Painter v Horrocks HC Auckland CP466SD/00

[2001] NZHC 1021

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP466SD/00

BETWEEN MICHAEL HENRY PAINTER and NICOLA LOUISE PAINTER
Plaintiffs

AND HOLMDEN HORROCKS
Defendant

Hearing: 25, 26 September, 10 and 11 October 2001

Counsel: P Dale for the Plaintiffs
G C Everard and J Stafford for the Defendant

Judgment: 26 October 2001

RESERVED JUDGMENT OF PATERSON J

Solicitors:
Grove Darlow & Partners, DX CP 24049, Auckland
Phillips Fox, DX CP 24027, Auckland

Introduction

[1] In February 1997, Mr and Mrs Painter purchased a property at Patteson Avenue, Mission Bay (the Patteson property). Mr Somervell, a partner of Holmden Horrocks acted as their solicitor on the purchase. They allege he was negligent in advising them on aspects of the purchase and seek to recover damages from Holmden Horrocks caused by his negligence.

Background Facts

[2] The unit at Patteson Avenue was one of three erected on an 809 square metre section. Sterling Nominees Ltd (Sterling), the owner of the fee simple estate in the section, granted a head lease over the property. Mr and Mrs Painter acquired the Patteson property by taking transfers of both a one third interest in the lessee’s estate in the head lease and the sub-lease of the particular unit acquired by them. This was a cross-lease situation where the owners of each of the units had an undivided interest in a leasehold estate, rather than the fee simple estate, and a sub-lease for a fixed term of their particular unit. In 1997, the Painters’ sub-lease was due to expire on 30 January 1999.

[3] The head lease contained unusual and onerous terms. At the time Mr and Mrs Painter acquired the Patteson property it was for a term of 21 years from 1 February 1978 and contained a perpetual right of renewal. It provided for rent reviews every three years with the reviewed rent being the greater of a CPI adjustment or 10% of the value of the land without improvements.

[4] The provision which is at the heart of the issues in this case is the manner in which the rent was to be fixed at the time the lease was renewed on 1 February 1999. It was to be the greater of an amount calculated on a CPI adjustment or “an amount equal to ten percentum of the value of the said land and buildings (if any) existing at the creation of the original lease . . . ”. (emphasis added). The vital difference between this formula and the one applied during the original 21 year term was that from 1 February 1999 the 10% was based on “the value of the said land and buildings” whereas during the previous 21 years it had been based on “value of the said land without improvements.”

[5] A further provision of the head lease provided that if the lease was not renewed or was determined by forfeiture, re-entry or otherwise, all buildings and improvements on the said land would absolutely revert to the landlord free from any payment or compensation whatsoever. Another clause which had practical application in this case provided that “where two or more Lessees are parties hereto, the covenants and agreements on their part herein expressed or implied shall bind them jointly and each of them severally . . . ”. Thus, Mr and Mrs Painter were liable for the complete rental payable under the sub-lease, although they had rights of contribution at law against the owners of the other two units for two-thirds of the total head lease rental.

[6] The sub-leases provided that upon the sub-lessors procuring periodic renewals of the head lease “they will immediately . . . grant to the lessee a new lease in substitution for this present lease . . . ”. In reality, the owners of the three units, in order to retain their units, were required as lessees under the head lease to renew the head lease. A failure to do so would mean all improvements on the land reverted to Sterling without compensation. Renewal would expose them to having their rent fixed under a more onerous formula.

[7] Mr Painter had on 30 September 1996 signed an unconditional agreement to purchase a 1.8598 hectare property at Greenhithe Road (the Greenhithe property) for a sum of $550,000 with settlement on 28 February 1997. He paid a deposit of $10,000 from borrowed money. In September 1996, Mr and Mrs Painter lived at 35 Waipuia Place, Greenhithe (the Waipuia property) but intended to sell it to help fund the purchase of the Greenhithe property. Mrs Painter was the sole owner of the Waipuia property, while Mr Painter had signed to buy the Greenhithe property in his own name.

[8] At the beginning of February 1997, Mr and Mrs Painter were required to find by the end of that month $540,000 to complete the purchase of the Greenhithe property. They had unsuccessfully attempted to sell the Waipuia property and had not made arrangements to raise finance to complete the purchase of the Greenhithe property.

