Yenald Nominees Pty Ltd v Como Investments Pty Ltd
[1996] FCA 202
•25 Mar 1996
CATCHWORDS
TRADE PRACTICES - misleading or deceptive conduct - sale of property subject to a lease for restaurant and function centre - representation that investor was protected by an excellent lease covenant - lease liable to forfeiture for non-payment of rent - valuation of property and assessment of loss.
Trades Practices Act 1974 ss 52, 75B, 82, 87
Colonial Mutual Life Assurance Society Limited v. The Producers and Citizens Co-operative Assurance Company of Australia Limited (1931) 46 C.L.R. 41
Dalrymple Holdings Pty. Ltd. v. Gohl, Unreported (Federal Court of Australia, 31 March 1993)
Kizbeau Pty. Ltd. v. W.G. & B. Pty. Ltd. (1995) 69 A.L.J.R. 787
Krakowski v. Eurolynx Properties Ltd. (1995) 130 A.L.R. 1 Lloyd v. Grace, Smith & Co. [1912] A.C. 716
Melluish (Inspector of Taxes) v. B.M.I. (No. 3) Ltd. [1994] 3 W.L.R. 1032
T.S.B. Bank plc v. Botham [1995] E.G.C.S. 3;
Wheeler Grace & Pierucci Pty. Ltd. v. Wright [1989] A.T.P.R. 40-940
YENALD NOMINEES PTY. LTD. (ACN 008 871 225) V. COMO INVESTMENTS PTY. LTD. (IN LIQUIDATION) (ACN 008 732 223) & ORS.
WAG51 OF 1994
LEE J.
PERTH
25 MARCH 1996
IN THE FEDERAL COURT )
OF AUSTRALIA )
WESTERN AUSTRALIA )
DISTRICT REGISTRY )
GENERAL DIVISION ) NO. WAG51 OF 1994
B E T W E E N: YENALD NOMINEES PTY. LTD.
(ACN 008 871 225)
Applicant
and
COMO INVESTMENTS PTY. LTD.
(IN LIQUIDATION)
(ACN 008 732 223)
First Respondent
and
RICHARD ELLIS (WESTERN AUSTRALIA)
PTY. LTD.
(ACN 008 912 641)
Second Respondent
and
GIACOMO BEVACQUA AND LIDIA BEVACQUA
Third Respondents
and
COMO INVESTMENTS PTY. LTD.
(IN LIQUIDATION)
(ACN 008 732 223)
First Cross Claimant
and
GIACOMO BEVACQUA AND LIDIA BEVACQUA
Second Cross Claimant
and
RICHARD ELLIS (WESTERN AUSTRALIA) PTY. LTD.
(ACN 008 912 641)
Cross Respondent
MINUTE OF ORDER
JUDGE MAKING ORDER: LEE J.
DATE OF ORDER: 25 MARCH 1996
WHERE MADE: PERTH
THE COURT ORDERS THAT:
There be judgment for the applicant against the first and second respondents and first-named third respondent in the sum of $286,000.
The applicant's claim against the second-named third respondent be dismissed.
The first respondent and first-named third respondent indemnify the second respondent in respect of any sum paid by the second respondent in discharge of the judgment entered against it.
The cross-claim by the first respondent against the second respondent be dismissed.
By 2 April 1996 the parties file a consent minute in respect of orders for costs or submissions in respect thereof.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT )
OF AUSTRALIA )
WESTERN AUSTRALIA )
DISTRICT REGISTRY )
GENERAL DIVISION ) NO. WAG51 OF 1994
B E T W E E N: YENALD NOMINEES PTY. LTD.
(ACN 008 871 225)
Applicant
and
COMO INVESTMENTS PTY. LTD.
(IN LIQUIDATION)
(ACN 008 732 223)
First Respondent
and
RICHARD ELLIS (WESTERN AUSTRALIA)
PTY. LTD.
(ACN 008 912 641)
Second Respondent
and
GIACOMO BEVACQUA AND LIDIA BEVACQUA
Third Respondents
and
COMO INVESTMENTS PTY. LTD.
(IN LIQUIDATION)
(ACN 008 732 223)
First Cross Claimant
and
GIACOMO BEVACQUA AND LIDIA BEVACQUA
Second Cross Claimant
and
RICHARD ELLIS (WESTERN AUSTRALIA) PTY. LTD.
(ACN 008 912 641)
Cross Respondent
CORAM: LEE J.
DATE : 25 MARCH 1996
PLACE: PERTH
REASONS FOR JUDGMENT
In this matter the applicant ("Yenald") seeks to recover the amount of loss or damage it claims to have suffered by reason of contraventions of the Trade Practices Act 1974 ("the Act") by the first respondent ("Como") and the second respondent ("Richard Ellis"). Yenald claims that, pursuant to ss.75B and 82 of the Act, the third respondents ("Mr and Mrs Bevacqua"), are persons involved in the contraventions of the Act by Como and Richard Ellis and are liable to Yenald in the same sum. Based upon the same facts Como has made a cross-claim against Richard Ellis, and Richard Ellis has cross-claimed against Como and Mr Bevacqua.
