Tuscany Limited v Gill HC Christchurch CP56/99
[2001] NZHC 712
•7 August 2001
IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY CP56/99
BETWEEN TUSCANY LIMITED
Plaintiff
AND SUKHMOHAN SINGH GILL
First Defendant
AND PATRICK COSTELLOE
Second Defendant
AND ROSSENDALE HOLDINGS LIMITED
Third Defendant
Hearing: 14, 15, 16, 17, 18 and 28 May 2001
Counsel: N Till and D M Lester for Plaintiff
J K Guthrie and W E Andrews for First Defendant
G M Brodie for Second Defendant
A W Robinson for Third Defendant
Judgment: 7 August 2001
JUDGMENT OF CHISHOLM J
Solicitors:
Saunders & Co, Christchurch for Plaintiff (Counsel: N Till)
Anderson Lloyd, Dunedin for First Defendant
Anthony Harper, Christchurch for Second Defendant
Cunningham Taylor, Christchurch for Third Defendant
[1] This litigation arises from an unfortunate series of events. In 1996 the plaintiff, a property developer, entered into an agreement to purchase a Christchurch commercial property from the third defendant subject to existing tenancies. The plaintiff had been led to believe by the vendor that all existing tenancies were monthly tenancies except for a recently negotiated long term lease in favour of the first defendant but that a “demolition clause” in that lease entitled the lessor to terminate the lease on six months’ notice. Unfortunately the lease in favour of the first defendant (which was unsigned when the sale and purchase agreement was entered into) in fact included a proviso deferring operation of the demolition clause for six years. Shortly before the sale and purchase agreement became unconditional the third defendant’s solicitors advised the plaintiff’s solicitor (the second defendant) about the proviso, but the second defendant failed to bring this information to the attention of the plaintiff. The purchase was duly settled. Much later the plaintiff sought to invoke the demolition clause against the first defendant but he refused to vacate on the basis that operation of that clause had been deferred for six years.
[2] The plaintiff claims that by virtue of its inability to obtain vacant possession from the first defendant it was forced to radically alter its development proposals for the property with the result that its ability to fully develop the property has been irretrievably compromised. It regards the first defendant as a trespasser and seeks an order for vacant possession against him or alternatively damages in the sum of $581,891. A similar sum is claimed by way of damages against the second defendant on the grounds that he breached duties owed by him as solicitor for the plaintiff. Likewise damages in the same sum are also claimed against the third defendant as vendor on the grounds of breach of trust and/or misrepresentation. Various cross claims have been pleaded by the defendants.
CONTENTS
Background Para [3] - [12]
Pleadings Para [13] - [21]
The Evidence Para [22] - [28]
Approach To Liability Para [29]
Liability of Third Defendant Para [30] - [46]
Liability of Second Defendant Para [47] - [51]
Liability of First Defendant Para [52] - [73]
Approach to Damages Para [74] -[76]
Causation/Remoteness Para [77] - [82]
Quantum of Damages: Third Defendant Para [83] - [93]
Quantum of Damages: Second Defendant Para [94] - [108]
Contribution Between Defendants Para [109]
Outcome Para [110] - [113]
Background
[3] The L shaped property in issue comprising 2511 M2 (“the property”) is held in three separate titles, two fronting Papanui Road and the other Leinster Road. At the time of purchase there was an old villa on each Papanui Road title and a large historic building known as “Leinster House” on the Leinster Road title. The property was zoned Residential 2 under the Transitional Plan and Living 2 under the Proposed Plan. In 1995 the third defendant lodged a submission seeking a chance of zoning for the property from Living 2 to Business 1. It had owned the property for many years.
[4] In January 1996 the first defendant, an experienced restaurateur, reached agreement with the third defendant for the lease of part of Leinster House as a restaurant. The existing French restaurant occupying those premises was run down and its proprietors wished to sell. The lease was to be for an initial period of three years from 1 June 1996 with two rights of renewal for three years and four years respectively. Although the lease was to include a six month demolition clause, it had been agreed that such clause was not to come into operation until the second right of renewal came into effect (a period of six years from commencement). Unfortunately the lease prepared by the first defendant’s solicitors and forwarded to the third defendant’s solicitors for perusal on 27 March 1996 accidentally omitted the proviso deferring operation of the demolition clause.
[5] Before this mistake was picked up the plaintiff and third defendant reached agreement for the sale of the property to the plaintiff at a price of $1.25m. During negotiations Mr Rawstron, the third defendant’s managing director, had handed a copy of the faulty lease (then still unsigned) to Mr Yankov, a director of the plaintiff, who was negotiating the purchase on its behalf. It is not suggested that there was any fraudulent conduct on the part of Mr Rawstron. The agreement for sale and purchase (“the agreement”) was executed on 27 May 1996 and Mr Costelloe was instructed by the plaintiff to act for it on the purchase.
[6] When the first defendant was about to sign the lease in his solicitor’s office a few days later he spotted that the proviso deferring operation of the demolition clause had been omitted. When this omission was brought to the attention of the third defendant’s solicitors it was readily agreed that the proviso should have been included and it was inserted in due course (although there were further delays before the lease was actually signed). Upon becoming aware that the proviso had been omitted the solicitors for the third defendant sent the following facsimile to the second defendant on 4 June 1996:
“Re: Rossendale Holdings & Tuscany Ltd
Please note that the Leinster House lease clause 46 has been changed. Copy follows. Also copy first three pages. Please let me know if you want any more. The tenant has signed and paid first month’s rent.”
Clause 46 was, of course, the demolition clause and it is common ground that the change referred to was the proviso deferring the operation of that clause. It is not disputed that although this facsimile was received at Mr Costelloe’s office it completely escaped his attention with the result that it was not brought to the notice of the plaintiff who remained oblivious to the existence of the proviso.
[7] The agreement was conditional upon:
“. . . approval of the purchaser’s solicitor of the Title, Town Planning, Zoning and Compliance with the Resource Management Act 1991 in respect of the property within ten (10) working days from the date of this Agreement.”
On 11 June 1996 Mr Costelloe advised the third defendant’s solicitors that the contract was unconditional in all respects. Execution of the lease was completed the following day. It was not registered. The first defendant opened his restaurant on 31 July 1996 having by that time completed a major and expensive refit. The purchase was settled on 11 December 1996 and the plaintiff became the registered proprietor on 18 December 1996.