[9] In early February 1997, Mr and Mrs Painter replied to an advertisement in the New Zealand Herald. This resulted in them purchasing the Patteson property in an exchange deal with Ms Cameron, the then owner of the Patteson property, acquiring the Waipuia property.

[10] Mr Painter, who had considerable previous experience in property transactions prepared, on the standard Real Estate Institute form, agreements for sale and purchase of both properties. Mr Painter took both these agreements, signed by him, but not Ms Cameron, to Mr Somervell. The draft agreement for the purchase of the Patteson property included the following special conditions:

“15.2 Subject to solicitors approval by both parties by 4 pm Wednesday 12.02.97.

15.3 Subject to solicitors approval of ground lease by 4 pm Wednesday 12.02.97.”

Settlement and possession was to take place on 28 February 1997.

[11] Mr Somervell prepared alternative agreements and on 14 February 1997, forwarded them to Mr and Mrs Painter for execution. The price for the Patteson property was $205,000 with possession on 21 March 1997. This agreement which became the final signed agreement, was subject to the consent of Sterling but was not subject to solicitor’s approval of the terms of the lease.

[12] The exchange deal between Mr and Mrs Painter and Ms Cameron was settled on 26 March 1997 with Ms Cameron acquiring the Waipuia property for $335,000 and Mr and Mrs Painter acquiring the Patteson property for $205,000. Funds obtained by Mr and Mrs Painter from the settlement were used to partly finance the purchase of the Greenhithe property which was settled on the same day. A loan secured over the Waipuia property was partly repaid and partly utilised to finance the purchase of the Patteson property.

[13] The rent under the head lease in March 1997 was $16,362. In accordance with the terms of the sub-lease, Mr and Mrs Painter covenanted to pay the ground rent under the head lease and had a potential liability for this full amount. In practice, while all sub-lessees remained solvent, their obligation was to pay one-third of the rent payable, namely, $5454.

[14] When the head lease was renewed on 1 February 1999, the rent was fixed at 10% of the value of the land and buildings. This came as a surprise to Mr and Mrs Painter and the other sub-lessees. Pursuant to their rights under the head lease, they arbitrated the rental and it was fixed at $47,000 inclusive of GST, being 10% of the value of the land and improvements of $470,000 (apportioned as to $300,000 to land and $170,000 to improvements). The sub-lessees challenged the assessment through this Court although Mr and Mrs Painter withdrew from the proceedings. When the challenge was unsuccessful Mr and Mrs Painter became jointly and severally liable from 1 February 1999 for the rent of $47,000 under the head lease. A one-third share of this was $15,666.66.

[15] The judgment of Potter J upholding the rental of $47,000 issued on 3 July 2000. On 13 July 2001, the District Court in a summary judgment order gave possession of the three units to Sterling. Sterling issued bankruptcy proceedings against all sub-lessees. These proceedings were stayed against all sub-lessees when Mr and Mrs Painter gave security for the total amount owing, which now exceeds $180,000.

Issues

[16] Holmden Horrocks do not deny that Mr Somervell owed a duty of care to Mr and Mrs Painter. Their position is that, in the circumstances of this case, the advice which it is alleged Mr Somervell failed to give in respect of the lease, did not have to be given under the limited scope of the retainer. The issues for resolution are:

(a) the scope of the retainer;

(b) whether there was a breach of duty of care having regard to the scope;

(c) if there was a breach, did that breach cause loss?

(d) what damages, if any, can Mr and Mrs Painter recover?

Factual findings

[17] There was a conflict of evidence between Mr and Mrs Painter, on the one hand, and Mr Somervell on the other. The determination of the issues referred to in paragraph 16 requires a resolution of these conflicts. The conflicts relate both to the scope of the retainer and the advice given by Mr Somervell to Mr Painter.

[18] As a result of what has happened, Mr and Mrs Painter have effectively lost what they paid for the Patteson property and have a substantial indebtedness to Sterling. The disastrous financial consequences which have resulted and the probability of them having gone over the evidence many times may account for inconsistencies in their evidence. They may have convinced themselves that the evidence which they gave in Court was truthful. In some respects, I am satisfied that it was not. While the factors mentioned may have been the reason for this untruthful evidence, Mr Painter’s tendency to answer questions with submissions lead him into accepting, wrongly at times, that his submissions were facts. Mrs Painter supported her husband in this evidence. She was present in Court when he gave it. Events which had a factual basis were expanded upon to assist Mr and Mrs Painter and some of the events described probably happened, but not in the sequence suggested. In making factual findings, I have placed little weight on some of the evidence given by both Mr and Mrs Painter.