Yenald is controlled by Dr and Mrs Leong and it is an investor in property.
Mr and Mrs Bevacqua have carried on business for some years as restaurateurs and at material times were the controllers of Como. Como is now in liquidation. Until about March 1993 Como operated the business of restaurant and function centre known as "Le Mirage" on a property situated in Francis Street, Perth ("the property"). Como owned the property. The building used for the restaurant and function centre had been constructed for that purpose by Como.
In about April 1993 Como sold the business to Jentine Pty. Ltd. ("Jentine") and granted Jentine a lease of the property and improvements for a term of five years with options to renew the lease for two further terms of five years. Jentine was controlled by Mr and Mrs Morse. They guaranteed due performance of the lease covenants by Jentine.
Richard Ellis carries on business as a real estate agent and property consultant. In November 1993 Mr and Mrs Bevacqua instructed Richard Ellis to sell the property by auction. Richard Ellis publicized the pending auction by arranging for brochures to be printed and distributed to interested parties and by placing advertisements in "The West Australian" newspaper.
On about 18 November 1993, in response to such an advertisement, Dr and Mrs Leong contacted a representative of Richard Ellis, Mr Quinn-Schofield, and arranged to meet that person on site to inspect the property that day.
Upon meeting Mr Quinn-Schofield at the property Dr Leong received from Mr Quinn-Schofield a brochure and a second document described as a "Sales Report", which, inter alia, described the property for sale.
On the front of the brochure was printed in bold type:
"FULLY LEASED PROPERTY INVESTMENT".
In the Sales Report the following statement was made:
"General Comments
The subject property possesses the following major attributes:
...
(ii)The investor is protected by an excellent lease covenant over the subject premises
..."
In his evidence Dr Leong did not refer directly to the statement in the Sales Report as to the "excellence" of the "lease covenant" but he did say that on 18 November 1993, at the time Dr and Mrs Leong inspected the property with Mr Quinn-Schofield, the latter made an oral statement to like effect when he stated that the tenant was very secure, had several properties in Perth, and was interested in purchasing the property.
Dr Leong was challenged in cross-examination by counsel for Como as to the accuracy of his evidence that Mr Quinn-Schofield made such a statement. For the reasons stated later, I am satisfied that the statement was made by Mr Quinn-Schofield. Observing Dr Leong throughout his testimony I found him to be a satisfactory witness whose recollection of material matters could be relied upon.
Mrs Leong gave evidence that she did not read the Sales Report closely after her husband handed it to her to read but her attention had been caught by the statement under the heading "General Comments" that the "investor is protected by an excellent lease covenant". She stated that she regarded that comment as most important in determining the price to be offered and in determining whether acquisition of the property at that price would be a good investment. Mrs Leong also gave evidence that Mr Quinn-Schofield told them that the property had "a secure and good tenant". Mrs Leong also was cross-examined vigorously by counsel for Como but at the end of her evidence I was given no cause to doubt the accuracy of her recollection of principal events.
Later that day Mr Quinn-Schofield attended Dr and Mrs Leong at their home and Yenald executed a form of "Offer and Acceptance" in which it offered to purchase the property for a price of $2m. On receiving the offer Como inserted a counter-offer of $2.25m and Mr Quinn-Schofield returned to the Leong residence with the document late in the evening. Dr and Mrs Leong considered the price set by Como and Yenald made a further offer of $2.15m. The following day Mr Quinn-Schofield advised Mrs Leong that Como had accepted Yenald's offer. Under the terms of the agreement made by the acceptance of the offer settlement of the transaction was to be effected on 25 January 1994.
Settlement took place on 27 January 1994. On 28 January 1994 Jentine's bank appointed receivers and managers to control Jentine's affairs under the terms of a debenture granted to the bank by Jentine. On 15 February 1994 Jentine was placed in liquidation.
The principal questions in this litigation are whether Como and Richard Ellis engaged in conduct in trade or commerce that was misleading or deceptive and, if so, whether Yenald suffered any loss by reason of that conduct.
The first question involves identifying the acts or omissions of Como, or its agent Richard Ellis, said to constitute the relevant conduct in trade or commerce and assessing whether that conduct had the capacity to mislead or deceive an ordinary purchaser of commercial property not being a person experienced or sophisticated in the field.
The facts I find to be relevant to identifying that conduct and its character I set out below.
Como agreed to sell the business "Le Mirage Restaurant and Function Centre" to Jentine in about April 1993. By a lease dated 7 May 1993 Como granted a lease of the property to Jentine for a term of five years from the date of settlement of the contract of sale of the business. Settlement took place on or about 24 May 1993.
The monthly rental payable under the lease was calculated on an annual rent of $150,000 per annum for the first eighteen months of the term subject to the proviso that no rental be paid in the first three months. The annual rent for the twelve months following the first eighteen months was to be $200,000 per annum.