[8] Two days earlier - on 16 December 1996 - the plaintiff had sent a letter advising tenants that it had purchased the property from the third defendant and that:
“. . .it is the intention of the new proprietors to redevelop the site, however this is some way off and in order to protect everybody concerned and to eliminate the ever hanging shadow of doubt, it is proposed that we will offer to all the current tenants a standard Auckland District Law Society lease for an initial period of three years. The lease will contain a clause allowing us to terminate the lease on giving six months notice in writing should we wish to proceed with the development. In addition . . . we would offer you space in any new development . . .”.
In response the first defendant’s solicitor wrote to the plaintiff on 20 December:
“I have to hand a copy of your letter dated 16 December 1996 . . . Mr and Mrs Gill have asked me to respond on their behalf.
The lease that Mr and Mrs Gill have is already for a term of three years from the 1st of June 1996 with two rights of renewal. There is a “demolition” clause contained in the Lease but this cannot be invoked before the end of the first three [sic] year period.
Your offer of a new lease therefore is declined. I have advised your solicitor, Mr Costelloe, of this.”
According to the evidence of the first defendant’s solicitor, Mr Thompson, he rang Mr Costelloe to inform him of the situation. However, Mr Costelloe’s evidence was that he had no recollection of any such telephone conversation, although he did not deny that such a conversation took place . It is not disputed that the letter was received by Mr Yankov and that he handed it to Mr Costelloe so that Mr Costelloe could check out the situation. Unfortunately nothing was done by Mr Costelloe.
[9] Development proposals for the property in 1998 revolved around the construction of a new building on the Leinster Road frontage for long term lease to a major medical company, Castlereagh Radiology NZ Limited. The plaintiff intended to develop the Leinster Road frontage first so that the Papanui Road frontage, which contained the more valuable retail frontage, could be developed in the future. Naturally development of the Leinster Road frontage required either complete removal of Leinster House or its relocation on the property to make room for the new building. By August 1998 the plaintiff’s negotiations with Castlereagh had progressed to a stage where the plaintiff was able to instruct Mr Steele (the real estate agent involved in the sale to the plaintiff) to approach the Leinster House tenants and advise them that the development was imminent. During this process Mr Steele became aware that Mr Gill, the first defendant, was relying on a proviso to the demolition clause. This was reported to Mr Yankov who referred the matter to Mr Costelloe. After a short delay Mr Costelloe advised Mr Yankov to take independent advice (although Mr Costelloe continued to act in connection with the Castlereagh leasing arrangements).
[10] The facsimile of 4 June 1996 came to light after Mr Costelloe had delivered the plaintiff’s file to Saunders & Co, the new solicitors instructed by the plaintiff. Initially the plaintiff proceeded on the basis that it was bound by the proviso to the demolition clause in the Gill lease. However, by late 1998 it had formed the view that the indefeasibility provisions of the Land Transfer Act 1952 entitled it to take title free of the proviso primarily because the lease was unregistered. On 1 December 1998 the plaintiff gave Mr Gill six months’ notice of termination. Mr Gill remained in possession on the basis that the notice was ineffective.
[11] Attempts by the plaintiff to resolve the matter initially focussed on reaching a compromise with Mr Gill that would enable Leinster House to be relocated towards the rear of the property so that the new Castlereagh building could be constructed on the Leinster Road frontage. With time, however, the plaintiff also began to look at the possibility of demolishing the two old villas on the Papanui Road frontage so that if the worst came to the worst the new Castlereagh building could be constructed on the Papanui Road frontage. Eventually attempts to reach a compromise with Mr Gill broke down and the plaintiff was forced to resort to the Papanui Road alternative (with the co-operation of Castlereagh). Construction of the new building commenced in May 1999 and by the end of August 1999 the building was ready for occupation by Castlereagh. It is claimed by the plaintiff that this forced change of plan irretrievably compromised future development of the site.
[12] It should also be mentioned that Mr Gill duly gave notice of his intention to take a first renewal of lease from 1 June 1999 and in response the plaintiff proposed an increased rental which was disputed by Mr Gill. During subsequent correspondence between solicitors the plaintiff’s solicitors advised that the plaintiff was reserving its rights in relation to the notice of termination which had already been issued and indicated that any deed of renewal would be executed on that basis. A deed of renewal of lease was ultimately executed by the first defendant and plaintiff on 2 March 2000.
Pleadings
[13] This proceeding was initially issued against the second defendant alone on 29 April 1999. Summary judgment as to liability was sought on causes of action alleging two breaches of duty: by failing to advise the plaintiff about the facsimile of 4 June 1996; and failing to advise the plaintiff to issue a notice invoking the demolition clause. In his judgment of 30 July 1999 the Master found that although the first breach had been established, it was inappropriate to enter summary judgment because the Master could not say that any of the losses claimed by the plaintiff were attributable to the breach. In relation to the other alleged breach he was not satisfied that there was no arguable defence. Costs in the sum of $2,500 were fixed with liability for payment reserved.
[14] On 8 November 1999 an order was made for the joinder of the first and third defendants. Since that time there have been a series of pleadings and amendments. This pleading history is not of moment and the following reflects pleadings current at the time of trial.
First Defendant
[15] In its fourth amended statement of claim the plaintiff pleads two causes of action against the first defendant. The first cause of action:
“28 By letter dated 1 December 1998 the Plaintiff by its solicitors, Saunders & Co, gave written notice to the First Defendant of the Plaintiff’s intention to demolish the property and gave 6 months’ notice of termination of the lease requiring the Defendant to vacate the premises at the end of the notice period.
29 By letter dated 7 December 1998 the First Defendant by his solicitor, Ian Thomson, advised that the First Defendant did not accept the terms of the Plaintiff’s notice and that any attempt to evict the First Defendant would be vigorously resisted.
30 By letter dated 27 September 1999 the Plaintiff by its solicitors, Saunders & Co, gave further written notice to the First Defendant of the Plaintiff’s intention to demolish the property and gave 6 months’ notice of termination of the lease requiring the Defendant to vacate the premises at the end of the notice period.
31 The notices given by the Plaintiff on 1 December 1998 and 27 September 1999 have expired and the First Defendant has refused to give vacant possession of the premises to the Plaintiff.”
An order for possession is sought. The other cause of action alleges that by refusing to vacate in accordance with the demolition notice the first defendant became a trespasser thereby frustrating the plaintiff’s intention to develop the site; damages in the sum of $581,891 are claimed.
[16] The first defendant denies that the plaintiff is entitled to an order for possession or that he is a trespasser. He also advances two affirmative defences: fraud under the Land Transfer Act and estoppel. His pleading in relation to fraud:
“24. The Plaintiff entered into the Agreement for Sale and Purchase of the property subject to tenancies in place and the tenancy of the First Defendant.