[19] When Mr and Mrs Painter and Ms Cameron met to discuss the exchange deal, the question of the lease was obviously discussed. Ms Cameron, who candidly acknowledged that she was not familiar with the terms of the lease, apart from knowing that it was not in the same form as many public body leases, replied to questions from Mr Painter by saying he should take his own advice on the lease. Mr Painter, who drew the original draft agreement, made the agreement “subject to solicitors approval of ground lease.” When Mr Painter took this draft agreement into Mr Somervell, he provided him with a copy of the lease. Mr Somervell must have known that the proposed purchase was subject to him approving the lease. The final form of the agreement did not include a provision requiring approval of the lease because by that time, the question of approval of the lease had apparently been resolved.

[20] Mr Somervell spent time perusing the lease. A timesheet record indicates that he spent 30 minutes on this task on 12 February 1997. It is possible that some of this time was spent redrafting the agreements for sale and purchase. He did not, in writing or orally, advise Mr Painter, who in this respect can be seen as the agent of Mrs Painter as well, on the onerous provisions of the lease. Mr Somervell’s evidence was that he told Mr Painter that Mr Friedlander, who controlled Sterling, was a tough but fair person. He thought he also told Mr Painter that Mr Friedlander’s leases were tough. On the evidence, I cannot find that Mr Somervell told Mr Painter much more about the terms of the lease. Mr Somervell did not record what he told Mr Painter. In my view, it is unlikely that there was any discussion at that time on the formula for fixing the rent on a renewal of lease. Discussions on that topic, upon which both Mr and Mrs Painter gave evidence, if they occurred, were subsequent to the problem arising with Sterling. Mr Somervell did not advise Mr Painter that the terms of the lease might make it difficult to resell the property.

[21] Mr Painter did tell Mr Somervell that the intention was to resell the Patteson property as soon as possible. This was confirmed by both Mr Somervell and Mr Painter. The equity in the property would be required in due course to meet the costs of subdividing the Greenhithe property.

[22] Despite protestations to the contrary by both Mr and Mrs Painter, they were under quite severe financial pressure at the time they signed the exchange agreements with Ms Cameron. The deposit of $10,000 on the Greenhithe property had been borrowed and they were required to find a further $540,000 within a month. The Waipuia property was subject to a first mortgage and it would have been difficult to have borrowed a great deal more on the security of that property. They could obviously not obtain sufficient finance on the security of the Greenhithe property alone or on the combined security of both properties. Attempts made prior to the beginning of February 1997 to acquire finance from institutions had been unsuccessful. One of the reasons for this was that Mr and Mrs Painter were seen as bad credit risks because the Westpac Banking Corporation had previously taken mortgagee sale proceedings against them. The sale of the Waipuia property was an important, if not essential step, in the acquisition of the Greenhithe property.

Scope of retainer

[23] Holmden Horrocks’ position was that the retainer in this case was limited and Mr Somervell was not required to give advice on the details of the lease, including the effect of the renewal provision. It was submitted that Mr Painter was not concerned with the detail of the head lease because he intended to resell the Patteson property immediately. The exchange deal with Ms Cameron was an essential element in releasing their equity in the Waipuia property to enable them to settle the purchase of the Greenhithe property. Mr Painter believed he would make a profit of $500,000 on the subdivision and disposal of the Greenhithe property, and his need to release cash from the sale of the Waipuia property was such that he was determined to complete the exchange deal regardless of the terms of the lease.

[24] Mr Somervell’s evidence was that Mr Painter was not concerned with the details of the Patteson Avenue lease because of his intention to resell the property immediately. Because of this intention, Mr Somervell did not accept that, nevertheless, he should have told Mr Painter the basis on which the rent would be set in two years’ time. Further, he stated that Mr Painter did tell him there was no need to go into the details of the lease. On my assessment of the evidence, Mr Painter did not in February 1997 request Mr Somervell to tell him how the rent would be set in two years’ time, nor did Mr Somervell explain this to him.