In the brochure and the Sales Report the date the term of the lease commenced was incorrectly stated to be 8 March 1993. The Sales Report also stated incorrectly the dates on which rental increments came into effect. In the Sales Report the "Current Rental" was described as follows: "$200,000 per annum plus all outgoings. ($150,000 from tenant plus $50,000 to be paid in advance by vendor at settlement)." As part of the agreement to sell the property to Yenald, Como agreed to pay Yenald $50,000 on settlement to "subsidise" the "net rental" payable under the lease.
On the date of settlement, 27 January 1994, the amount of "subsidy" required to bring the rental to $200,000 per annum would have been approximately $32,000, so the sum of $50,000 represented an overpayment in that respect of approximately $18,000.
Under the lease the first payment of rent fell due on 24 August 1993 in the sum of $3,287.67. It was a proportionate amount for the period 24 August 1993 to 31
August 1993. From 1 September 1993, and on the first day of each month thereafter, the rent due and payable was $12,500.
Rent was not paid on 24 August 1993 nor on 1 September 1993. On 17 September Como presented for payment a cheque drawn by Jentine in the sum of $15,787.67 in payment of the rent due on 24 August 1993 and 1 September 1993. The cheque was dishonoured. It was re-presented on 21 September 1993 and dishonoured again. The next instalment of rent was not paid when it fell due on 1 October 1993. On 18 October 1993 Como presented another cheque from Jentine in the sum of $15,787.67. That cheque was honoured.
As at 1 November 1993 the rent due on 1 October and 1 November 1993 remained unpaid. At about that time Como had advised Jentine, by letter signed by Mr Bevacqua, that interest was payable upon rent not paid as provided by the lease.
In early November Como, by Mr Bevacqua, instructed an agent to collect the rent payable to Como by Jentine. At about the same time Como, by Mr Bevacqua, instructed Richard Ellis to sell the property.
On about 15 November 1993 a cheque for $5,000 on account of the arrears of rent was paid to the collecting agent. The cheque was negotiated when presented for payment.
On 18 November 1993 when Dr and Mrs Leong met Mr Quinn-Schofield to inspect the property the amount of rent then due and unpaid was $20,000.
On 1 December 1993 the rent due and unpaid stood at $32,500. On 3 December 1993 Como received from Jentine a cheque in the sum of $2,500 on account of the arrears of rent. That cheque was honoured on presentation. No rent was paid by Jentine thereafter. As at 1 January 1994 the amount owing for rent was $42,500.
When cross-examined by counsel for Richard Ellis Mr Bevacqua maintained that he believed Jentine's business was going well at the beginning of November and agreed that he told Mr Quinn-Schofield so when he instructed Richard Ellis to sell the property. On that day Mr Bevacqua took Mr Quinn-Schofield to the Francis Street property and introduced him to Mr Morse. Several days later Mr Quinn-Schofield returned to the property for a more thorough inspection and had a further discussion with Mr Morse. Either at that meeting or the earlier meeting Mr Quinn-Schofield asked Mr Morse whether Jentine would consider selling its business to allow the property to be offered to an owner/operator. It was Mr Quinn-Schofield's evidence that Mr Morse said that the business was going well and Jentine would not be interested in selling.
The evidence given by Mr Morse contradicted Mr Quinn-Schofield on that issue. Mr Morse said that he told Mr Quinn-Schofield that the business was not going well, that a management adviser had been appointed, and that it was hoped that the business could be turned around. Mr Morse said he told Mr Quinn-Schofield that if a prospective buyer was introduced Jentine would be keen to sell.
Although for the reasons that follow little turns upon the point, I found Mr Morse to be a more impressive witness than Mr Quinn-Schofield and I accept that Mr Morse told Mr Quinn-Schofield in early November that the business was not trading well, that Jentine was hoping to turn it around with the assistance of a consultant, and that if Mr Quinn-Schofield introduced a purchaser for the business Jentine would be willing to sell and that it was in that context that Mr Quinn-Schofield had told Mr Morse that he (Mr Quinn-Schofield) had been faced with financial problems in the past and was now doing well and was sure Mr Morse (Jentine) could do the same.
Having found that in early November, Mr Morse had informed Mr Quinn-Schofield, in general terms, that the business was not trading well, was it the fact as stated by Dr and Mrs Leong that Mr Quinn-Schofield told Dr and Mrs Leong on 18 November that Jentine was a good and secure tenant? As set out above Mr Bevacqua had not told Mr Quinn-Schofield that Jentine was two months in arrears in the payment of rent at
the time Bevacqua instructed Richard Ellis to sell the property. To the contrary Mr Bevacqua had told Mr Quinn-Schofield that the tenant's business was going well. I consider it likely, given that Mr Quinn-Schofield continued to maintain that he had not been told otherwise by Mr Morse, that Mr Quinn-Schofield put aside Mr Morse's remarks on the state of the business and conveyed to Dr and Mrs Leong the substance of the statement made to him by Mr Bevacqua that the business was good and the tenant was "strong" or "secure". Indeed, in his evidence-in-chief Mr Quinn-Schofield said that in response to a question from Mrs Leong about the tenant he had said that "to the best of his knowledge the tenant was a strong tenant", and when cross-examined by counsel for Yenald Mr Quinn-Schofield conceded that when he met Dr and Mrs Leong he had told them, in words to that effect, that the tenant was a good tenant and that he had done so based on the instructions he had received from Mr Bevacqua. Mr Quinn-Schofield agreed that had he known of the extent of Jentine's default as at 18 November 1993 he would not have said to Dr and Mrs Leong that the tenant was a good tenant and, perhaps significantly, he stated that "he would not have even bothered auctioning under those circumstances", the "circumstances" being the extent of Jentine's default as learnt by Richard Ellis in due course.
