl 6.3, Ardmillan could:

(a)        defer Completion;

(b)       waive the requirement on Next Stage to fulfil those obligations in whole or in part;

(c)        complete the sale and purchase of the Assets as far as practicable; or

(d)       serve a Notice of Default under cl 16.

1. It follows from this provision that a failure by Next Stage to deliver a conforming Priority Deed (assuming there was an NSL Lender) would mean a condition to Completion would not have been fulfilled, and Next Stage would have been in breach of cl 6.3, enlivening Ardmillan’s range of options under cl 6.7.  If Ardmillan were to elect to serve a Notice of Default, the regime established under cl 16 provided for the notice to allow a minimum of five business days (and a maximum of 15 business days) to rectify the breach. 

1. Following execution of the ASA, Ardmillan was also obliged to take steps to procure the variation and assignment of the Head Lease between Menzies, the owner of the hospital building and Ardmillan Apartments, Ardmillan’s related entity.  Specifically, Ardmillan was obliged to, inter alia, use ‘commercially reasonable efforts’ to (cl 7.1):

(a)        procure Ardmillan Apartments to negotiate and finalise the Head Lease Assignment Deed and the Head Lease Variation Deed with the Head Landlord (being Menzies);

(b)       deliver to the Purchaser executed versions of those deeds; and

(c)        deliver to the Purchaser the originals of those deeds, executed by Menzies and Ardmillan Apartments. 

1. The two deeds were, in substance, deeds varying and assigning the Head Lease between Ardmillan Apartments and Menzies, pursuant to which Ardmillan occupied Level 3 of the hospital building.[10] Until these deeds were executed by all parties, Next Stage was precluded (by cl 7.2(b)) from engaging with Menzies without Ardmillan’s consent.

   [10]The Head Lease Assignment Deed was a deed of assignment between Ardmillan Apartments, Next Stage, Menzies and others (substantially in the form of Annexure B to the ASA, which form included guarantees given by the same entities as were guarantors under the Contract of Sale).  The Head Lease Variation Deed was a deed varying the lease between the Head Landlord, Next Stage and others (substantially in the form of Annexure C to the ASA, which form included guarantees given by the same entities as were guarantors under the Contract of Sale).

1. Ardmillan’s obligations in respect of the Head Lease Assignment Deed and the Head Lease Variation Deed were to be complied with by the ‘Sunset Date or such other date agreed in writing by the parties’ (cl 7.4).  The Sunset Date was nine months from the date of the ASA, but the parties included a clause to address what was to occur if the obligations were not satisfied by the Sunset Date.  Clause 7.5 provided that:

7.5      Obligations continuing

If the obligations of the parties under this clause 7 are not satisfied by the Sunset Date, the parties acknowledge and agree that the obligations in clause 10 continue to apply and the parties must negotiate in good faith for a period of 20 Business Days the basis on which the Purchaser can enjoy the benefit of the land the subject of the Head Lease, which may include the subdivision and sale of the Head Lease Premises.

1. Clause 10 established mechanisms by which Next Stage could assume the benefits under various ‘Assumed Contracts’ from Completion.  The Assumed Contracts included:

(a)        the ‘Village Contracts’, being the contracts between Ardmillan and the retirement village residents; and

(b)       the Head Lease, to the extent that the Head Lease Assignment Deed and/or the Head Lease Variation Deed were not delivered at Completion.

1. As is apparent, by cls 7 and 10, the parties to the ASA contemplated that matters associated with amending and assigning the Head Lease may not have been finalised by Completion, such that arrangements were put in place to permit Next Stage to have the benefit of the Head Lease (and Village Contracts) following Completion.

1. Pursuant to cl 11.1 and Sch 2, warranty 2, Ardmillan warranted that the Accounts (defined as the audited outgoings of the Business as at 30 June 2018)[11] gave a materially accurate view of the outgoings of the Business and the Assets as at 30 June 2018, and the outgoings of the Business for the 12 months ended on 30 June 2018. 

   [11]There was no dispute that these accounts were the accounts at CB3059_01.

Call Option Deed

1. The third contract in the suite executed on 5 August 2019 was the Call Option Deed. Whereas only Ardmillan and Next Stage were parties to the Contract of Sale and the ASA, the persons named in Sch 5 of the Call Option Deed — the ‘Guarantors’ — were also parties to the Call Option Deed. The Guarantors were the then directors of Next Stage, Daniel Milentijevic and Joshua Balsim,[12] and the entities which held (directly or indirectly) shares in Next Stage, namely Next Stage Living Group Pty Ltd, Deca Design Pty Ltd and Trivett.

   [12]Who were directors of Next Stage at the time the contracts were executed. 

1. Under the Call Option Deed, Ardmillan had the right to step in and repurchase the Assets from Next Stage for the ‘Call Option Price’ at any time during the Option Period.  The Option Period was triggered if there was an Event of Default, and, if triggered, only ended when all amounts had been repaid to Ardmillan under the Contract of Sale, including the vendor finance: cl 3.1 and defined terms referred to therein.

1. An Event of Default occurred under the Call Option Deed if Next Stage, or any NSL Lender, failed to satisfy various obligations including those under SC 12 and 25 of the Contract of Sale: cl 1.1.

1. The Call Option Deed annexed the form of the Priority Deed between the Vendor, Purchaser and ‘any NSL Lender’ (Annexure D).  I have already set out the definition of NSL Lender in the Call Option Deed at paragraph 56 above.  It should be recalled that the due execution of the Priority Deed was among the conditions precedent set out in cl 2.1 of the ASA.

1. Clause 9.9 of the Call Option Deed anticipated that a third party lender to Next Stage may not be entirely content with the form of the Priority Deed annexed to that deed, and that the form of the Priority Deed might be amended prior to its execution, but only if Ardmillan agreed.  Clause 9.9 was in the following terms (emphasis added):

NSL Lender

NSL must procure that any third party lender, including for the purpose of funding payments to Ardmillan under the ASA and Property Sale Contract or in respect of the Proposed Development Works, enters into and delivers to Ardmillan a duly executed Priority Deed (subject only to any amendments acceptable to Ardmillan in its sole discretion) and where NSL delivers a duly executed Priority Deed to Ardmillan, Ardmillan must execute and return to NSL two duly executed counterparts of the Priority Deed as soon as practicable after delivery of the Priority Deed by NSL.

1. Under the form of the Priority Deed annexed to the Call Option Deed, Ardmillan, as ‘First Creditor’, had priority over the ‘Second Creditor’ (being the potential third party lender to Next Stage) both in respect of its security interests, and in respect of the order of repayment from moneys and proceeds received from the disposal, or other dealing with, ‘Secured Property’ (cls 2.2-2.3).  The priority accorded to Ardmillan was reinforced by cl 2.8, which subordinated the ‘Second Debt’ (being the debt owed to the Second Creditor) while any part of the ‘First Debt’ (being the debt owed to Ardmillan) remained outstanding.