[25] I do not accept that the scope of the retainer was limited as Mr Everard contended. That Mr and Mrs Painter wanted advice on the lease is evidenced by the solicitor’s approval clause Mr Painter included in the draft agreement and supported by Ms Cameron’s evidence. Mr Somervell perused the lease. He advised Mr Painter that it was a tough lease but did not advise of the particular details. Mr Painter may not have wanted a detailed assessment of all the provisions of the lease but he did want some advice on the lease.

[26] The evidence satisfies me that the retainer was not limited as contended. I think it likely that Mr Somervell realised the settlement of the purchase of the Greenhithe property might be in jeopardy if the exchange deal had not proceeded. He also knew of the intention to resell the Patteson property almost immediately. As such, he may have formed the impression that the terms of the lease were not too important, but his impression of the circumstances did not, in my view, limit the scope of the retainer. Mr Painter may not have required a detailed review of all the terms of the lease, but on my view of the facts, he wanted to be advised of the essential features of the lease. There was an obligation on Mr Somervell to advise Mr and Mrs Painter of any unusual and onerous terms in the lease. This was particularly so if those terms were likely to impede a quick sale of the property. The stated intention to sell quickly increased rather than decreased the obligation to advise on provisions which might adversely affect this intention.

[27] It is not necessary to refer to the authorities relied upon by Mr Everard to support the submission that there was a limited retainer. I accept that a Court should not impose on a solicitor duties beyond the scope of what the solicitor is actually requested to do. A request to advise on the terms of the lease is not a request to advise on the commercial advisability of the contract. However, it is a request to advise on the main features of the lease so that the client will be aware of the relevant provisions as they apply to his or her ownership of the property. Unusual or onerous terms as well as the effect of them should be explained. Mr Somervell was given the lease and perused it. He knew Mr Painter wanted him to advise on it. The retainer required Mr Somervell to approve the lease. In doing so, he was required, in my view, to consider the terms of the lease against the stated intent of Mr and Mrs Painter to sell the property quickly. Just as Mr and Mrs Painter required some advice on the lease, any prudent purchaser of the property would require advice on the terms of the lease. I do not accept that in the circumstances of this case Mr Somervell had no obligation to advise on the essential terms of the lease.

Breach of Duty

[28] Evidence on behalf of Mr and Mrs Painter was given by Mr Haynes, an experienced legal practitioner. In his opinion, the rent review provisions of the head lease were most unusual for ground leases in Auckland. It was Mr Haynes’ position that, in the circumstances, a competent practitioner would draw the prospective purchaser’s attention to the relevant provisions of the rent review clause, as well as the changed formula for review which applied on the renewal of the lease. He or she would explain that the provisions were unusual and would refer to the consequences which could flow from provisions of this kind. Mr Haynes was also of the view that a competent practitioner should go further and advise the client against acquiring a property held on a tenure of this kind, at least unless the price were substantially discounted to reflect the risk involved in such a lease. This observation recognises that the terms of the lease would lead a prudent purchaser to offer less than the price which would be offered if the lease were on more usual terms.

[29] In an affidavit sworn in an earlier summary judgment application, Mr Somervell said “[i]f I had been instructed to give advice to the plaintiffs about the terms of the lease, and in particular clause 13, I would not have foreseen the impact of that clause on the rent review and the flow-on effect on the capital value of the property.” In this hearing, Mr Somervell acknowledged he did not say anything about the import of clause 13 (the clause which contained the onerous rent review provision on renewal). The reason he gave for this was that Mr and Mrs Painter proposed to sell immediately and therefore, there was no need to advise on this provision.

[30] In my view, a solicitor exercising the reasonable care and skill required of him or her in such circumstances, had an obligation to advise Mr and Mrs Painter of the provisions of clause 13 and also the difference in the manner in which the rent would be reviewed on the lease renewal from that which had applied to previous reviews. The addition of a rent component based on 10% of the improvements would obviously lead to a considerable increase in rental in those cases where the improvements were of considerable value. Mr Somervell did not know the value of improvements on the Patteson property. He would have known that there was a dwelling on the property and that there were probably dwellings on the other two “units.” The rent adjustment in approximately two years could have been considerable. Mr and Mrs Painter proposed to immediately resell the property. Mr Somervell said he could not have foreseen the impact of the rent review provision. In my view, he should have been aware and advised Mr and Mrs Painter that the rent review in 1999 would be on a different basis from the previous reviews and would include a factor which had the potential to substantially increase the ground rental. I accept that he could not assess the actual flow-on effect on the capital value of the property but he should have advised Mr and Mrs Painter that the potential for a considerable increase in ground rental might substantially reduce the market price of the property when they came to sell. This was particularly so as he had been advised of this intention. It would have then been for Mr and Mrs Painter to decide whether they wanted to investigate the matter further. They were not given this opportunity.