To an ordinary reader of the brochure and the Sales Report who had been told that the tenant was a good tenant, the statements set out in those documents referred to above
suggested that the worth of the property to a prospective investor was to be ascertained by having regard to the rental payable under the lease. The statements also conveyed the assurance that the "excellence" of the lessee's covenants under the lease "protected" the investment made upon the purchase of the property.
Was that conduct engaged in by Como and Richard Ellis misleading or deceptive as alleged? Whether it was deceptive is unnecessary to decide. Certainly it was misleading. At the time Mr Quinn-Schofield dealt with Dr and Mrs Leong on 18 November 1993 the lease was subject to forfeiture for non-payment of rent. Como chose to do more than give notice to a prospective purchaser that a lease of the property had been granted in May 1993. By the documents prepared by its agent and by the statements made on its behalf Como commented upon the "strength" of the lessee and the "excellence" of the lessee's covenant and held out that these facts would secure the investment of the purchase price. It cannot be submitted that the statements did no more than recite the effect of the terms of the lease. In circumstances where a vendor has chosen to represent to a prospective purchaser that the property is subject to a lease that would "protect" the investor, fair dealing in commerce would require the vendor to disclose that the lease was, in fact, forfeitable. Jentine's failure to pay rent was not an aberration by a lessee that had duly performed such a covenant
over a period of time. From the outset Jentine had failed to pay rent under the lease as it fell due and that conduct had not been remedied by its guarantors. Jentine's default was not a case of delay or oversight in attending to payment. The first rental payment remained unpaid for approximately seven weeks and, perhaps more importantly, within that time a cheque tendered in payment of the rent had been dishonoured twice. Such dishonour was a clear warning to Como of the lessee's trading difficulties. Furthermore, as at 18 November 1993 the arrears of rental had increased and Como had instructed an agent to take steps to collect the amount outstanding. Como chose to make statements that promoted the worth of the lease, and if that conduct was to be relieved of its capacity to mislead Como was obliged to disclose to a prospective purchaser that the lessee was in default in a fundamental respect. (See: Krakowski v. Eurolynx Properties Ltd. (1995) 130 A.L.R. 1.) If Como believed that Jentine or its guarantors could remedy their default either by liquidation of assets or through the assistance of their banks, that belief was irrelevant to Como's obligation to disclose the state of the lease when promoting it as being of value to an investing purchaser.
Como submitted that the particular statements in the brochure and Sales Report and the statement by Mr Quinn-Schofield were the responsibility of Richard Ellis and not Como but plainly the acts of Richard Ellis were within the
scope of the authority granted to Richard Ellis by Como and the acts of Richard Ellis were not only the acts of Richard Ellis but also the acts of Como. (See: Colonial Mutual Life Assurance Society Limited v. The Producers and Citizens Co-operative Assurance Company of Australia Limited (1931) 46 C.L.R. 41 per Gavan Duffy CJ., Starke J. at 47; Dixon J. at 50; Lloyd v. Grace, Smith & Co. [1912] A.C. 716 per Ld. Macnaghten at 736-738.)
The next question is whether the conduct described had a causal connection with Yenald's decision to purchase the property?
Dr Leong's evidence was that he and his wife were looking for a commercial property in the vicinity of the Perth central business district to be purchased by Yenald as an investment. He also stated that it was of importance to him, in making a decision to purchase a property, that the property be held by a good tenant.
Dr Leong stated, and I accept, that he would not have caused Yenald to purchase the property had he known that the lessee was in breach of its covenant to pay rent. It was either stated directly or implied in the content of their evidence that Dr and Mrs Leong were not considering a purchase by Yenald of a vacant commercial property for which a lessee would have to be found. The lease to Jentine was of prime importance in Yenald's decision to buy the property. The property was offered for sale as an investment proposition and Yenald was an investor, not an operator of a restaurant business. Therefore, the return from the lease was an important consideration for Yenald in deciding to purchase the property as an investment and in calculating an appropriate price to offer.
No doubt Dr and Mrs Leong appreciated, as would any investor of ordinary experience, the assignment to the purchaser of the vendor's interest as lessor carried with it the risk of default by the lessee. However, in this case the vendor encouraged Yenald to accept that risk by holding out that the tenant was strong and that an "excellent" lease covenant "protected" the purchaser's investment. To so hold out involved misleading conduct and disclosure of the misleading nature of that conduct would have resulted in Yenald refraining from offering to purchase the property.