25. The Plaintiff knew of the terms of the lease, including the proviso to clause 46, prior to the settlement of the Agreement for Sale and Purchase and the registration of the transfer of title to the property to the Plaintiff.
26. The Plaintiff did not intend to abide by the proviso to clause 46 of the lease as at the date of registration of the transfer of the title of the property to it or thereafter.
27. In the circumstances set out in paragraphs 24 to 26 above, and by reason of the Plaintiff or its agent’s fraud, the Plaintiff did not obtain an indefeasible title as against the First Defendant’s lease interest pursuant to section 182 of the Land Transfer Act 1952.
. . .”
It is claimed that the plaintiff held title subject to the lease including the proviso to clause 46 which precluded any notice of termination on the grounds of demolition until the second right of renewal became effective. The affirmative defence based on estoppel alleges that the plaintiff is estopped from asserting, first, that the terms of the lease did not include the proviso to clause 46; secondly, that it was induced to enter into the contract for purchase on the basis that there was an effective demolition clause immediately available; and, thirdly, that it had sustained any loss that was attributable to the actions of the first defendant.
[17] The first defendant cross claims against the third defendant on the basis that if it is liable to the plaintiff and the third defendant is also liable, the first defendant is entitled to be indemnified by the third defendant.
Second Defendant
[18] Breach of contract, negligence and breach of fiduciary duty are pleaded against the second defendant. Each is pleaded in the same fashion:
“. . . the Defendant failed to advise the Plaintiff:
i) of the contents or existence of the Cunningham Taylor fax of 4 June 1996;
ii) the terms of the lease to the First Defendant as provided on settlement were different from the terms of the First Defendant’s lease as made known to the Second Defendant by the Plaintiff;
iii) of the prospects of challenging the First Defendant’s claim that he had the benefit of the amended demolition clause and/or;
iv) to proceed to forthwith give notice to the First Defendant invoking the demolition clause despite the terms of the amended demolition clause;
v) and failed to make any or adequate enquiries or to take proper steps prior to confirmation and/or settlement, to ascertain or confirm the lease had been executed by the First Defendant and the Third Defendant in accordance with the terms of the unsigned draft lease provided to him by the plaintiff.”
During the hearing leave was granted for a further particular of breach to be added in relation to Mr Thompson’s letter of 20 December 1996. Damages in the sum of $581,891 are sought in respect of each cause of action.
[19] The second defendant acknowledges that by failing to bring the contents of the facsimile of 4 June 1996 to the attention of the plaintiff he breached his contractual duty and/or was negligent. However, the allegation of breach of fiduciary duty is denied as are all other alleged breaches. If the second defendant is found liable in damages he seeks contribution or indemnity against the other defendants.
Third Defendant
[20] Two causes of action are pleaded against the third defendant: breach of trust and misrepresentation. The pleading as to breach of trust:
“45 Prior to entering into the contract on or about 27 May 1996 the Third Defendant by its director, Brent Rawstron, represented to the Plaintiff by its director Yank Yankov that all leases effecting the property were either monthly tenancies or could be terminated on 6 months’ notice in the event that the landlord wished to demolish and handed to Yank Yankov a copy of an unsigned lease between the Third Defendant and the First Defendant containing a 6 months’ demolition clause (“the representation”).
46 Following confirmation of the contract on 11 June 1996 the Third Defendant held Leinster House as bare trustee for the Plaintiff.
47 On 12 June 1996 the Third Defendant granted or purported to grant a lease to the First Defendant containing a proviso to the demolition clause under which the demolition clause could not be invoked prior to the second right of renewal coming into effect (i.e. 1 June 2002).
48 The grant or purported grant of the lease with such proviso constituted a breach of trust by the Third Defendant.”
In relation to misrepresentation it is alleged that the plaintiff was induced to enter into the agreement by a misrepresentation as to the demolition clause. In both cases damages in the sum of $581,891 are sought.
[21] The third defendant denies the plaintiff’s allegations and seeks contribution or indemnity from the other defendants if he is found liable in damages.
The Evidence
[22] Nine witnesses gave evidence and extensive documentary evidence was presented. Of those witnesses five gave evidence for the plaintiff: Mr Yankov, a director of the plaintiff; Mr Steele, a real estate agent; Mr Wright, a registered valuer; Mr Thompson, the solicitor for the first defendant; and Mr McCracken, a consultant planner. Evidence in person was given by the first and second defendants and Mr Rawstron gave evidence for the third defendant. Mr Sellars, a registered valuer, was called by the second defendant. An outline of the evidence given by those witnesses follows.
[23] Mr Yankov discussed negotiations leading to the execution of the agreement; his instructions to Mr Costelloe; development proposals for the property including negotiations with Castlereagh; his discovery that there was a proviso to clause 46 of the lease; attempts to reach a compromise with Mr Gill so that the Castlereagh development could proceed on the Leinster Road frontage; factors leading to the decision to develop the Papanui Road frontage and implications of that decision in terms of the overall development of the property; steps taken subsequently to invoke the demolition clause against Mr Gill; and losses his company has suffered as a result of the actions of the various defendants.
[24] Mr Steele, the first supporting witness for the plaintiff, gave evidence about events leading to the presentation of the plaintiff’s offer to the third defendant; negotiations prior to execution of the agreement; his instructions in mid 1998 to advise the tenants, including Mr Gill, that the property was to be developed and the upshot of his approach to Mr Gill. Mr Thompson gave evidence about his letter of 20 December 1996 to the plaintiff and about his telephone conversation with Mr Costelloe when the letter was sent. Mr Wright compared the value of the property if Mr Gill’s lease was subject to an unqualified demolition clause with the position if Mr Gill’s lease included a proviso deferring operation of that clause for six years. He also gave detailed evidence about the various heads of damage claimed by the plaintiff. Mr McCracken, who was involved in the resource consent process on behalf of the plaintiff between October 1998 and March 1999, discussed that process and the implications of developing the Papanui Road frontages first.
[25] Mr Gill explained his professional (chartered accountant) and business backgrounds; events leading to the negotiation of his Leinster House lease; his discovery that the proviso had been omitted from the draft lease and steps taken to overcome that omission; setting up the restaurant; his discussion with Mr Yankov with reference to the demolition clause after the restaurant opened on 31 July 1996; his surprise at receiving a telephone call from Mr Steele in mid 1998 indicating that the site was to be developed and his advice to Mr Steele that the demolition clause could not be invoked at that time; subsequent negotiations; and his shock when he found that he was being sued.
[26] Mr Costelloe discussed his instructions from the plaintiff; his involvement in events leading to execution of the sale and purchase agreement; his role in confirming the agreement was unconditional and in negotiations with Castlereagh; his actions after it emerged that the executed lease in favour of Mr Gill contained a proviso to clause 46; and further negotiations with Castlereagh until his retainer was finally terminated.