[31] In the circumstances, I am of the view that there was a breach of duty in this case. Mr Somervell had an obligation to advise Mr and Mrs Painter of the provisions of the unusual rent review and the potential it had to affect the purchase price of the property when they came to sell. He did not do this.

Causation

[32] Causation is the most difficult issue to determine in this case. Counsel were agreed upon the legal principles which apply. Mr and Mrs Painter have the onus on the balance of probabilities to establish that if they had been properly advised they would not have entered into the swap transaction - see Sykes & ors v Midland Bank Executors & Trustees Co. Ltd [1971] 1 QB 113 and Clark Boyce v Mouat [1993] 3 NZLR 641 (PC).

[33] Mr Everard, on behalf of Holmden Horrocks, submitted that Mr and Mrs Painter had not discharged the onus on them and that even if they had been appropriately advised, they would have still completed the purchase of the Patteson property. In support of this submission, it was said the evidence established that Mr and Mrs Painter were enthusiastic and confident the Greenhithe subdivision would be a success and a profit of up to $500,000 would be made from the subdivision. Further, Mr Painter accepted the swap transaction was necessary to fund the settlement of the Greenhithe property purchase and the original intention of his wife and himself was to sell the Patteson Avenue property immediately to provide equity for the subdivision. In these circumstances it was submitted that proper advice would not have changed the intention to purchase, particularly as Mr Painter was a person who took risks. The evidence did establish that Mr Painter had not always been prudent in his property dealings.

[34] Mr Dale, on behalf of Mr and Mrs Painter, noted that both of them had said they would not have proceeded if they had known the correct position; Mr and Mrs Painter had not contractually committed themselves to the purchase before consulting Mr Somervell and asking him to look at the lease; and there were other alternatives available to Mr and Mrs Painter in respect of the Greenhithe purchase settlement. Those alternatives were neither considered nor investigated at the time because the swap transaction with Ms Cameron enabled Mr Painter to complete the Greenhithe purchase (Mr Painter alone completed the purchase although the Waipuia property which was involved in the swap transaction, was owned by Mrs Painter).

[35] Mr and Mrs Painter both made light of the predicament they were in at the beginning of February. The suggestion that they could probably have walked away from the Greenhithe purchase with the loss of the deposit of $10,000 only was, in my view, unrealistic and not supported by evidence. Mr Painter potentially stood to lose more than the deposit if he defaulted on the purchase. However, as he was not an owner of the Waipuia property, the equity in that property was not at risk if Mr Painter defaulted under the Greenhithe property agreement. They would have had difficulties in arranging finance and to accept the alternative offer which they say Mrs Painter had for the Waipuia property would have meant that they had to fund a further $50,000. There was a considerable incentive for them to proceed with the swap deal.

[36] Although in some respects I found the evidence of Mr and Mrs Painter unsatisfactory, I have come to the view that they have, to the necessary standard of proof, established that they would not have entered into the swap deal if they had been properly advised. In this respect, it is relevant to consider the advice which, in my view, Mr Somervell should have given to Mr and Mrs Painter. There are three aspects in particular upon which advise should have been given. First, Mr and Mrs Painter should have been advised that the rent on a renewal could be fixed as a percentage of the value of the land and improvements rather than a percentage of the land as had previously been the case. Secondly, the formula for fixing the rent based on the higher of a CPI adjustment or 10% of the land and building value was likely to lead to a higher rental than usually charged on perpetual leases from public leasing bodies in Auckland City. Thirdly, Mr and Mrs Painter should have been advised that they were jointly and severally liable for payment of the rent under the head lease.

[37] Further, they should have been advised, in my view, that the cumulative effect of these provisions might seriously impinge on the market price of the property and they would be wise to take advice on the appropriate market price. I do not find, as Mr Haynes suggested, that there was an obligation to advise Mr and Mrs Painter not to proceed with the purchase. The obligation in this respect was to advise Mr and Mrs Painter that the provisions of the lease, particularly as the renewal was less than two years away, may lead to difficulties in selling the property at the price Mr and Mrs Painter had agreed to pay. They should have been strongly advised to obtain valuation advice on the market value of the property in view of the unusual lease terms.