I am satisfied that the considerations which influenced the controllers of Yenald in the decision made by Yenald to offer to purchase the property included reliance upon the representations that the property for sale then stood "fully leased" and that an investing purchaser was "protected by an excellent lease covenant". I am also satisfied that such reliance was reinforced by the statement of Mr Quinn-Schofield that the lessee was a good, strong or secure tenant.
It was submitted by Como that Yenald, through Dr Leong, was attracted to the property and fixed on purchasing it to the point that Yenald would have offered the same purchase price irrespective of knowledge of Jentine's default under the lease. I am satisfied on the evidence that Dr Leong would not countenance a defaulting lessee and that knowledge of the extent of Jentine's default would have been more than enough to dissipate any interest Dr Leong had in the property as a prospect for investment.
Como submitted further that in respect of any statement contained in the brochure and the Sales Report it was subject to a disclaimer in the following terms:
"Richard Ellis (Western Australia) Pty Ltd (Richard Ellis) provides this document as a guideline only, on the condition that the reader by receiving and reading this document agrees not to act upon its contents without first independently satisfying themself as to the correctness or otherwise of its contents (including all statements of fact, assumptions, calculations and methodology) and the reader takes notice that and agrees that they shall have no claim against Richard Ellis for damages or any other remedy at law or in equity should any part of the contents be incorrect or misleading whatever the cause of such error may be. ..."
Apparently, Como contends that by reason of that disclaimer Yenald cannot be said to have relied upon the statements contained in those documents.
Whether Yenald suffered loss by reason of the
conduct of Como and Richard Ellis is a question of fact. The statements made in the documents were significant and of direct relevance to a decision to offer to buy. Furthermore, they were reinforced by Mr Quinn-Schofield's oral statement. I have no doubt that either alone, or in combination with Mr Quinn-Schofield's statement, the representations made in the documents to which the disclaimer was attached influenced the decision made by Yenald on that day. But in any event it is the totality of the conduct that must be examined for causal connection with any loss claimed. In the present case that conduct includes failure to dislcose the extent of the lessee's default under a lease promoted as being of value and the connection between that default and the entry into the agreement to buy the property is both direct and patent.
Como submitted that Dr Leong and Mrs Leong made their own enquiries about the standing of the tenant and its guarantors and were not concerned to know anything more about them beyond that which they had learnt from those enquiries. Therefore, it is said, Dr and Mrs Leong relied upon their own judgment and not upon any "oral or written representations" made on Como's behalf. That submission could only be relevant if predicated upon a more limited finding of misleading conduct on the part of Como than is disclosed in the findings set out above of which the failure to inform Yenald of the true state of affairs under the lease is a significant part.
Apparently to the same point, it was submitted by Como that the notation on the settlement statement that indicated that rental payable on 1 January 1994 had not been received was sufficient to alert Yenald to the prospect of the tenant's default and the failure to act on that information indicated that it was not a matter of great concern to Yenald. Such a statement had no bearing upon causal connection between the misleading conduct and the loss sustained by reason of that conduct and proceeding to settlement on the part of Yenald did not exhibit such foolhardiness or lack of care for its welfare to constitute a supervening event disposing of any causal link between the misleading conduct and the loss sustained by Yenald.
A further submission put by Como on the question of causation was directed to the condition inserted in the offer to purchase made by Yenald to the effect that the agreement was conditional upon Yenald "being absolutely satisfied with the terms and conditions of the lease document". It should be noted that the condition in the offer and acceptance would not stand unfulfilled if the purchaser had no problem with the terms which comprised the lease document but was not satisfied with the standing of the tenant. However, I am satisfied that Yenald continued to rely upon the conduct of Como and Richard Ellis and that any knowledge gained from the further enquiries made by Yenald did not supplant, or make irrelevant, that reliance.
In finding that the conduct of Richard Ellis and of Como described above was misleading in contravention of s.52 of the Act, and was relied upon by Yenald, it becomes unnecessary to consider whether other conduct by Como, or Richard Ellis, also contravened s.52 of the Act as alleged.
It was claimed that by the brochure and the Sales Report, and by oral statements made by Mr Quinn-Schofield, it was represented to Yenald that various items affixed on, or to, the premises were included in the property offered for sale to Yenald when, in fact, title to those items had already passed to Jentine by prior sale.
It was also claimed that subsequent to the acceptance of Yenald's offer and in answer to requisitions delivered to it by Yenald, Como, by Mr Bevacqua, engaged in conduct that was misleading or deceptive by failing to disclose the terms of a local authority work order in respect of the property served on Como after Yenald had agreed to purchase the property.
With regard to the alleged statements as to fittings and fixtures Dr Leong and Mrs Leong stated that Mr Quinn-Schofield had told them when they were inspecting the building on 18 November 1993 that everything fixed to the floor, fixed to the ceiling and fixed to the wall belonged to the building and would be sold to the purchaser but anything moveable, such
as tables and chairs, belonged to the tenant. Mr Quinn-Schofield said that he told Dr Leong and Mrs Leong that they were buying the shell of the building with air-conditioning and lighting.