1. Under the annexed form of the Priority Deed, the Second Creditor was required to release its security to the extent necessary to permit Ardmillan to procure the sale or transfer of Secured Property following enforcement of a ‘Security’, or the exercise by Ardmillan of the ‘Call Option’, whether or not that would fail to discharge the debt owed to the Second Creditor (cl 4.8).

1. Clause 9.3 of the Call Option Deed is also relevant, as Next Stage pointed to it in support of its argument that the basis upon which it would have obtained funding to settle, having served the Notices to Complete on 25 May 2020, did not involve an ‘NSL Lender’, meaning that no Priority Deed was required.  Clause 9.3 imposed a number of constraints on Next Stage and its ‘Related Bodies Corporate’, and on the Guarantors and their Related Bodies Corporate.  Those constraints were stated to apply from execution of the ASA to the ‘PSC Settlement’ (essentially when all monies owing to Ardmillan under the Contract of Sale, including the vendor finance, had been paid). 

1. Clause 9.3 relevantly provided as follows:

Without limiting clause 9.2 but subject to clause 9.4, NSL and its Related Bodies Corporate must not (and the Guarantors and their respective Related Bodies Corporate must not) from the ASA Completion Date until PSC Settlement:

(a)grant or agree to grant any Security Interest over any Asset or the Property including as a result of:

(i)entering into any new debt arrangement, incurring additional borrowing, granting any loan or advancing or entering into any off balance sheet financing or assume, guarantee or endorse the obligations of any person in connection with the Business; or

(ii)granting any step-in rights or a right to oversee or manage the Business of any kind to any third party;

(b)       dispose of all or any part of the Assets or the Business;

(c)amend, vary or fail to enforce the terms of the Lease (other than as required to effect the variation and assignment of the Head Lease pursuant to the ASA and as contemplated by the Head Lease Assignment Deed and the Head Lease Variation Deed);

(d)pay any dividend or transfer any Cash out of the Business including, for the avoidance of doubt, any loan or interest repayments to any NSL Lender before the completion of Stage 1 (as that term is defined in Schedule 3 – Payment Schedule to the Property Sale Contract);

…

(j)appoint, or grant a licence to, any new person or contractor to manage the Business or any part of the Business; or …

1. Clause 9.3 was subject to cl 9.4.  Amongst other things, cl 9.4 provided that cl 9.3 did not:

(a)        prevent any action expressly contemplated by, inter alia, the Priority Deed; or

(b)       prevent Next Stage from paying a dividend following completion of Stage 1 (as set out in Sch 3 of the Contract of Sale),[13] as long as there was no subsisting Event of Default. 

[13]Sch 3 provided for stages 1a (villa units in the north west corner of the Property), 1b (house and land freehold lots along Derby St) and 1c (balance of the eight new apartments on Level 3).

The witnesses

Lay witnesses

1. Next Stage called four lay witnesses: Mr James Maitland, Mr Anatoly (Tony) Balsim (Mr Balsim), Mr Anthony Elzain and Mr Mario Salvo.  Ardmillan called two lay witnesses: Mrs Marina Darling and Mr Alex Booth.  All of the lay witnesses were cross-examined.

1. Mr Maitland is the General Manager of the Salvo Property Group and, following the Salvo Property Group’s investment in Next Stage in November 2019 (through Trivett), had carriage of the conduct of the transaction on behalf of Next Stage.  He gave evidence-in-chief through three witness statements, dated 31 August 2020 (Maitland), 11 November 2020 (Further Maitland) and 8 June 2021 (Reply Maitland).  Among other things, his evidence addressed the corporate structure of Next Stage and the Salvo Property Group’s investment in it, the parties’ interactions in the lead up to the anticipated settlement date of 29 November 2019, the subsequent negotiations concerning potential amendments following Next Stage’s nominations, the procurement of interim stamping from the State Revenue Office, interactions with Ardmillan following circulation of the last set of draft amendments, Next Stage’s financing arrangements (including how it would have financed settlement had it proceeded on 1 June 2020), the reasons why Next Stage did not accept Ardmillan’s April 2021 offer and the costs incurred by Next Stage in purported reliance on the original contracts.

1. Mr Balsim is the representative of Balsim Family Holdings Pty Ltd.  That company held one third of the shares in Trivett, which was the majority shareholder in Next Stage.  He gave evidence-in-chief through three witness statements, dated 2 September 2020 (Balsim), 6 November 2020 (Further Balsim) and 8 June 2021 (Reply Balsim).  His evidence addressed the parties’ pre-contractual negotiations, the ability of Next Stage to fund settlement on 1 June 2020 and the reasons why Next Stage did not accept Ardmillan’s April 2021 offer.

1. Mr Elzain is the sole director of Maxcon Constructions Pty Ltd.  Mr Elzain gave evidence-in-chief through two witness statements, dated 21 September 2020 (Elzain) and 6 September 2021 (Further Elzain).  His evidence addressed the context of the loan agreement he entered into with Trivett, including his relationship and interactions with Mr Balsim, the terms of the loan agreement and his ability to provide finance for the 1 June 2020 settlement if required.

1. Mr Salvo is the ultimate owner and founder of the Salvo Property Group and, following the Salvo Property Group’s investment in Next Stage in November 2019 (through Trivett), a director of Next Stage.  He gave evidence-in-chief through three witness statements, dated 31 August 2020 (Salvo), 8 June 2021 (Reply Salvo) and 17 September 2021 (Further Reply Salvo).  His evidence addressed the background to the Salvo Property Group’s investment in Next Stage, its financing arrangements including his willingness to fund settlement on 1 June 2020 and the reasons why Next Stage did not accept Ardmillan’s 1 April 2021 offer.

1. Mrs Darling is the sole director of Ardmillan.  She gave evidence-in-chief through two witness statements, dated 15 October 2020 (Darling) and 15 April 2021 (Further Darling).  Her evidence addressed the history and nature of the subject land and retirement village business, including the likely cost of amending IPO 7, the background to the transaction, the entry into the original contracts, the parties’ interactions in the lead up to the anticipated settlement date of 29 November 2019, her attendance at Ardmillan’s solicitor’s office for settlement on 29 November 2019, the subsequent negotiations concerning the potential amendments following Next Stage’s nomination of itself in its trustee capacity, her interactions with the Head Landlord, her interactions with Mr Maitland through the course of negotiations and following circulation of the last version of the draft amending documents in March 2020. 

1. Mr Booth has been the Development Manager for various entities associated with Mrs Darling, including Ardmillan.  He gave evidence-in-chief through a witness statement dated 15 October 2020 (Booth).  His evidence addressed pre-contractual communications with Next Stage in relation to the deposits, the parties’ interactions in the lead up to the anticipated settlement date of 29 November 2019, his attendance at Ardmillan’s solicitor’s office for settlement on 29 November 2019, his interactions with the Head Landlord and various other interactions with Next Stage.