[27] Mr Rawstron provided background information about the property and discussed his attitude towards sale of the property; events leading to the plaintiff’s offers and execution of the agreement for sale and purchase, including discussions at his home on Sunday, 26 May 1996; his astonishment when he was advised over two and a half years after the agreement had been signed that the plaintiff intended to make a claim against his company; his denial that he made any representations to Mr Yankov which were incorrect or which may have misled Mr Yankov or induced him to enter into the agreement; problems that have arisen in mitigating losses and defending itself by virtue of the plaintiff’s delay in bringing its grievance to his attention; and his attitude towards Mr Steele’s evidence that the demolition clause was discussed during a telephone conversation between himself and Mr Steele.
[28] Mr Sellars gave valuation evidence in opposition to the plaintiff’s claim for damages.
Approach To Liability
[29] The logic behind the ranking of the defendants as first, second and third defendants is not readily apparent. To me it is more logical to approach liability issues on a basis whereby the plaintiff’s allegations against each defendant are generally considered in chronological sequence, and I intend to adopt that approach. Thus the liability of the third defendant will be considered first followed by liability of the second defendant and finally liability of the first defendant
Liability Of Third Defendant
[30] Although the breach of trust cause of action is pleaded before the misrepresentation cause of action, Mr Till’s closing submissions addressed them in reverse order. I will adopt the same approach. The misrepresentation allegation revolves around Mr Rawstron’s actions in handing the unsigned lease containing an unqualified demolition clause to Mr Yankov and indicating to Mr Yankov that it would be signed within a couple of days. Mr Yankov claims that those actions, coupled with his perusal of the unqualified demolition clause in the document provided to him, induced the plaintiff to enter into the agreement.
[31] The third defendant rejects those allegations. Its stance can be summarised: because the lease was only a draft lease which was to be “sorted out” between solicitors there was no representation; Mr Rawstron was not in a position to make a representation that the plaintiff could rely on; there could have been no inducement having regard, inter alia, to the fact that Mr Yankov did not state or make known to Mr Rawstron that the plaintiff required a demolition clause in the lease and the agreement for sale and purchase did not carry any condition relating to the lease; and to the extent that there was a misrepresentation (which was denied) it was innocent and once the problem was discovered the vendor took immediate steps to correct the misrepresentation by giving notice of the actual situation to the plaintiff through Mr Costelloe.
[32] Adopting a chronological approach to events it is convenient to begin by addressing the conflict of evidence between Mr Steele and Mr Rawstron about whether there was reference to the demolition clause during a telephone conversation between them about two weeks before the plaintiff’s first offer was submitted. According to Mr Steele’s supplementary evidence in chief:
“A. I phoned [Mr Rawstron] and sought clarification on various matters including whether Roland Associates had a sole agency, the asking price and the tenancies in general.
Q. What did he say about the tenancies.
A. Most were on a month by month tenancy. Whilst many had been there for up to 10 years it was the landlord’s intention to keep them on a month by month as that maintained flexibility. He said the only tenancy of any consequence, Leinster restaurant, had a six months’ demolition clause.
Q. Did he make mention of the six months’ demolition clause not being exercisable during the first part of the lease.
A. No.”
Although Mr Rawstron acknowledged that the demolition clause may have been discussed during the telephone conversation, he considered this to have been unlikely for two reasons: first, because the conversation took place at a time when he was extremely busy with the result that he would have been disinclined to discuss such matters especially when he had no particular interest in selling the property; and, secondly, because there was no specific reference to the lease or demolition clause in the sale and purchase agreement ultimately signed.
[33] Several factors lead me to prefer Mr Steele’s evidence. First, it is not disputed by Mr Rawstron that the telephone conversation took place and Mr Rawstron also conceded that the demolition clause might have been discussed. Secondly, given that Mr Steele was attempting to bring about a sale to a known developer it would have been entirely logical for him to have checked the duration of tenancies so that he could determine whether there was any real prospect of selling the property to Mr Yankov’s company. Thirdly, my impression that Mr Steele was a reliable witness was supported by his handwritten note on the schedule of leases “Demo. 6 month” with what appears to be an arrow from the Leinster restaurant details. While Mr Rawstron raised the possibility that the note might have arisen from a conversation with someone else (for example, another real estate agent or Mr Rawstron’s father), I am satisfied that Mr Steele accurately recalled that it in fact arose from his telephone conversation with Mr Rawstron. Thus I accept Mr Steele’s evidence to the effect that Mr Rawstron made an unqualified statement that the Leinster restaurant lease was subject to a six month demolition clause.
[34] Of itself that finding is not of critical significance. But it does clarify events leading to the crucial discussion between Mr Rawstron and Mr Yankov at Mr Rawstron’s property on Sunday, 26 May (at which Mr Steele was also present). It is not disputed that at that meeting Mr Rawstron handed Mr Yankov a copy of the unsigned Gill lease which included an unqualified six month demolition clause and that Mr Rawstron gave Mr Yankov to believe that the lease would be signed “within the next couple of days”. Moreover, there is no dispute that these events occurred before the parties reached agreement and shook hands and before the agreement for sale and purchase was finalised the following day.
[35] When those actions are linked to Mr Yankov’s evidence, which I accept, that he checked the demolition clause and satisfied himself as to its contents, it must be abundantly clear that Mr Rawstron represented that the property would be sold subject to a lease in favour of Gill which would include an unqualified six month demolition clause. That representation was, of course, made on behalf of the third defendant. It is also abundantly clear that such representation was false. The evidence overwhelmingly supports those conclusions. Mr Yankov’s evidence is generally supported by Mr Steele. Moreover, Mr Rawstron made several key acknowledgments: tenancies had been discussed at the meeting; he had confirmed that the Leinster restaurant was the only significant tenancy not on a monthly basis; he had handed the draft lease to Mr Yankov who had looked at the document; Mr Yankov had been given to believe that the document would be signed within the next couple of days; and Mr Yankov had been entitled to take the document at face value. In my assessment any reasonable person would have interpreted Mr Rawstron’s actions and words as a clear representation that the lease in favour of Mr Gill containing an unqualified demolition clause would be signed within the next couple of days and that the property was being sold subject to a lease in favour of Mr Gill containing an unqualified demolition clause.