[38] Two valuers gave evidence in this matter. The valuer called on behalf of Mr and Mrs Painter stated that in February 1997, the appropriate market valuation of the Patteson property, according to a traditional lessee’s interest calculation approach, was approximately $15,500. On a sales comparison approach, the valuation for an unsophisticated purchaser was approximately $100,000. The valuer called by Holmden Horrocks valued the lessee’s interest at $17,000. On a sales comparison approach he valued the property at $85,000. It follows that if Mr and Mrs Painter had been advised to take valuation advice, and they would have been foolish not to have done so in view of the terms of the lease, they would have found out they were paying for the Patteson property at least $100,000 more than it was worth. As part of the financing of the Greenhithe property, Mr and Mrs Painter needed to persuade Countrywide Bank to transfer a mortgage loan from the Waipuia property to the Patteson property. The amount eventually transferred was $158,808 with the balance of $86,959 being repaid. It would have been obvious to Mr and Mrs Painter that if Countrywide Bank had undertaken an appropriate valuation of the Patteson property, they would not have been able to lend anything like the amount which Mr and Mrs Painter required to be lent to enable them to purchase the Greenhithe property.

[39] It follows, in my view, that if Mr and Mrs Painter had been advised of the implications of the onerous and unusual provisions in the head lease, they would have been very imprudent not to have sought valuation advice. This valuation advice would have made it clear to them that they were paying at least $100,000 too much for the Patteson property and they might have to suffer a loss of this amount at least if they proceeded with the swap deal. Further, the figures would have indicated to them that they would have had extreme difficulty in arranging a replacement mortgage. The fact that Countrywide Bank appears to have lent an amount well in excess of the value of the property without obtaining a valuation is looking at the matter in hindsight. Thus, notwithstanding the eagerness of Mr and Mrs Painter to proceed with the Greenhithe property purchase, it is my view they would not have done so if appropriately advised of the terms of the lease. The advice would have triggered a chain of events which would have made it impractical, if not impossible, to complete the purchase. Causation is established to my satisfaction.

Damages

[40] Mr and Mrs Painter sue both in contract and in tort. Both counsel accepted that the result would be the same whether damages be assessed for a breach of a contractual duty of care or for a breach of a duty imposed by the general law. In accordance with McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39, the damages to be recovered by Mr and Mrs Painter are those which are reasonably to be contemplated or foreseen from the breach of duty. The issue is whether the particular damage claimed is sufficiently linked to the breach of the particular duty to merit recovery in the circumstances. The test is whether it was not unlikely that the loss would arise from the breach and reasonable foresight or contemplation are important considerations. As noted in McElroy Milne

“[f]actors including directness ‘naturalness’ as distinct from freak combinations of foreseeable circumstances, even perhaps the magnitude of the claim and the degree of the defendant’s culpability, are not necessarily to be ignored in seeking to establish a just balance between the parties.”

[41 ] Mr and Mrs Painter have claimed the following:

(a) Loss of equity in the Patteson property $43,900.00

(b) Liability to mortgagee for purchase of property as at 10 October 2001 $150,764.20

(c) Loss of principal $7,457.25

(d) Net loss for retaining Patteson property after taking into account expenses associated with purchase of property, payment of interest and deduction of rentals received $55,017.47

(e) Rates $1,207.64

(f) Joint and several liability to Sterling as at 8.10.01 $182,880.09

(g) Legal costs associated with legal challenge to Sterling $6,602.90

(h) Accountant’s costs $2,092.52

(i) Solicitors fees in respect of bankruptcy proceedings $ 10,000.00

$459,922.07

In addition there is a claim for ongoing interest to the mortgagee in the sum of $31.80 per day from 10 October 2001 and a claim for general damages arising from distress and worry totalling $50,000.

[42] Damages are a factual issue. Normally, but not invariably, they are assessed at the date of breach of contract. They must be reasonably foreseeable. In this case, Mr Painter’s evidence was that he “told Mr Somervell that we were going to sell the property immediately.” This advice, which was also confirmed by Mr Somervell in his evidence, was a factor in my findings of negligence against Mr Somervell. It should also be a factor, in my view, in considering what was reasonably foreseeable in the circumstances of this case. The damages which were reasonably foreseeable in February 1997 were the loss which Mr and Mrs Painter would suffer if they had endeavoured to sell the property in March 1997 or shortly thereafter.