Expert evidence in overview

1. Next Stage called four expert witnesses: Mr Michael Barlow on planning, Mr Veki Brdjanin on financing, Ms Laila Burnet on business and property valuation and Dr Kwabena Mintah on valuation approaches.  Ardmillan called three expert witnesses: Mr Robert Milner on planning, Mr Greg Meredith on business valuation and Mr Brett McAuliffe on property valuation.

1. Mr Barlow is a Director of Urbis Pty Ltd, a planning consultancy firm.  Mr Barlow has nearly 40 years’ experience as a town planner and has a Diploma of Applied Science (Town Planning) from Royal Melbourne Institute of Technology.  He gave evidence-in-chief through an expert report dated 14 October 2020 (Barlow Report).  He opined on the development potential of the vacant land, including its zoning and planning context, its highest and best use under various scenarios and the prospects of obtaining any permit or change in planning regulation necessary to achieve a higher or better use than permitted at the date of his report.  Mr Barlow was cross-examined but there was no conclave or concurrent evidence involving the planning experts.

1. Ms Burnet is a National Director of Health, Aged Care and Seniors Living at M3property (Vic) Pty Ltd, a property valuation firm.  She has been a qualified valuer for 15 years and holds a Bachelor of Business (Property) from the University of South Australia.  She gave evidence-in-chief through two expert reports dated 2 November 2020 and 9 September 2021 (Burnet First Report and Burnet Supplementary Report), as well as through a joint expert report dated 10 September 2021 (the Joint Expert Report).  Ms Burnet participated in concurrent evidence with Mr Meredith on business valuation topics and with Mr McAuliffe as well as Dr Mintah on property valuation topics.  Ms Burnet also provided a supplementary document dated 1 October 2021 during trial, at the Court’s request, detailing her opinions of the value of the Business based on certain audited accounts.  She opined on the value of the Business (by reference to the components representing the fee-related income streams and the vacant stock), the value of the Balance of Level 3 and the value of the Vacant Land.

1. Dr Mintah is a Lecturer in the School of Property, Construction and Project Management at RMIT University.  He holds a Master of Science (Real Estate Economics) from Aalto University (Finland) and a Doctor of Philosophy (Built Environment) from RMIT University, among other qualifications.  He gave evidence-in-chief through an expert report dated 22 June 2020 (Mintah Report), as well as through the Joint Expert Report.  He also participated in concurrent evidence with Ms Burnet and Mr McAuliffe.  He opined on the instructions provided to Mr McAuliffe, as well as the assumptions adopted and the methods used by Mr McAuliffe in the preparation of Mr McAuliffe’s expert reports, including whether those matters were in accordance with sound valuation principle and practice. 

1. Mr Brdjanin is a Director of UNIQ Finance Australia Pty Ltd, a finance company operating in the residential and commercial mortgage industry.  He has held that role for approximately 18 years and holds a Bachelor of Commerce, Accounting and Finance from Victoria University.  He gave evidence-in-chief through an expert report dated 22 June 2020 (Brdjanin Report). His evidence addressed the funding arrangements that would have been likely to be available from a bank or non-bank lender to fund $22 million of the settlement amount, or part thereof, and the likely applicable interest rate and other fees.  Mr Brdjanin was cross-examined, but, with no opposing expert being called by Ardmillan, did not participate in any conclave or concurrent evidence.

1. Ardmillan tendered a report of Mr Milner, a Principal of Kinetica, a planning consultancy firm.  Mr Milner has practiced in planning for over 40 years, and holds a Diploma in Town and Country Planning from Liverpool Polytechnic.  He gave evidence-in-chief through an expert report dated 17 March 2021 (Milner Report).  He opined on Mr Barlow’s report, the extent of development and use permitted on the vacant land at 1 June 2020 and the process for amending IPO7.  Mr Milner was not cross-examined.

1. Mr Meredith is a Partner of KPMG, specialising in business valuation.  He has practised as a forensic accountant for over 30 years and held a Bachelor of Economics from the University of Sydney, among other qualifications.  He gave evidence-in-chief through an expert report dated 26 March 2021 (Meredith Report), as well as through the Joint Expert Report.  Mr Meredith participated in concurrent evidence with Ms Burnet.  He also provided a supplementary letter dated 28 September 2021 (Meredith Letter Report) addressing Ms Burnet’s supplementary report as well as four supplementary documents, each dated 1 October 2021, during trial identifying the financial value of certain differences in his and Ms Burnet’s approaches, and his opinions on the value of the Business having regard to certain audited accounts.  Mr Meredith opined on Ms Burnet’s expert reports, and the value of the two components of the Business (the fee-related income streams and the vacant stock).

1. Mr McAuliffe is a Partner of KPMG, specialising in property valuation, among other things.  He worked in the real estate industry, including as a valuer, for over 25 years and holds a Bachelor of Applied Science (Property Economics) from the Queensland University of Technology and a Master of Urban and Regional Planning from the University of Queensland, among other qualifications.  He provided evidence-in-chief through two expert reports, dated 23 March 2021 (McAuliffe First Report) and 22 April 2021 (McAuliffe Supplementary Report), as well as through the Joint Expert Report.  Mr McAuliffe participated in concurrent evidence with Ms Burnet and Dr Mintah.  He also provided a supplementary bundle of documents during trial, responding to some comparable properties identified by Ms Burnet, and related matters.  Mr McAuliffe opined on Ms Burnet’s expert reports, the value of the Balance of Level 3 and the value of the Vacant Land under various development assumptions.

The facts: what occurred between 26 November 2019 and 1 June 2020?

1. The following record of the facts and relevant correspondence exchanged is based on the chronology submitted by the parties,[14] amplified by reference to the evidence adduced at trial.  While the factual narrative is extensive, it reflects the basis of Ardmillan’s case, which lay in the accumulation of facts concerning the parties’ actions and interactions over an extended period, as well as the ambit of the evidence adduced by both parties.

   [14]Including court book references and references to witness statements (other than where the chronology has been amplified).

Events leading up to the scheduled completion date of 29 November 2019

1. The contracts were executed on 5 August 2019, the deposits under the Contract of Sale and the ASA having already been paid directly to Ardmillan on 2 August 2019.[15] The Contract of Sale, the ASA and the Call Option Deed were executed following a period of negotiations stretching back to February 2018.  Prior to the introduction of the Salvo interests in November 2019, Mr Milentijevic had carriage of the negotiations leading to execution of the contracts.  After the Salvo interests became involved, Mr Maitland took carriage of dealings with Ardmillan on behalf of Next Stage.  Dealings between Ardmillan took place between solicitors (Madgwicks for Next Stage, and MinterEllison for Ardmillan) and directly between the principals (Mr Maitland for Next Stage, and Mrs Darling for Ardmillan).