The fitting out of the premises was substantial and I have no doubt that it was an attractive feature on inspection. I am also satisfied that having regard to my assessment of the witnesses as indicated above, the evidence of Dr Leong and Mrs Leong is to be preferred. Having regard to the extent to which many of the items sold to Jentine would be regarded as part of the building, (see: T.S.B. Bank plc v. Botham [1995] E.G.C.S. 3; Melluish (Inspector of Taxes) v. B.M.I. (No. 3) Ltd. [1994] 3 W.L.R. 1032) careful description of the property sold to the tenant was essential. However, I am not satisfied that the revelation that all fixed items belonged to the tenant would have deflected Dr Leong and Mrs Leong from causing Yenald to make an offer to purchase the premises. They may have calculated that at the conclusion of the lease Yenald could purchase the fixtures and fittings at a depreciated cost. I do not think that the anticipation of that future expenditure would have had much of an impact on the bargaining that took place in respect of the amount to be offered for the purchase of the property. In any event that claim is subsumed within the claim for loss arising out of the primary allegation of misleading conduct already dealt with.
With regard to the claim of misleading conduct in respect of the undisclosed work order, it is unnecessary to determine whether the contract made between Yenald and Como would have permitted Yenald to terminate the agreement if Como provided an answer to a requisition that disclosed the existence of a work order. I am not satisfied that the work involved under the work order, or the cost thereof, was of such significance that it would have caused Yenald to terminate the agreement to purchase the property. The failure to inform Yenald of the order may have deprived Yenald of an opportunity to vary the agreement and complete settlement at a lesser price but I do not accept that Yenald would not have performed the contract. Again, any claim for loss pursued under this heading is subsumed entirely within the loss assessed on the primary claim of misleading conduct.
I now turn to the question of the loss, if any, suffered by Yenald by reason of the conduct of Richard Ellis and Como.
As an alternative to an order for the payment of the loss it had suffered Yenald sought orders under s.87 of the Act that would have the effect of rescinding the bargain between the parties by directing Como to re-take the property, refund the purchase price and reimburse wasted expenditure with liberty to return to the Court for further orders in the event that Como was unable to comply with the orders. Given
that Como has been placed in liquidation since the property was acquired by Yenald the altered status of Como makes it unlikely that an order in the nature of rescission could be satisfied and on that ground alone such an order would be inappropriate. Therefore, the amount of loss suffered by Yenald should be assessed.
In a case of this type the appropriate measure of loss is the difference between the price paid for the property and the true value of the property at the time it was acquired. (See: Kizbeau Pty. Ltd. v. W.G. & B. Pty. Ltd. (1995) 69 A.L.J.R. 787.) That date should be taken to be the date of acceptance of the offer, when Yenald became bound to the bargain and obtained an equitable interest in the property, rather than the date of settlement of the transaction, 27 January 1994, although little turns on the point.
The parties presented evidence of value from three valuers instructed to value the property for the purpose of these proceedings. Although other methods were discussed a common method of valuation employed was to ascertain the fair market rental payable per annum and to apply an appropriate capitalization rate to that sum and I accept that method to be appropriate in the circumstances.
The improvements on the property consisted of a
three level building of recent construction. The first level is a basement providing parking space for twenty-two vehicles, storage facilities and air-conditioning plant. All three levels are served by a goods lift described as a "dumb waiter". The second level is a kitchen and restaurant area. The third level is designed for use as a function area and includes several reception rooms one of which is described as a "bridal suite". The second and third levels are connected by two wide staircases which are features of the internal layout of the building.
In the evidence of value a difference arose as to the appropriate method of measurement of the lettable area for the purpose of calculating the amount of the annual rent. It was suggested that according to the guidelines of the Building Owners' and Managers' Association ("B.O.M.A.") the rent for a single tenancy building such as this should be set as for a commercial building calculated on the gross building area measured from the outside walls. Valuation is not an exact science and the evidence of the persons who have expertise in the field is designed to assist the Court to adopt a method of valuation that will be appropriate in the circumstances of the case. It is the role of the Court to apply logic and commonsense assisted by that evidence and draw conclusions from the facts as found. As Spender J. said in Dalrymple Holdings Pty. Ltd. v. Gohl, Unreported (Federal Court of Australia, 31 March 1993) at pp.15-16:
"In this case the Court has been supplied with considerable evidence as to comparable value and as to an acceptable methodology of assessing value. Some of the processes of reasoning in the various experts' contributions adopt a figure which is not to be preferred in the light of other evidence. In these circumstances the Court has to discharge its primary obligation of finding the facts and it does so in grateful reliance on the assistance provided by the opinions of experts but without a slavish and uncritical adoption of any particular part of any such opinion."