[43] Mr and Mrs Painter have not satisfied me that they endeavoured to sell the Patteson property shortly after they purchased it. While Mrs Painter stated the property had been put on the market straight away, she also said this matter was handled largely by her husband. His evidence was unconvincing and unsatisfactory. He did say he put the property on the market after he ensured the tenants were staying long term, but did not elaborate further on this point. Then, he said, they initially marketed the property themselves before generally listing it with local agents. He could not recall the listing price. In his evidence in chief, Mr Painter expressed disappointment at losing the Patteson property “and the potential that we thought it had for providing an on-going income and possible capital gain.” During cross-examination, Mr Painter said that the property would have been worth keeping “if it had been self sufficient and able to obtain capital gains.” It would have been at least 18 months from the date of purchase before they found out about the lease problem and hence the inability to obtain capital gain. Taking into account the interest which was being paid on a loan, effectively borrowed to finance the Greenhithe property, the property was not self sufficient but without it, it was. During their second year of ownership, Mr and Mrs Painter borrowed further funds to improve the Patteson property. No evidence was called from an agent as to the steps taken to sell the property. On my assessment of the evidence it is more likely than not that once the purchase had been completed, and it became apparent that moneys would not be required for the Greenhithe subdivision for a further year or so, Mr and Mrs Painter did not place the property on the market. They determined to hold it in the meantime in the hope they would get a capital gain from it.

[44] In some cases the possibility of delaying the sale of a property would be reasonably foreseeable. However, for the reasons given earlier, such a possibility was not reasonably foreseeable in this case. The circumstances surrounding the Greenhithe property and its subdivision suggested the need for an early sale of the Patteson property. Mr Painter confirmed this was the intention.

[45] The valuation evidence suggests that there were unsophisticated purchasers in the market in March 1997. The valuer who gave evidence on behalf of Mr and Mrs Painter noted that the unit purchased by them had been sold in 1998 and 1992, Unit 2 had been sold in 1988 and 1995 while Unit 3 had been sold in 1987 and 1995. The latter sale was at a price of $100,000. That valuer considered that an unsophisticated purchaser would purchase the property for $100,000. The valuer who was called by Holmden Horrocks suggested that the appropriate price based on comparative sales evidence was $85,000. It is likely that there would have been real estate agent’s fees on the sale and certainly, solicitors’ costs. It is reasonable therefore to assume that Mr and Mrs Painter could have sold the property within a reasonable period of buying it for a price of $85,000 net to them. If they had actively marketed the property, they then would have found out the true value of it and obtained an appreciation of their financial problems. They could have moved to address them then.

[46] On the facts of this case, I am therefore of the view that loss arising from a delayed sale was not reasonably foreseeable. It was not reasonably foreseeable that Mr and Mrs Painter would not endeavour to sell the property shortly after they purchased it. In the circumstances it is my view that the foreseeable loss was the difference between the purchase price of $205,000 and the net price of $85,000 which would have been available to Mr and Mrs Painter. That loss was $120,000.

[47] It was foreseeable that the sale proceeds of the Patteson property, if it had sold for a price close to what was being paid for it, would be available to repay indebtedness. Mr and Mrs Painter’s equity in it was to be used to develop the Greenhithe property. However, a loan of $158,808 would have needed to be repaid. A further foreseeable loss was interest on borrowings. This interest should be on the sum of $120,000. The only evidence of interest rates was that the residue advance over the Patteson property (which is now secured on another property) is currently bearing interest at 8.5% per annum, and the interest rates under the Greenhithe property mortgages are 12% and 15% per annum respectively. In the circumstances, an interest rate of 12% per annum is appropriate. The remaining question is the period of interest in view of my finding that Mr and Mrs Painter did not endeavour to sell the Patteson property as early as planned. A reasonable period in my view is four years concluding on the date of judgment. This is the best assessment I can make on the evidence. Interest at 12% on $120,000 for four years is $56,000. This loss was, in my view, reasonably foreseeable.

[48] It is therefore my view that damages of $176,000 (being the likely loss on sale of $120,000 and interest of $56,000) were reasonably foreseeable in March 1997. These damages, rather than the damages claimed in subparagraphs 41(a) to (e) above, are the appropriate damages in respect of the Patteson property.