   [15]Maitland, [32], [36]; Darling, [78]; CB9672-9673.

1. While the parties had initially intended to settle on 2 September 2021, in late August 2019 it became apparent that settlement on that date would not be possible.[16] Around the same time, some complexity with stamp duty arose and,[17] in mid-September 2019, PwC were briefed to prepare a stamp duty submission to the State Revenue Office (SRO).[18]

   [16]Darling, [83].

   [17]Darling, [84]; CB4914-4933.

   [18]Darling, [90]; CB5115-5115.

1. At the end of October 2019, Mr Milentijevic emailed Mrs Darling, confirming an earlier conversation advising that Next Stage proposed to obtain finance from Newground Moonee Ponds Pty Ltd (Newground) (which had accepted the Priority Deed in its current form), setting out terms of the proposed Newground loan, indicating Next Stage’s intention to refinance the project in mid-2020, and advising that Trivett had invited Salvo to become a shareholder.[19]

   [19]Darling, [95]; CB5121-5121.

1. Between 11 and 14 November 2019, there was correspondence between Next Stage’s solicitors and the SRO in which the SRO requested an extension of time for settlement, to assess stamp duty.  The SRO’s request for more time to conduct its stamp duty assessment was communicated to Next Stage and to Ardmillan. 

1. In mid-November 2019 Mr Maitland provided an assessment of the project to Mr Salvo.[20] The feasibility projected total liabilities of $41,788,830 and net realisations of $50,246,000, using valuation figures from a valuation report prepared by m3.[21] The sources of funds were identified as comprising the vendor loan ($22,000,000), the Newground loan ($11,750,00) and what was termed ‘equity’ of $5,038,830 (although the expression ‘equity’ in the document appeared to record sums to be sourced other than from the vendor loan or the Newground loan).

   [20]Salvo, [8]; CB7099.

   [21]CB4210-4293.

1. Given the SRO’s delay in assessing duty, on 19 November 2019 Madgwicks raised the possibility of paper settlement with the SRO.[22] The solicitor also called the SRO on 25 November 2019, raising concerns over delay,[23] and, the same day, called Land Use Victoria, requesting a paper transaction (in lieu of having to use the electronic PEXA system).[24] She also emailed Victorian Land Registry Services, requesting a paper transaction, forwarding that request to MinterEllison.[25] The request for a paper settlement was ultimately refused on 27 November 2019.[26]

   [22]Further Maitland, [27]; CB5225-5225.

   [23]Further Maitland, [35]; CB5243-5248.

   [24]Further Maitland, [35]; CB5243-5248.

   [25]Further Maitland, [39]; CB5243-5248.

   [26]Maitland, [56]-[59]; CB5447-5452.

1. Newground was a mezzanine lender.  Next Stage executed an initial terms sheet on 16 November 2019.[27] Alongside pressing the SRO and attempting to obtain approval for a paper settlement, Madgwicks sought changes to the Priority Deed.

   [27]Further Maitland, [56]; CB5226-5235.

1. At 2:56pm on 21 November 2019 Madgwicks emailed MinterEllison, requesting the Priority Deed be amended on request of Newground to include a clause concerning repayments to be made to Ardmillan (referred to as the ‘First Creditor’ in the Priority Deed).[28] After some correspondence between the solicitors, this matter came to a head when a proposed amended form of the Priority Deed was provided to MinterEllison under cover of an email from Madgwicks at 2:11pm on 26 November 2019.[29]

   [28]Further Maitland, [29]; CB5236-5237.

   [29]Maitland, [53]; Booth, [18]; Darling, [106]; CB5335-5336, CB5405-5424.

1. Mr Salvo also gave evidence concerning the rejection of the offers.  He confirmed that Next Stage did not have any assets, income or facilities by which it could fund the transaction on the terms set out in the two offers in light of the withdrawal of vendor finance, and further, that it did not have any assets on which it could borrow.  Mr Salvo’s evidence also confirmed that the two immediate shareholders of Next Stage, being Trivett and Next Stage Living Group Pty Ltd, did not have any capacity to fill the funding gap caused by the withdrawal of the vendor finance or the ability to proffer security to support third party lending.  In respect of his personal capacity to fund settlement,[548] notwithstanding the withdrawal of vendor finance, Mr Salvo’s evidence was that he was not willing or obligated personally to fund any shortfall created by the withdrawal of the vendor finance.  His evidence in his reply witness statement was briefer on this point.[549]

   [548]Personal capacity to fund including funding through Salvo Group entities.

   [549]Reply Salvo, [6]-[12].

1. Next Stage also relied on the expert report of Mr Brdjanin.  It was Mr Brdjanin’s opinion that there was no prospect that Next Stage would obtain bank finance in the amount of $22 million on the basis that the amount of the loan would be well outside any bank’s loan to value ratio covenants.[550] If assets acquired under the ASA and the contract of sale were included, the LVR would be approximately 75% but, in Mr Brdjanin’s opinion, the assets to be conveyed under the ASA would not have been acceptable such that they would be excluded from the LVR analysis of bank finance.[551] However, Mr Brdjanin was of the view that finance to an LVR of 30% on the purchase price of the land or valuation amount (whichever was the lower) may be obtained.[552] Mr Brdjanin also gave evidence that no bank would allow a borrower to structure finance such that there was no equity contribution at all.[553]

   [550]Brdjanin Report, 7. 

   [551]Brdjanin Report, 7. 

   [552]Brdjanin Report, 7. 

   [553]Brdjanin Report, 8.

1. Mr Brdjanin’s opinion also addressed the availability of non-bank finance.  His opinion was that a non-bank lender would also not agree to advance $22 million to Next Stage but might consider advancing an amount of no more than 50% of the land security contract amount or valuation amount (whichever is the lesser).[554] Mr Brdjanin’s opinion was that a non-bank lender would also require an equity contribution from the borrowers,[555] although there was some ambiguity in what Mr Brdjanin considered to constitute equity in this context as his report refers to an equity position ‘in the form of cash or additional securities’.  Mr Brdjanin also gave expert opinion evidence as to likely interest rates and establishment fees and legal fees.[556]

   [554]Brdjanin Report, 9. 

   [555]Brdjanin Report, 9.   

   [556]Brdjanin Report, 9. 

1. Mr Maitland was cross-examined on the Salvo Group’s approach to investing, in support of an overall thesis, advanced in closing submissions, that the absence of vendor financing was not material given that it is common for investors to have to invest equity in projects.

1. Mr Salvo’s evidence on these matters was as follows:

(a)        the Salvo Group typically invested in assets which it owned as to 100%, although it sometimes invested with partners as well; and

(b)       more rarely, when the Salvo Group had excess cash, it would make pure third party loans but did not otherwise have a ‘lending business’.[557]

[557]T235-T237, T255.8-T256.1, T258, T259. 