[36] Mr Robinson argued that Mr Rawstron’s undisputed comment to Mr Yankov that the matter was being “sorted out” between solicitors negated the alleged misrepresentation. I do not accept that submission. In my opinion that comment was entirely consistent with the solicitors sorting out the form of the document and arranging for its execution; it does not indicate that the contents were to be revisited. Mr Robinson’s submission that Mr Rawstron was not in a position to make the representation is equally untenable. It was none other than Mr Rawstron who had reached agreement with Mr Gill as to the terms of the lease. By the time the misrepresentation was made Mr Rawstron had agreed to the terms of the lease and he was perfectly well placed to accurately represent those terms to Mr Yankov.
[37] Having found for the plaintiff on the first issue of whether there was a misrepresentation, it is now necessary to consider whether at law the misrepresentation induced the plaintiff to enter into the agreement. In this regard the observations of Hardie Boys J in Savill v NZI Finance Ltd [1990] 3 NZLR 135 (CA) at p145 are relevant:
“At general law, inducement involves purpose as well as result. Not only must the representation have caused the representee to enter into the contract but also the representor must, either in fact or in contemplation of law have intended to cause him to do so. . . . I cannot think that the legislature [by enacting the Contractual Remedies Act 1979] intended [to] . . . make the test of inducement a purely subjective one, judged from the point of view of the representee. Not only is there no spelling out of an intention of that kind; but the familiar verb “induce”, which has always had its two aspects, has been retained. Therefore I consider that it remains the law that it is not enough for a party to say that a representation caused him to act in a particular way. He must also show either that the representor intended him to do so, or that he “wilfully used language calculated, or of a nature, to induce a normal person in the circumstances of the case to act as the representee did”: I quote from Spencer Bower & Turner at p 132. To view the Act in this way is to be consistent with the objective approach generally taken in regard to the law of contracts.”
Two questions need to be answered: first, did the representation cause the plaintiff (through Mr Yankov) to enter into the contract; and, secondly, did Mr Rawstron intend the representation to cause him to do so, or alternatively, did Mr Rawstron wilfully use language calculated or of a nature to induce a normal person in the circumstances of the case to act as the plaintiff (through Mr Yankov) did.
[38] Before specifically addressing those questions, it is helpful to fit the transaction into its commercial context. By virtue of its strategic location, size and the nature of the existing buildings (all old), the property was plainly ripe for redevelopment in 1996. This was obvious to Mr Rawstron, a person with considerable business experience, who, shortly before the property was sold to the plaintiff, took the precaution of including the demolition clause in the Gill lease. That clause provided:
“46.
THAT in the event of the Lessor proposing to redevelop the whole or any part of the site or the premises of which the demised premises form part to any extent and in any manner style or form the Lessor may terminate this lease upon the giving of six months notice in writing at the expiration of which period the Lessee will give up possession to the Lessor without claim against the Lessor. * The Lessee shall have the first option to take up space in any new premises that are available for use as restaurant or food premises.
*PROVIDED THAT this clause shall not be able to be invoked by the Lessor before the second right of renewal contained in the Lease comes into effect.”.
Of course Mr Rawstron’s first preference had been an unqualified six month demolition clause but eventually he and Mr Gill had compromised at six years. Obviously Mr Rawstron was well aware that the potential of the property lay in the land and that it was important for the lessor to have the ability to terminate if development was proposed. Likewise Mr Yankov, also an experienced businessman and property developer, was primarily interested in the land and “to a real extent the state of the buildings was irrelevant”. Not surprisingly he considered the presence of a demolition clause to be crucial in the case of the Gill lease because without such a clause the lease could run for up to 10 years thereby significantly hindering development of the property.
[39] Clearly both parties were well aware that the plaintiff was interested in the property for development purposes. Mr Rawstron said that during the Sunday meeting Mr Yankov described himself “as a property developer of some years standing” and that in response to a direct enquiry about his plans for the property Mr Yankov had said that he would “in some time develop it”. The tenure of all tenancies was discussed for the obvious reason that tenure could affect development proposals. And Mr Rawstron told Mr Yankov that he would provide him with plans of a proposed residential/commercial development already commissioned by the third defendant if the purchase proceeded. That would not have made much sense if the property was not being purchased for development purposes . In all the circumstances the demolition clause was obviously crucial and capable of constituting an inducement.
[40] Now I address the first question: did the representation cause the plaintiff to enter into the contract? I have no doubt that it did. In this regard I accept Mr Yankov’s evidence which was supported in material respects by Mr Steele. Undoubtedly the demolition clause was very important to Mr Yankov and that is why, having specifically checked the clause and being satisfied with it, he decided to proceed with the purchase subject to the Gill lease. His satisfaction with what he had read also explains why he did not feel that it was necessary for any additional provision to be included in the agreement for sale and purchase or for his own solicitors to check the lease document.
[41] The second question: did Mr Rawstron intend the representation to cause the plaintiff to enter into the agreement, or alternatively, did he wilfully use language calculated, or of a nature, to induce a normal person in the circumstances of this case to act as the plaintiff did? I am completely satisfied that the plaintiff has also established this requirement. Despite the fact that the third defendant (through Mr Rawstron) was not an anxious seller in the beginning, it is perfectly plain that by the time of the Sunday meeting Mr Rawstron was prepared to sell provided the plaintiff met his price of $1.25 million. I have no doubt that his purpose in handing over the unsigned lease and indicating that it would be signed within the next couple of days was to satisfy Mr Yankov that although the Gill lease was a long term lease the plaintiff could nevertheless safely purchase the property for development purposes. This was intended to serve as an inducement to the plaintiff to enter into the agreement. Had it been necessary to address the alternative question I would also have arrived at the conclusion that Mr Yankov wilfully conducted himself (handed over the unsigned lease) and used language (that the agreement would be signed within the next couple of days) calculated to induce the plaintiff to act as it did.
[42] On behalf of the third defendant Mr Robinson submitted that Mr Yankov was “no longer induced” by the time he instructed Mr Costelloe to make the contract unconditional. There are at least two fundamental flaws in that submission. First, the issue is whether the misrepresentation induced the plaintiff to enter into the agreement. If that is established then liability is made out and it is only necessary to consider the remedy (if any). Secondly, given that the contract was only conditional upon Mr Costelloe’s approval of title, zoning and compliance with the Resource Management Act, confirmation did not have anything to do with the demolition clause.