[49] On my view of the facts, a solicitor advising Mr and Mrs Painter in February 1997 would not have been able to reasonably foresee that there would be a continuing liability under the head lease from 1 February 1999. Mr and Mrs Painter’s intention to sell promptly would mean they were no longer lessees under the head lease at the date by which notice of renewal of the head lease was required to be given (ie 31 July 1998). The reasons for this view are contained in paragraph 43 above. In the circumstances I am of the view that losses which resulted from the renewal of the lease, or the retention of the property beyond a month or two after it was purchased, were not reasonably foreseeable in February 1997. For this reason, the damages referred to in paragraph 41(f) to (i) are not losses which were reasonably to be contemplated or foreseen from Mr Somervell’s breach.

[50] If I had determined that the losses arising from the Sterling claim were reasonably foreseeable, I would have considerably discounted them. The other sub-lessees have a legal liability for two-thirds of that amount. Mr and Mrs Painter have a right of contribution against them. One of them, Mr Johns, gave evidence and said he had no financial ability to pay. No evidence of the financial means of the other sub-lessees was given. Sterling, not surprisingly, looked to Mr and Mrs Painter for payment because they have a property over which security has been taken. The evidence did not satisfy me that Mr and Mrs Painter had taken any reasonable steps to seek recovery from the other sub-lessees. They appeared content to endeavour to recover from Holmden Horrocks the complete rental due to Sterling. Further, although Mr and Mrs Painter’s obligation to Sterling was a joint and several obligation, it was not, in my view, reasonably foreseeable in March 1997 that Mr and Mrs Painter could end up effectively underwriting the rental obligations of other owners of units.

[51] The claim for general damages for distress and worry is, in the circumstances, not strong. I accept there has been distress and worry but much of this arose from the subsequent dealings with Sterling. On the findings I have made, those dealings were not reasonably foreseeable. There would have been distress and worry if the real position had been confronted within a month or two of the purchase in March 1997. In the circumstances of the case, a modest award only can be considered. While there were commercial overtones in the various property transactions entered into by Mr and Mrs Painter, this is not a case where the commercial element should completely exclude general damages of this type. In the circumstances, a reasonable award in my view is an award of $5000 to each of them.

[52] On behalf of Holmden Horrocks, Mr Everard made submissions in respect of mitigation, lack of causal connection and contributory negligence. In view of the findings which I have made, I do not believe it necessary to deal with any of these submission. In the main they applied to damage claims which I have not allowed.

[53] Mr Everard also submitted that any profit made on the Greenhithe subdivision should be offset against any damages which I might find to be owing. The evidence was that Mr and Mrs Painter made a profit of $141,000 on the Greenhithe subdivision without taking into account that they acquired a section in the subdivision which, on one valuation, is worth more than $200,000. A Court can, in appropriate circumstances, offset profit made against damages caused. However, Mustill LJ in Hussey & anor v Eels & anor [1990] 2 QB 227 at 241 stated:

“Ultimately, as with so many disputes about damages, the issue is primarily one of fact. Did the negligence which caused the damage also cause the profit - if profit there was?

. . .

It seems to me that when the plaintiffs unlocked the development value of their land they did so for their own benefit, and not as part of a continuous transaction of which the purchase of land and bungalow was the inception.”

[54] The negligence in this case did not cause a profit. Mr Painter had committed himself to purchase the Greenhithe property before the swap deal was entered into. The swap deal facilitated the purchase of the Greenhithe property but there was no causal link between the negligence and the profit which was made. It is possible that the purchase of the Greenhithe property may not have been completed if the swap deal had not been entered into. However, this is speculative and I can make no finding that this would have been the case. There was, in my view, no causal link between the negligence and the profit in the sense referred to in Hussey v Eels. It is not appropriate to reduce the damages arising from the negligence because of the profit made from the Greenhithe property.

Result

[55] Mr and Mrs Painter are awarded the sum of $174,000 for damages caused by the negligence of Holmden Horrocks. In addition, each will receive $5,000 general damages.

Costs

[56] The appropriate category for costs is 2B of the appropriate Schedules to the High Court Rules. If the parties are unable to agree costs, counsel may file memoranda. The memorandum on behalf of the party claiming costs is to be filed within 30 days of the date of this judgment and any memorandum in reply is to be filed within a further 21 days.