1. As was apparent from the evidence of Mr Maitland, the term ‘equity’ was not used in a consistent or technical way in the documents and witness evidence.  For example, Mr Maitland explained that where development financing is obtained it is possible to fund with close to 100% debt in some circumstances, for example where the rise in the value of underlying land is treated as ‘implied equity’ meaning, by way of example, that the owner of a piece of land worth $3 million, could 100% debt fund the development by having that implied $7 million in equity.[558] In essence, Mr Maitland’s evidence exposed that there is not a simple blanket position in relation to whether projects of the relevant scale can be debt funded.  Nor is all debt financing obtained by project sponsors necessarily reflected in the form of a debt owed by the project vehicle entity.  In the case of Next Stage, funding to pay the deposits was obtained by the upstream holders of economic interests in Next Stage and applied to the deposits due under the Contract of Sale and the ASA, but not, according to Mr Maitland, reflected in an intercompany debt owed by Next Stage.  Rather, according to Mr Maitland, it was ‘equity into a transaction’.[559] Ultimately, the evidence was unclear on the means by which those funds were made available to Next Stage.  Nonetheless, Mr Maitland accepted that ‘broadly speaking’ the need for an equity contribution by project sponsors is standard.[560]

   [558]T255.8-22. 

   [559]T257-T258; T259. 

   [560]T260.30-261.1. 

1. In re-examination, Mr Maitland also gave evidence as to why it was that the vendor finance was favourable and important.  As he explained, the vendor finance was generous both in terms of quantum and the fact that there was zero percent interest in the first year and then relatively low interests rates in the second and third years.  The fact that the vendor finance would not grow in amount in the first year and was only subject to low interest rates in the following year allowed, in Mr Maitland’s understanding, Newground to lend at a higher LVR[561]. 

   [561]T377.23-T378.14. 

1. Mr Balsim was also cross-examined on matters relating to equity and funding.  He explained in his evidence that the approach initially made to the Salvo group was made in the context of Mr Balsim having lost his initial funder, LBA, and looking ‘of course, on top of that mezzanine facility, additional equity will be required’.[562]  It was in that context that Mr Balsim made reference to additional equity being required and, as with most discussion of equity in the evidence in this case, there was no clarity regarding the way in which that term was being used by Mr Balsim in his evidence.  It was Mr Balsim’s evidence that lenders would not lend 100% of the valuation, and he accepted a proposition put to him in cross-examination that ‘[t]he project sponsor, the buyer, will always have to put in equity as balance to whatever’s being borrowed?---Yes, always.’[563]

   [562]T401.28-402.1. 

   [563]T403.5-15. 

1. Mr Balsim was cross-examined on his evidence that he no longer had the resources, and could not have completed the project without, vendor finance pursuant to the offers made in 2021.[564] As to the value disparity between under the Second Offer and the valuation of $46 million, Mr Balsim responded ‘Well, the value 20 isn’t right.  46 million, 47 million, it is 46 and 47 million.  But, if you can’t settle, it doesn’t matter if it’s 5000’.[565]

   [564]T418-419. 

   [565]T419.26-30. 

1. It was clear from Mr Salvo’s evidence that, where the Salvo Group considered it to be in its interests, it would borrow money to buy and develop property, at times offering an unencumbered property as security to support finance on another project.[566] When cross-examined on the failure to accept the Second Offer, Mr Salvo’s evidence in cross-examination was that it no longer suited them to take it up, that he was only one of three investors and that, without the vendor finance, ‘the cash required – another 23 million or 24 million or whatever it was – was significant amount of equity we put in and it just – it changed the whole dynamics of the deal because then there would have had to be total negotiations – discussions with the people involved – I said to the deal to say well we have that equity and all that sort of stuff so – (indistinct) I said no it’s not applicable’.[567]

   [566]T472-T474. 

   [567]T479.9-18. 

1. Mr Salvo was also cross-examined on the financial capacity of his group to take advantage of opportunities, COVID-19 notwithstanding.  Without delving into the detail of his evidence, the thrust of it was that the financial capacity of his organisation to take on new deals was generally strong, but that its capacity varied.  As Mr Salvo put it ‘you know there’s times where there’s opportunities there’s no money – there’s times where there’s opportunities and plenty of money so it just depends on the timing and the day, the week, the month or the year’.[568] Mr Salvo also gave evidence that getting a bank loan could take six to eight weeks in general.[569] As to management capacity, while Mr Salvo accepted that the Salvo group had senior employees in addition to Mr Maitland, the team was small and relied heavily on consultants.[570] Besides mention of an accountant, it was not clear how many other senior people there were or what they did.  In relation to putting in equity, the following exchange took place:

MR WILLIS:… it’s inevitable that you’ve always got to put some equity in ---?---Yes of course.  All, all or 100 per cent, or 50 per cent or 30 per cent, just depends on what the, what our cash flow is at the time, how much money we’ve got sitting around and what’s the most productive use of our money, right?[571]

[568]T494.6-10. 

[569]T494.18-19. 

[570]T495.16-28. 

[571]T498.15-20. 

The parties’ contentions

1. On the question of mitigation, Ardmillan accepted that it bore the onus of establishing that Next Stage’s conduct had been unreasonable.  It submitted as follows (in summary):

(a)        Next Stage’s failure to mitigate does not merely reduce its damages, it means Next Stage suffered no compensable loss or damage.

(b)       Next Stage’s claimed lack of financial capacity to accept the offers is not credible.

(c)        Next Stage’s failure to accept the offer was a matter of ‘choice not necessity’ as its principals had the means and capacity to take up the offer.  Ardmillan pointed to Next Stage’s own contention that it had the necessary financial capacity to settle on 1 June 2020 in seeking to establish that it was ready willing and able to settle, having served Notices to Complete on 18 May 2020.  Ardmillan highlighted that Next Stage’s lack of independent means at the time the offers were made was nothing new; it was always a company with limited share capital (or paid up units on issue as trustee) and was always dependent on support of its controllers.

(d)       The offers which Next Stage failed to accept, while different in terms from the original contracts, were not ‘materially worse’.  The discount of $6 million more than compensated for the withdrawal of vendor finance.

(e)        Next Stage’s contention that the proffered transaction was materially worse on the basis that the withdrawal of vendor finance would have required it to settle with a mixture of debt and equity ought to be rejected by reference to evidence given at trial.  That evidence included evidence from lay witnesses and expert evidence of Mr Brdjanin that it is standard for such projects to include equity contributions.

(f)        To the extent that Next Stage sought to justify non-acceptance of the offers based on having ‘moved on’ and the investors lacking financial capacity, that assertion should be rejected.  In support of this submission, Ardmillan pointed to concessions made by Mr Salvo in cross-examination concerning his financial capacity and contended that Mr Balsim’s professed lack of financial capacity should be doubted.  It contended that the claimed lack of management capacity had not been substantiated.