[43] Mr Robinson also advanced the relatively optimistic submission that in a situation where there has been a misrepresentation it is possible to correct the misrepresentation by communicating the correct information to the other party. Perhaps there are situations where that might be so. But it would be extraordinary if the innocent party automatically lost its rights in that situation. This case exposes the fallacy in any such argument. The plaintiff was induced to enter into the agreement by the third defendant’s representation that the demolition clause would enable the Gill lease to be terminated on six months’ notice. That representation was false because the demolition clause could only be invoked after the second right of renewal came into effect. Thus the plaintiff did not receive the bargain it had contracted for. The third defendant cannot purge its misrepresentation by simply confessing to the plaintiff that it had misrepresented the situation. How could that negate any loss or damage suffered by the plaintiff? If the plaintiff elects to proceed with the contract (as it is perfectly entitled to do) it will still suffer the consequences of the misrepresentation. Under those circumstances the third defendant should not be allowed to escape liability.
[44] All of this means that the facsimile of 4 June 1996 from the third defendant’s solicitors to the plaintiff’s solicitor could not cure the misrepresentation. The third defendant entered into a contract with the plaintiff who is entitled to the benefit of that contract. The legal position is explained in Chitty on Contracts (28th Edition, Vol 1) at para 25-009:
“Where the innocent party, being entitled to treat himself as discharged by the other’s breach, nevertheless elects to affirm the continued existence of the contract, he does not thereby necessarily relinquish his claim for damages for any loss sustained as a result of the breach. Further, he may insist on holding the other party to the bargain and continue to tender due performance on his part.”
Despite the notification of 4 June the plaintiff was entitled to complete the contract and seek its remedy in damages. There is no suggestion that the plaintiff waived any of its rights to do so.
[45] It follows that the plaintiff has proved that it was induced to enter into the sale and purchase agreement by the third defendant’s misrepresentation. Liability has been established.
[46] In view of that conclusion it is only necessary to make brief reference to the breach of trust cause of action. The plaintiff’s confidence in this claim is probably reflected by the fact that it was virtually ignored by Mr Till during his closing submissions. In Mr Till’s words the breach of trust allegation came down to this:
“. . . after the agreement for sale and purchase Rossendale granted or purported to grant a lease to Gill containing a deferred demolition clause at a time when the vendor was trustee of the property following the agreement for sale and purchase”.
The short answer is that even assuming the vendor was a trustee from the time the agreement for sale and purchase was signed (which I doubt), the lease to Mr Gill had been granted well before that time. There was not any breach of trust.
Liability Of Second Defendant
[47] The second defendant admits that he owed a duty in contract and tort to advise the plaintiff as to the existence of the facsimile of 4 June 1996 and that he breached that duty. He does not accept that those actions also constituted a breach of any fiduciary duty, but nothing turns on that and I do not find it necessary to consider that aspect any further. It is, however, necessary to consider three other breaches alleged by the plaintiff (all of which are denied) because they might have implications in terms of damages (if any) to be awarded against Mr Costelloe.
[48] First, it is alleged that the second defendant should have confirmed the terms of the draft lease before making the contract unconditional and should also have detected that the lease handed over on settlement was different from the document handed to Mr Yankov by Mr Rawstron. The issue is whether Mr Costelloe’s retainer required him to check the lease documents. In Gilbert v Shanahan [1998] 3 NZLR 528 (CA) at p537 the Court said:
“Solicitors’ duties are governed by the scope of their retainer, but it would be unreasonable and artificial to define that scope by reference only to the client’s express instructions. Matters which fairly and reasonably arise in the course of carrying out those instructions must be regarded as coming within the scope of the retainer.”
I accept Mr Costelloe’s evidence that when he met with Mr Yankov on 27 May 1996 he was instructed that Mr Yankov did not require him to approve the leases. This instruction is borne out by Mr Costelloe’s file note and also by Mr Yankov’s evidence that once he had satisfied himself that there was a demolition clause in the Gill lease there was no reason for him to be concerned because he had “approved it [himself]”. Given those specific instructions it could not be said that there was any obligation on Mr Costelloe to check the contents of the draft or executed lease in the course of carrying out those instructions. This allegation fails.
[49] Secondly, the amendment permitted during hearing introduced a further allegation that Mr Costelloe had breached his duty by failing:
“. . . to check the terms of the demolition clause in the Gill lease
i) following the [telephone] call from Mr Ian Thompson on or before 20/12/96;
ii) following the communication from Mr Yankov as to the terms of the letter to him and Mr Donnithorne dated 20/12/96.”
Mr Thompson said that at the time he sent the letter of 20 December 1996 to the directors of the plaintiff he telephoned Mr Costelloe and during “a fairly cursory conversation” explained to Mr Costelloe that as far as the Gills’ were concerned they had a lease with a demolition clause that could not be invoked for some years. It is not disputed that Mr Yankov received the letter of 20 December 1996 and that it was referred to Mr Costelloe so that the situation could be clarified. For his part Mr Costelloe said that he had no recollection of any conversations about the letter with either Mr Thompson or Mr Yankov, but he did not deny that he had received the letter or that they had spoken with him.
[50] Under cross-examination by Mr Till, Mr Costelloe virtually admitted that he had breached his duty towards the plaintiff:
“Q. I am asking you to accept the conversation as I put it to you and as Mr Thompson told the Court it was. As part of what you were engaged to do for the plaintiff you were required to check the lease following such telephone call.
A. That would be a reasonable assumption.
Q. And it must be right that you didn’t check it.
A. Yes.
Q. Mr Yankov has referred to the letter from Mr Thompson at p233. He says he brought it to your attention and asked you to follow it up.
A. I have no recollection of that nor are there any file notes on the file to that effect.
Q. If you would accept that he discussed it with you in that way, that that too meant that you were required by him to check the lease weren’t you.
A. Yes.”
I accept that Mr Thompson telephoned Mr Costelloe and that Mr Yankov referred the letter to him for advice. Despite those two separate references to the letter, Mr Costelloe failed to take any action. I am satisfied that by failing to check the lease and advise Mr Yankov that there was a proviso to clause 46, Mr Costelloe breached his duty in contract and tort and that liability has been made out.
[51] Thirdly, the plaintiff alleges that Mr Costelloe also breached his duty by failing to forthwith invoke the demolition clause against Mr Gill. Mr Costelloe denies any breach in this respect. In Palmer v Hicks & Ors (Christchurch Registry, CP244/91, 13 November 1996) I observed:
“It is well settled that an error of judgment, whether on matters of discretion or of law, does not necessarily constitute negligence. This is of particular importance in the field of litigation where practitioners are often called upon to exercise difficult judgments involving the balancing of many factors in fluid and unpredictable situations. By its very nature the outcome of litigation tends to be unpredictable because both sides have expectations of success. It follows that in the normal course of events a practitioner cannot, in the absence of a failure on the part of the practitioner to exercise proper care and skill, be held accountable for a particular outcome.