I accept that if a purpose-built building is leased to a single lessee for a restaurant business, the whole of the floor area of the building, subject to certain exclusions for areas that serve obligations of the lessor and do not appear to contribute to the lessee's capacity to generate income from the use of the premises, may be the appropriate area for which an annual rental is to be determined. However, it must be borne in mind that rentals payable for such entire areas of space may attract a lower rate than the rental payable for net lettable areas which include a loading in respect of the common use by multiple tenants of unlet space in corridors, foyers and service areas. In the circumstances described the relevant area should be a net lettable area calculated from internal wall measurements.
Having regard to the photographs of the restaurant and functions areas it is apparent that the two internal staircases would be an integral part of a business conducted on the premises and the floor area occupied by those stairs should be included in the lettable area. Similarly, the use
of the dumb waiter would be of importance to the efficient operation of that business and the floor space given to that facility should be included in the lettable area. However, the void surrounding the circular staircase on the first floor is unusable space and should be excluded. It may be thought that, similarly, the area taken up by the staircases constructed as fire escapes should be treated as part of the shell of the structure and not included in the floor area available to the lessee but the stairs are part of the safety obligations to be observed by a lessee restaurateur and integral to the operation of such a business conducted in the building by the sole occupier and should be included in the lettable area.
The floor space of the ground floor or restaurant area including the area occupied by the internal stairs, fire stairs and dumb waiter is 758m².
The relevant lettable area of the first floor, or function area, including the area applied to the internal staircases and fire stairs and to the dumb waiter but excluding the void beyond the area occupied by the stairs at the rear of the floor is 838m².
With regard to the basement area, the car parking areas should be given a rental value but the area dedicated to a "right of way" should be excluded. That area should be
regarded as committed to the access and egress of vehicles and not available for storage or other uses of the lessee. I note that in the evidence of the valuer called by Como, Mr Bracewell, the rate adopted for the market rental for the ground floor in his first report took into account the use of storage and machinery space used in the basement and, therefore, it was unnecessary to apply a separate rental to that part of the basement area. In a subsequent report Mr Bracewell suggested that additional rental could be ascribed to the space provided for storage and machinery but I reject that approach in the absence of appropriate adjustment to the rent adopted for the ground floor which he acknowledged was a rate that took into account the use of the additional basement space.
I propose to follow the course followed by Mr Bracewell in his original report, and by other valuers, and assign no separate component of rental for the basement space other than for car-parking.
In the circumstances described in these reasons the property offered for sale on 18 November 1993 was a property subject to a lease where the lessee was in substantial default and the lease was liable to forfeiture. Having regard to the evidence which suggests that as at 18 November 1993 forfeiture was inevitable the appropriate value for the property was as a property offered to a purchaser with vacant possession. As
noted earlier Mr Quinn-Schofield stated that he would not have put the property up for auction as a leased property if he had known the state of the lessee's default. A valuation of the property by applying the annual rental payable under the forfeitable lease as the market rent and capitalizing that sum could not be relied upon. A proper valuation must examine the indicators relevant to the market for the property at the time of sale recognizing that the vendor and purchaser would be willing, but not over enthusiastic, parties to an agreement for sale and purchase.
In respect of the appropriate rate per square metre payable for the ground and the first floor levels, there was accord between two of the valuers that the rate to be applied was $160 per square metre, a third valuer set $150 per square metre as an assessment of an attainable rental. Having regard to the inclusion of the use of storage and machinery space on the basement in setting the appropriate rate for the ground floor, I am satisfied that $160 per square metre is the appropriate rental to be applied at the date of sale. With regard to the rental payable for the first floor space three separate rates were chosen by the three valuers, namely, $65, $75 and $85 per square metre. Having regard to the fact that that the lettable area in this case includes space that would not be included be in areas let to tenants of divided space on floors of other buildings let for like purposes, I am satisfied that $75 per square metre is an appropriate rate to
adopt. With regard to the basement $26,400 per annum appears to be an appropriate rental for the car-parking spaces provided therein at $100 per month for 22 bays. The components of the annual rental may be set out as follows:
Basement$ 26,400
Ground Floor (758m² x $160) $121,280
First Floor(838m² x $ 75) $ 62,850
$210,530
As to the selection of the appropriate capitalization rate the evidence relied upon by the valuers in respect of the sale of comparable properties reflected yields accepted by purchasers ranging from 9.5% to 11%.
To determine the rate of yield a purchaser would seek for this property it is necessary to have regard to the fact that the property was to be offered with vacant possession with the risk to a purchaser that that entailed, and that the property offered was purpose-built for a restaurant and function centre the alteration and use of which would occasion further capital outlay. It may be accepted also that the purchaser of a property to be let for use as a restaurant would be alert to the need to provide for contingencies involved in letting to that market. I therefore
consider that an appropriate capitalization rate is 11%. The selection of that rate necessarily makes allowance for the risks described and for delay in letting the premises, the need to provide incentives and the prospect of the failure of any restaurant business conducted by a lessee. Therefore, it is not appropriate to make a deduction for such contingencies to arrive at the appropriate valuation. However, in the instant case the sum produced by capitalization of the annual rental would need to be reduced by a sum sufficient to provide for a purchaser's need to purchase or replace the fittings, plant and fixtures sold by Como to Jentine, to put the premises in a condition to attract the rental set out above. To resolve a dispute with the liquidator as a matter of urgency Yenald paid to the liquidator a sum of $175,000 for those items but the reduction a purchaser would make in the amount offered to purchase the property may be expected to be substantially less than that sum bearing in mind that the value ascribed to those items for sale "ex situ" at auction and for stamp duty purposes "in situ" was approximately $15,000 and $25,000 respectively. I consider that an uncommitted purchaser could expect to obtain appropriate plant fixtures and fittings for $100,000.