(g)       The $6 million discount against the price under the original contracts more than compensated for the loss of the vendor finance and inability to claim further damages due to the releases.

1. For its part, Next Stage contended that it had not acted unreasonably and submitted (in summary) that:

(a)        The Second Offer was materially worse than the terms of the original contracts due to the withdrawal of the vendor finance.  Ardmillan could have, but did not offer to perform the original contracts.

(b)       Relying on Mr Brdjanin’s opinion, no bank or non-bank lender would replace the whole of the withdrawn vendor finance.  The most a bank would lend would be $7.815 million (reflecting an LVR of 30% applied to the price, which would be $26.05 million under the Second Offer), and the most a non-bank lender would lend would be $13.025 million (reflecting an LVR of 50% on $26.05 million), leading to a shortfall of at least $13 million.  No bank or non-bank finance could be obtained without an equity contribution and priority agreement.  The leasehold interest would not be accepted as security.

(c)        The proposition that the $6 million would more than cover the costs arising from the loss of vendor finance and the releases was just assertion from the Bar table, unsupported by evidence.[572]

(d)       If it accepted the Second Offer, it would risk the deposits (c. $3 million) if it was not able to obtain replacement finance or fund the required equity contribution, and would also have been required to give up its legal rights to claim for loss and damage arising from the additional financing costs it would incur.

(e)        Neither Next Stage nor its immediate shareholders had the financial capacity to fund the shortfall.  Mr Salvo was not required to, and was not prepared to, fund it personally.  In addition, the investors in Next Stage had ‘moved on’ in the intervening 10 months before the offers were made.

[572]T1210.08-14; T1211.22-T1212.09. 

1. During the course of oral closing submissions, I invited counsel for Ardmillan to identify any cases to which I should have regard that supported his argument that regard should be had to the position of the principals of Next Stage (and not just the financial capacity of the company itself as a special purpose vehicle) to accept the settlement offer.  Ardmillan requested, and was granted, a short period in which to identify any relevant cases.  Ardmillan submitted a five page note which stated that no direct authority had been identified.  Ardmillan’s note went on to contend that the obligation on Next Stage to mitigate ‘necessarily requires, in the circumstances of this case, that the plaintiff’s controllers act reasonably to minimise the plaintiff’s loss’.  Ardmillan’s note went on to elaborate on the argument on the basis that Next Stage’s ordinary course of business as a special purpose vehicle always involved dependence on its principals and it was not open to Next Stage, on the question of mitigation, to confine the analysis to the position of Next Stage. 

1. Next Stage objected to this note being received and considered, but went on to respond to it.  The basis of the objection was that it went beyond the permission granted to identify any relevant cases, and also on the basis that the contention that there was an obligation on Next Stage’s principals to act reasonably was not opened, pleaded or included in the list of issues. 

1. It is correct that the note submitted by Ardmillan went beyond the grant of leave.  However, I do not accept that it opened a new issue.  Whether or not Next Stage had mitigated its loss was a pleaded issue.  Next Stage engaged with that issue in its lay witness statements by volunteering evidence concerning the way in which Next Stage’s principals had ‘moved on’ and their unwillingness or inability (in Mr Balsim’s case) to fund settlement or volunteer their assets as security.  The trial was conducted on the basis that this evidence was relevant to the pleaded issue of mitigation and it was the subject of cross-examination, without objection.  Next Stage’s written opening submission clearly engaged with Ardmillan’s reliance on the position of its principals in relation to mitigation, contending that ‘there is no principle of reflective mitigation of damage that requires shareholders to fund mitigation of damage’.[573] Accordingly, I have not rejected the further note submitted by Ardmillan (to which Next Stage responded in substance in any event).  Nevertheless, as is apparent from the reasons set out below, my decision on mitigation does not depend on delving into the corporate veil issues addressed by the exchange of notes.

   [573]Next Stage opening submission on loss or damage, [14].  It was also addressed by senior counsel for Next Stage in opening: T57.

Legal principles

1. The principle of mitigation operates to ensure that defendants are only liable for such loss as is properly to be regarded as having been caused by its breach, not the plaintiff’s unreasonable failure to act reasonably to limit its loss.[574] The overarching principle was briefly stated by Ardmillan in its closing submissions, quoting Karacominakis v Big Country Developments Pty Ltd as follows:

A plaintiff who acts unreasonably in failing to minimise its loss from the defendant’s breach of contract will have [its] damages reduced to the extent to which, had [it] acted reasonably, [its] loss would have been less.[575]

[574]Sotiros Shipping Inc v Sameiet Solholt [1983] 1 Lloyd’s Rep 605 (Solholt), 608; British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London [1912] AC 673, 689.

[575][2000] NSWCA 313 (Karacominakis), [187].

1. Whether a plaintiff has acted unreasonably is a question of fact.  Failure to take up an offer to enter into a contract can constitute such unreasonable conduct,[576] although if taking up an offer would require the wronged party to continue in a relationship with the wrongdoer, the nature and status of the relationship will be relevant to whether it would be unreasonable to decline.[577]

   [576]Karacominakis, [188].

   [577]See, eg, Shindler v Northern Raincoat Co [1960] 1 WLR 1038 (Schindler), 1049 (employment relationship); Gul Bottlers (PVT) Ld v Nichols Plc [2014] EWCH 2173, [22] (licensing offer involving a close working relationship).

1. Where an entity has ongoing operations, it will not be required to take action other than in the ordinary course of business; action which is ‘ordinary’ will generally be reasonable.[578]  A plaintiff will not have failed to mitigate by failing to take action which it cannot afford.[579]

   [578]James Edelman, McGregor on Damages (Thomson Reuters (Professional) UK Ltd, trading as Sweet & Maxwell, London, 20^th ed, 2018), [9-082]; NRMA Ltd v Morgan [1999] NSWSC 407, [189].

   [579]Burns v MAN Automotive (Aus) Pty Ltd (1986) 161 CLR 653, 659.

1. Next Stage referred to, and distinguished, three cases involving a plaintiff failing to proceed with a transaction by entering into a new contract. 

1. The first of those cases is Payzu Ltd v Saunders,[580] in which the purchaser of goods was found to have acted unreasonably in declining the defaulting seller’s offer to supply the goods on cash terms without a discount when the seller breached the contract which permitted the purchaser to buy on credit terms with a 2.5% discount.  In referring to, and distinguishing Payzu, Next Stage emphasised the finding in that case that the plaintiffs were financially able to accept the replacement contract terms, and acceptance of the terms would not have precluded an action for damages for the loss sustained by virtue of the replacement contract terms being inferior.[581]

   [580][1919] 2 KB 581 (Payzu).