In the context of the plaintiff’s claim it also needs to be observed that different practitioners will approach solutions or litigation in different ways and as Blanchard J said in Simperingham [Simperingham v Martin & Ors (Auckland Registry, CP316/93. 19 October 1994)] (supra) at p17:
“Solicitors cannot be successfully sued for professional negligence merely because another solicitor may have found the solution or may have taken a particular (and more robust) course of action. The question is what a reasonably competent solicitor should have done as a minimum”
These observations again underline the importance of adopting a realistic objective standard in judging the conduct of the defendants with the benefit of hindsight firmly shut out.”
Those comments are equally relevant on this occasion. Given the complexity of the indefeasibility issue, the absence of any independent expert evidence as to what a reasonably competent solicitor should have done as a minimum, and my conclusion later in this judgment that the plaintiff’s demolition notice was ineffective, this allegation is bound to fail.
Liability Of First Defendant
[52] The claim against Mr Gill turns on whether the demolition notice issued by the plaintiff was effective. One way or other the affirmative defences of Land Transfer fraud and estoppel pleaded by Mr Gill will resolve that issue. Before addressing those matters it is helpful to trace the history of Mr Gill’s lease in more detail.
[53] In 1991 Mr Gill and his wife started a successful restaurant chain called “Little India” in Dunedin. Having turned their minds to Christchurch in 1995, they spoke to Mr Yankov who had been introduced to them as a property developer. He suggested that Leinster House might be suitable and the Gills’ investigations confirmed not only its suitability but also that the owners of the French restaurant wished to sell. Neither Mr Gill nor Mr Yankov realised that their paths were destined to cross again in the future. By late 1995 Mr Gill had been informed by the owners of the French restaurant that their lessor (the third defendant) would be prepared to provide a new lease if they found a purchaser.
[54] By Christmas 1995/96 Mr Gill was in direct discussion with Mr Rawstron about the possibility of leasing the restaurant. When Mr Rawstron mentioned the possibility of the building being demolished Mr Gill made it clear that he did not wish to enter into a lease with a demolition clause because he would need time to recover the substantial expenditure that would be required to fit out the restaurant. Ultimately a compromise was reached whereby the demolition clause could not be invoked until six years had expired (i.e. until the second right of renewal commenced).
[55] In January 1996 Mr Rawstron called to see Mr Gill in Dunedin and confirmed that the deal “was OK and that there would be no demolition clause until after six years”. Following a further meeting with Mr Rawstron on 19 March 1996 Mr Gill faxed a copy of his handwritten notes to his solicitor with instructions to prepare the necessary lease. The lease (which accidentally omitted the proviso) was forwarded by Mr Gill’s solicitors to Mr Rawstron’s solicitors for perusal on 27 March 1996. From that time Mr Gill was pressing to have the lease finalised. When he contacted Mr Rawstron on 24 May 1996 he was told that Mr Rawstron had signed the lease 10 days earlier, but even then further delays were experienced before the lease finally arrived back at Mr Gill’s solicitors’ office. When it was eventually returned Mr Gill discovered the error (which had apparently been overlooked by everyone else) and the wheels were set in motion to correct the error. The lease was finally executed on 12 June 1996.
[56] To retrace slightly. When the agreement for sale and purchase was being negotiated during the Sunday meeting. Mr Rawstron told Mr Yankov that Mr Gill was making an “extensive investment” in renovating the restaurant. And after the agreement had been finalised Mr Yankov went around and talked to Mr Gill who, in Mr Yankov’s words, “showed me what he do [sic] and change and how he painted it”. Under cross-examination Mr Yankov agreed that he had been aware that it was a very expensive exercise. In fact Mr Gill spent between $130-140,000 fitting out the restaurant.
[57] Sometime after the opening of the restaurant on 31 July 1996 there was a crucial conversation between Mr Gill and Mr Yankov. According to Mr Gill, Mr Yankov came into the restaurant and said that he was the new landlord. Mr Gill’s evidence then continued:
“I said to him, because I knew he was a developer and was in the business of bowling buildings and building new ones, that he couldn’t demolish Leinster House for six years. I remember this discussion because I was standing behind my bar and Yanko [Yankov] was drinking coffee. He said to me he had big plans for Leinster House and that he may have to demolish it one day. I said “Not for six years you can’t because I’ve got a signed lease”. Yanko said “You’re a friend Sukhi, I wouldn’t do that to you”.”
During his evidence in chief Mr Yankov acknowledged that the conversation described by Mr Gill could have taken place but he attempted to explain it on the basis that “[Mr Gill] has a six year lease and I have a six months demolition clause in it”. Under cross-examination by Mr Guthrie he said:
“A. He told me about a six year lease. I was listening. I had a six months demolition clause. I had no reason to start an argument over lease when it is not my business to do so.
Q. Mr Gill will say you responded to his remark by saying “You are a friend Sukhi, I wouldn’t do that to you”. Do you remember saying that.
A. I could have. But he has been my friend and I never disputed and I never at any stage wanted Mr Gill to leave the restaurant.”
While Mr Yankov was generally an impressive witness, this aspect of his evidence was not particularly impressive. His explanation that Mr Gill had a six year lease does not make a lot of sense. In fact Mr Gill had a three year lease with two rights of renewal making a total of 10 years. It is simply not possible for Mr Yankov to explain away this conversation. Mr Gill was extremely impressive throughout his time in the witness box. To the extent that there is a conflict between the evidence of Mr Gill and the evidence of Mr Yankov, I have no hesitation in accepting Mr Gill’s account. I am satisfied that Mr Gill expressly told Mr Yankov that he could not demolish Leinster House for six years because of the signed lease and that Mr Yankov replied that he would not do that to him.
[58] Immediately after settlement of the purchase in December 1996 the demolition clause cropped up again as a result of the plaintiff’s written notification to tenants that it intended to redevelop the site in the future. Its right to do so was promptly challenged by Mr Gill’s solicitor with specific reference to the demolition clause (albeit with reference to a three year deferral instead of the six year deferral). Understandably Mr Gill interpreted Mr Yankov’s failure to respond to the letter as confirmation that the point made by his solicitor had been accepted and that there was no problem.
[59] Another 18 months passed. The restaurant prospered. Then Mr Gill received another shock, this time in the form of a telephone call from Mr Steele on 19 August 1998 indicating that the landlord was thinking of redeveloping the site and that because there was a demolition clause Mr Gill should get ready to move. Again Mr Gill’s slightly angry reaction is understandable: if Mr Steele had checked the lease he would have seen that the landlord was not entitled to demolish the building until 2002.