An annual rental of $210,530 capitalized at 11% provides, in round terms, $1,914,000. If $100,000 is allowed for the cost of fixtures and fittings to put the premises in a state to attain the market rent on which the value is
calculated, the valuation becomes $1,814,000. The difference between that sum and the purchase price is $336,000. However, the price paid by Yenald on settlement was reduced by $50,000 by the rental "subsidy" paid by Como and, therefore, amount of loss sustained by Yenald was $286,000.
With regard to Yenald's claims against Mr and Mrs Bevacqua no evidence was adduced to sustain a case against Mrs Bevacqua. Mr Bevacqua had knowledge of the default of Jentine and as the principal controller of Como took no steps to advise Richard Ellis of that fact at the time Richard Ellis was instructed by Como to place the property on the market for sale. Mr Bevacqua, therefore, was aware of the relevant facts that made Como's conduct a contravention of s.52 of the Act. (See: Wheeler Grace & Pierucci Pty. Ltd. v. Wright [1989] A.T.P.R. 40-940.) Mr Bevacqua's liability does not depend on whether he gave instructions to Richard Ellis to make a particular representation. The question is, as the person by whom Como's conduct was directed, what knowledge he held of relevant facts that would disclose that conduct by Como of the type described would be, or be likely to be, misleading. Those facts were the instructions given to Richard Ellis by Como as to the standing of the lease and Jentine's default thereunder.
As stated earlier, both Richard Ellis and Como pursued cross-claims against each other. Richard Ellis
alleged misleading conduct on the part of Como in that Como instructed Richard Ellis that Jentine was a strong tenant and failed to advise Richard Ellis of the extent of the tenant's default thereby rendering Richard Ellis liable to Yenald for any representations based on those instructions.
I accept the evidence of Mr Quinn-Schofield that he would not have put the property up for auction if he had been aware of the true state of affairs known to Mr Bevacqua. The brochures prepared by Richard Ellis and the oral statement made by Mr Quinn-Schofield reflected the instructions provided by Como in so far as representations were made about the strength of the tenant and the security of the tenant's covenant under the lease.
It follows that Richard Ellis is entitled to recover any loss sustained by reason of Como's misleading conduct in that regard. In this case that loss is the sum Richard Ellis was required to pay because of the liability incurred to Yenald based upon Richard Ellis' conduct that relied upon Como's statements as to the strength of the tenant.
Richard Ellis' cross-claim against Mr Bevacqua as a person involved in the conduct of Como must succeed for the same reasons set out above in respect of the similar claim by Yenald against Mr Bevacqua.
With regard to Como's cross-claim against Richard Ellis it was alleged that Richard Ellis was not authorized to make the representations that it did and was in breach of a duty of care to Como in doing so. I am satisfied that Richard Ellis was so authorized in so far as the representations which brought liability to Como were squarely based upon the instructions received from Como as to a property leased for a term to a strong tenant. It follows in those circumstances that no duty of care was owed by Richard Ellis to Como to take any other steps to keep Como safe from harm from the consequences of representations based on those instructions. The cross-claim by Como against Richard Ellis must fail.
There will be an order that Yenald is entitled to judgment against Como, Mr Bevacqua and Richard Ellis in the sum of $286,000. The claim against Mrs Bevacqua will be dismissed. On the cross-claim of Richard Ellis against Como and Mrs Bevacqua there will be an order that Como and Mr Bevacqua indemnify Richard Ellis in respect of any sum paid by it to discharge the judgment obtained by Yenald against it. The cross-claim by Como against Richard Ellis will be dismissed.
With regard to costs I will hear submissions from the parties as to the appropriate orders.
I certify that the preceding thirty-two (32) pages are a true copy of the Reasons for Judgment of his Honour Justice Lee.
Associate:
Date:
APPEARANCES
Counsel for the Applicant: M.J. McCusker Q.C.
L.C. Evans
Solicitors for the Applicant: Clayton Utz
Counsel for the First and Third Respondents: R.I. Viner Q.C.
E.W. Nielsen
Solicitors for the First and Third Respondents: Nielsen & Co.
Counsel for the Second Respondent: P.C. Doherty
Solicitors for the Second Respondent: Minter Ellison Northmore Hale
Dates of Hearing : 15-19 May 1995, 11-15 September 1995
Date of Judgment : 25 March 1996
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