   [581]Payzu, 586. See also Shindler, 1049 where having to give up legal rights to accept an offer was among the reasons why it was not unreasonable for a terminated employee to refuse an offer.

1. The second case is Solholt, in which the purchaser failed to seek to purchase a vessel which had been delivered late (leading to the termination of the original contract) where the trial judge found that the vessel owner would have accepted an offer to purchase the vessel at the original price, and without compromising any claim the purchaser may have had for delay.  The Court of Appeal dismissed an appeal against the trial judge’s rejection of the purchaser’s damages claim to the difference between the price of the ship and its market value (which had risen).  Next Stage relied on a reference in Solholt to an apparent concession by counsel for the ship seller that, if the purchaser had decided ‘ship owning was no longer for them’, the purchaser would be entitled to damages (and would not have failed to mitigate by seeking to purchase the vessel).  However, as the purchaser remained in the business of owning ships, and there was no suggestion of any change in their intentions or circumstances,[582] the concession was not (contrary to Next Stage’s submission) material to the Court of Appeal’s judgment.  Next Stage also distinguished Solholt on the basis that Ardmillan’s offer did not leave it free to pursue damages claims but involved releases.

   [582]Solholt, 609.

1. The third case is Castle Constructions Pty Ltd v Fekala Pty Ltd,[583] in which the purchaser of a property terminated the contract when the vendors failed to settle on the stipulated date.  The purchaser sought declaratory relief, and damages for the loss of a profitable re-sale.  The vendors cross-claimed seeking specific performance, and offered in the cross-claim to complete the contract on its terms under the court’s supervision.  The purchaser was found to have acted unreasonably in failing to mitigate its loss by considering the vendors’ offer.  Next Stage distinguished Castle Construction on the basis that the offer to complete was made quickly,[584] and was an offer to complete on the original terms.

   [583](2006) NSWLR 648 (Castle Constructions).

   [584]The purchaser in Castle Construction terminated on 29 August 2001, initiated the litigation on 25 September 2001, and the cross-claim was filed on 28 September 2001: Castle Constructions, 651, 658.

Analysis

1. In my view, Ardmillan has not discharged its burden of showing that Next Stage failed to mitigate its loss by unreasonably rejecting its offers. 

1. Ardmillan’s Second Offer was more favourable than its First Offer.  It relied on the Second Offer in its plea that Next Stage failed to mitigate.[585]

   [585]Further Amended Defence to Amended Statement of Claim and Counterclaim, [52A].

1. The vendor finance was an important feature of the transaction Next Stage bargained for.  The removal of the vendor finance from the offers meant that Next Stage did not, as Ardmillan contended, pass up an opportunity to ‘retake the bargain it claims to have lost by Ardmillan’s conduct’.  The bargain offered to settle the dispute was very different from the bargain Next Stage lost.  Even as negotiations on variations to the original contracts ensued from late November 2019 to mid-March 2020, those negotiations never departed from significant vendor finance being provided (notwithstanding Mrs Darling having raised an outright sale as another possibility, and variations to the terms of the vendor finance being negotiated).  There was also no serious challenge to the evidence of Next Stage’s witnesses that the fact of the vendor loan was highly favourable.  It was interest-free for the first year, during which Next Stage could progress the first stage of the development.  Due to the removal of the vendor finance, the terms of the Second Offer take the case outside of cases like Castle Constructions where an offer was made to a wronged party on substantially the same terms as the bargain contracted for. 

1. Whatever the precise arrangements were between Next Stage and those with upstream interests concerning the basis upon which the deposit funds were made available to it, on any view, provision of the vendor finance enabled Next Stage to acquire the Property by taking out much more limited third party financing (via the mezzanine facility) than would otherwise have been the case.  Provision of vendor finance would have permitted Next Stage to settle on the Contract of Sale with only an additional $1,445,000 due at settlement, from the purchase price of $26,050,000.  The vendor loan of $22 million therefore accounted for close to 85% of the purchase price of the Property (although the Contract of Sale and the ASA were independent and no vendor finance was provided under the ASA).  Next Stage could have funded the purchase price under the ASA through its mezzanine finance.  Provision of the vendor finance also, on Mr Maitland’s evidence, made it easier to obtain mezzanine funding. 

1. If the evidence was that third party loan finance would have been available to Next Stage to replace the vendor finance,[586] and that it could have been arranged within the period allowed for acceptance of Ardmillan’s Second Offer (to avoid exposing the deposits to jeopardy), and could have been obtained at a cost equivalent to — or at least not substantially more than — the terms of the vendor loan, then Next Stage’s failure to take up the Second Offer may (subject to other arguments) have been unreasonable. But that was not the case.

   [586]Calculations made by counsel for Ardmillan in oral closings (T1211ff) were premised on Next Stage only having to replace $13.125 million of the vendor funding, based on other facilities still being available to it.  However, the Newground facility was not on foot in April-May 2021, Mr Elzain’s offer had been to support settlement in mid-2020 and Mr Salvo no longer wished to support settlement, at least on the basis of a transaction without vendor finance, in April-May 2021.  Submissions made on the LVR required to support financing to accept the Second Offer were calculated as a percentage of the original contract price, not the price of the Second Offer: T1213.  That figure was apparently used as the comparison on the basis that lenders’ general practice of calculating LVRs by reference to contract prices (not valuations) could be avoided by structuring the transaction to artificially maintain a headline price of $35 million (T1214). 

1. On the contrary, and as set out above, the evidence of Mr Brdjanin was that only the Property would have been acceptable security to a bank or non-bank lender, and a bank would only advance to a maximum LVR of 30%, a non-bank lender up to 50%.  The interest rates that could be obtained from a bank would be between 4 and 5%, and between 8.5% and 10.00% from a non-bank lender.  There would also be establishment fees.  Mr Salvo said bank finance can take six to eight weeks to be approved.[587] Even if, most favourably to Ardmillan,[588] one applied the entire discount of $6 million to the assets being acquired under the ASA (and not the Property), as Next Stage’s submissions pointed out, there would still have been a shortfall in the maximum amount that could have been borrowed and the amount required to fund settlement had the offer been accepted.  Ardmillan’s response was to contend that it is typical for equity contributions to be required (however imprecisely the concept of equity is approached). 

   [587]T494.17-19.

   [588]To avoid reducing the price of the Property, and therefore the amount that could be borrowed on it having regard to the evidence that lenders typically use the lower of the price or a valuation in applying their LVRs.

1. I do not consider that the evidence relied upon by Ardmillan concerning equity contributions being standard,[589] or there being no impediment to a direct equity investment, undermine Next Stage’s contention that the transaction offered was materially less favourable because it would have required substantial equity contributions in order to obtain loan finance.  On the contrary, the fact that Next Stage had secured (by the original contracts) a transaction which required so little equity to be contributed only serves to highlight that the transaction without vendor finance was not materially the same as, or better than, the original transaction.[590] It was not unreasonable for Next Stage not to take up the Second Offer when it did not involve the provision of significant vendor finance on favourable terms, but would have required the principals to contribute substantial further funds (whether or not technically described as equity) and/or offer other assets as security to make up the difference between the funds that could be borrowed and the price under the Second Offer.

   [589]Defendant’s Closing Submissions, [145].

   [590]In its written opening submissions on loss or damage at [13], Next Stage calculated that the maximum it could have borrowed through bank and non-bank lenders left a shortfall of at least $13 million. 

1. On this analysis, it is not necessary to determine whether the discount of $6 million would have fully compensated Next Stage for the additional costs associated with procuring third party financing and its other damages.  However, if it were necessary to do so, I would find that Ardmillan has not shown that this is the case.  Calculations set out by counsel for Ardmillan in oral closings were premised on Next Stage only having to replace $13.125 million of the vendor funding,[591] based on other facilities still being available to it.  However, the Newground facility was not on foot in April-May 2021, Mr Elzain’s offer had been to support settlement in mid-2020 (not 2021)[592] and Mr Salvo no longer wished to support settlement, at least on the basis of a transaction without vendor finance, in April-May 2021. 

   [591]T1211ff.

   [592]T456.24-T457.25.

1. The submission that there was available to Next Stage a way of financing acceptance of the offer which was ‘bankable’ proceeded using that $13.25 million borrowing figure and calculating the LVR and the original total price under both the Contract of Sale and the ASA of about $35 million.[593] The original contract figure was apparently used as the comparison on the basis that lenders’ general practice of calculating LVRs by reference to contract prices (not valuations) could be avoided by structuring the transaction to artificially maintain a headline price of $35 million.[594]  I am not prepared to proceed on the basis that financing would need to have been arranged on the basis of some deft drafting artificially maintaining the headline price.  But there is another problem in Ardmillan’s scenario, namely that it assumes, contrary to the evidence,[595] that lenders would take the value of the assets being acquired, other than the Property, into account. 

   [593]T1213; that combination of figures was also used in cross-examination of Mr Brdjanin: T687.

   [594]T1214.

   [595]Brdjanin Report, [4.1], [4.6].  T659-660, T664.

1. Further, I do not accept that the financial capacity of those holding and controlling the ultimate economic interests in Next Stage (relevantly, at April 2021, Mr Balsim and Mr Salvo) is to the point.  The bargain that Next Stage struck was one including advantageous vendor finance.  That cannot be seamlessly substituted for the transaction offered in April 2021 on the basis that, even if Next Stage could not (or chose not to) borrow from third parties, Mr Salvo and/or Mr Balsim should have stepped in and either advanced funds by way of loan, injected significant capital or offered up other assets as security to support third party borrowing. 

1. In any event, I do not accept the submission that Mr Balsim’s evidence about his family’s financial capacity should be doubted or rejected, as Ardmillan contended.  The other investments made by Mr Balsim’s family interests were made in the last quarter of 2020, well before Ardmillan’s offers were made, and at a time when the transaction the subject of this proceeding had, on any view, ended some months before.  Similarly, the Balsim family’s purchase of Mr Aiello’s interests in Next Stage does not support a contention that Mr Balsim had wealth greater than that to which he attested.  If nothing else, the terms on which that acquisition was made were not explored with Mr Balsim in cross-examination. 

1. Additional matters also support the conclusion that it was not unreasonable for Next Stage not to accept the Second Offer.  First, the offer was made a long time after the transaction was at an end in late May 2020.  This is not a case like Castle Constructions, or Payzu where an offer to all but replace a determined contract on similar terms was made close to the time of determination.  Next Stage’s principals had ‘moved on’.  Nor can the matter of management capacity be readily dismissed.  It was clear from the evidence that, following the introduction of the Salvo interests, they were to have carriage of the project.  Accordingly, it is the management capacity of the Salvo interests that is relevant to this issue.  As Mr Salvo stated in his evidence, while his empire is large, his team is small and relies on third party consultants.  It was apparent from his evidence that Mr Salvo relies heavily on his team, particularly Mr Maitland.  There was no evidence that there were other senior employees with Mr Maitland’s skill set (cf, there being at least an in-house accountant).

1. Secondly, while the evidence concerning dealings with the Head Landlord have not been set out in detail earlier, the documentary evidence tendered made it clear that the Head Landlord had reservations about Next Stage, to the point where it refused its consent to the assignment of the Head Lease to Next Stage.[596] It was a term of both of Ardmillan’s offers that Next Stage would, in essence, be left to its own devices in dealing with the Head Landlord (cf, the obligations imposed on Ardmillan under the ASA in relation to the Head Lease).  While the offers were made on terms that provided for triggering the strata subdivision of Level 3, it was Mrs Darling’s evidence that executing a subdivision without cooperation is difficult.[597] While the position in relation to the Head Lease was not emphasised in Next Stage’s submissions, it is another feature of the Second Offer which made the transaction proffered less favourable to Next Stage.

   [596]CB2808-2808.

   [597]T589.2-20.

1. Before leaving the topic of mitigation, I should note that, while it may seem jarring that Next Stage had the capacity to settle following service of its Notices to Complete based on the support of Mr Salvo being available if needed, but lacked the capacity to accept the Second Offer, with the vendor finance still in place for the potential June 2020 settlement, the amount of financial support that Mr Salvo may have been required to offer was much more limited than the financial support that would have been required to support acceptance of the Second Offer.  In view of the significant difference in the level of support that would have been required from Mr Salvo, Next Stage’s ability to settle based on its Notices to Complete on 17 June 2020 is not inconsistent with its position concerning its ability to finance acceptance of the Second Offer. 

Residual matters concerning the deposits and Next Stage’s caveat

1. Given that I have rejected Ardmillan’s contentions that the original contracts were terminated by agreement or following repudiation by Next Stage, it follows that the bases upon which it claimed to be entitled to retain the deposits fall away.  Ardmillan also accepted that, if Next Stage is entitled to the return of the deposits, its entitlement supports the caveat.[598]

   [598]T1222.5-9.

1. Given my conclusion that Ardmillan repudiated the Contract of Sale and the ASA, Next Stage is entitled to recover its deposits. It is unnecessary to address Next Stage’s alternative arguments concerning relief against forfeiture in equity and under s 249 of the Property Law Act 1958.

Orders

1. I will hear the parties on the form of final orders to give effect to these reasons.

(Gleeson CJ, Gummow, Heydon and Crennan JJ); Laurinda Pty Ltd v Capalaba Park Shopping Centre
Pty Ltd (1989) 166 CLR 623, 658 (Deane and Dawson JJ) (Laurinda).

and Dawson JJ) and in Shevill v Builders Licensing Board (1982) 149 CLR 620, 633 (Wilson J)
(Shevill).