[60] Initially the plaintiff did not attempt to dispute that Mr Gill was entitled to the benefit of the proviso and attempted to negotiate its way out of the problem. Some months later, however, the plaintiff changed tack and by letter from its new solicitors dated 1 December 1998 advised Mr Gill that the plaintiff wished to demolish and that he was required to vacate in six months. The letter also recorded that the plaintiff did not recognise any limitation on the landlord’s right to give six months’ notice pursuant to clause 46. This change in approach reflected advice that the plaintiff had received about its indefeasibility of title. Mr Gill’s solicitor promptly protested that the plaintiff had been aware of the proviso to clause 46 for approximately two years, that it was now estopped from denying the proviso, and that the recent actions of the plaintiff in attempting to “buy Mr Gill out of the remaining term of the lease” were at odds with the approach that the plaintiff was now adopting. Negotiations continued, but ultimately broke down.
[61] The final twist involved renewal of the lease. On 21 June 1999 the plaintiff’s solicitors wrote to Mr Gill’s solicitor:
“We would advise that our firm is acting for Tuscany Limited and we have been handed a copy of your letter to it of 25 February. We note that in accordance with the lease dated 12 June 1996 your client has exercised his right to renew the term for a further three years from 1 June this year.
The rental of course is due for review as from the renewal date. We are instructed by our client company that it is now receiving a rental return of $250.00 per annum plus GST per square metre from its other tenants. We must therefore advise that our client company believes that the current market rental for the premises to apply as from 1 June is $45,000 per annum plus GST.
Please confirm urgently that the increased rental is agreed to and we will then forward to you the Deed of Renewal for execution.”
The existing rental was $23,111 plus GST and pursuant to the rent review mechanism in the lease Mr Gill disputed the proposed rental. Shortly thereafter the plaintiff’s solicitors said in a letter to the first defendant’s solicitors dated 25 June that they wanted to make it clear that the plaintiff continued to reserve its rights under the demolition notice. And after the rental to apply from the renewal date had been fixed their letter forwarding the deed of renewal for execution included the following:
“We must also advise that our client company is adamant that the demolition notice has not and will not be withdrawn. In these circumstances we obviously need to make it clear that the contents of the enclosed deed of renewal are without prejudice to such demolition notice.”
The deed of renewal dated 20 March 2000 provides for a further three year term from 1 June 1999 at an increased rental of $29,070 plus GST. The deed of renewal does not contain any reference to the demolition clause.
[62] Mr Till submitted that the renewal was without prejudice to the demolition notice and that this had not been contested by Mr Gill. I cannot accept either of those submissions. By the time the plaintiff’s solicitors unilaterally attempted to impose the without prejudice qualification the plaintiff had already locked itself into the renewal process by acknowledging that the right of renewal had been exercised and proposing a new rental. There is no evidence to suggest that the plaintiff’s without prejudice qualification was accepted by the first defendant or his solicitors. Indeed, his continued opposition to the demolition notice supports the contrary view. And I do not interpret Mr Gill’s answers under cross-examination as an acceptance on his part that the renewal was without prejudice to the demolition clause. When pressed on that issue Mr Gill said that “it was up to them [the plaintiff] what they did” and in response to the question that he had been aware that the renewal had been tendered without prejudice to the demolition notice he said “I presume so, if that is the case.” [Emphasis added]. This really begs the question. The plaintiff cannot in the same breath have both benefits of an increased rental under the renewed lease and the first defendant’s eviction pursuant to the demolition notice.
[63] That completes the history. Now I turn to the indefeasibility issue.
[64] Since the Gill lease was not for less than three years it was registrable in terms of s 115(1) of the Land Transfer Act and constituted an unregistered instrument for the purposes of ss62 and 182 of the Act. Those sections provide:
“62. Estate of registered proprietor paramount
Notwithstanding the existence in any other person of any estate or interest, whether derived by grant front the Crown or otherwise, which but for this Act might be held to be paramount or to have priority, but subject to the provisions of Part 1 of the Land Transfer Amendment Act 1963 the registered proprietor of land or of any estate or interest in land under the provisions of this Act shall, except in the case of fraud, hold the same subject to such encumbrances, liens, estates, or interests as may be notified on the folium of the register constituted by the grant or certificate of title of the land, but absolutely free from all other encumbrances, liens, estates, or interests whatsoever,-
[85] The valuation evidence demonstrates that developers would have outbidded investors for the property. Thus loss in value should be approached on the basis that the property would be acquired for development rather than investment purposes. Any restriction on the developer’s ability to make the highest and best use of the property would be reflected in the market value of the property, with the actual drop in value reflecting the market’s perception of the limitations imposed by the proviso.
[86] No doubt the market would recognise that there would be a delay between the purchase of the property and the commencement of any development. Actual events provide a useful yardstick. When the plaintiff purchased the property it did not have any specific development project in mind and only developed a firm proposal after Castlereagh came on to the scene around mid 1998 which is in line with the August 1998 time frame selected by the valuers. In other words, the marketplace would recognise that development options for the property could be limited by the proviso between, say, mid 1998 and mid 2002, a period of around four years.
[87] I accept Mr Wright’s evidence that the construction of two new buildings (on a similar scale to the Castlereagh building) and the relocation of Leinster House in the southern corner would constitute the highest and best use of the land. He concluded that the proviso would force the market value of the property down by approximately $304,000. On the other hand, Mr Sellars concluded that any loss in value would be in the region of $110,000. This discrepancy reflects the different approach of the valuers to the issue whether Leinster House could be moved and the rental obtainable from that building if it was relocated on the site.
[88] Mr Wright reasoned that the proviso would significantly reduce a developer’s options by excluding the land occupied by Leinster House from redevelopment until after 2002 and that the siting of the Castlereagh building 4.5 metres from the Papanui Road frontage ruled out any possibility of relocating Leinster House which would be lost in terms of its contribution to the development. This led him to conclude that development of the property would be confined to two buildings and that the loss of income as a result of the inability to fit in the third (relocated Leinster House) would significantly affect value because the relocated and upgraded Leinster House would have been able to command a relatively high rental.
[89] Mr Sellars was unable to accept that the proviso effectively ruled out any possibility of three income producing buildings on the property. Although he accepted that the 4.5 metre set back would reduce options for future development, he thought that the Council would provide concessions to retain Leinster House in its current position and that those concessions would enable a third building to be constructed on the property, especially now that the land had been rezoned Business 1. He also said that even if three buildings could not be accommodated on the property, Mr Wright’s figure for the loss in value was excessive primarily because he had not made proper allowance for the fact that the relocated Leinster House would be at the rear of the section and for that reason could not be expected to command a high rental.
[90] It is important to remember that we are endeavouring to arrive at a loss of value as at December 1996 and that it would be wrong to rely too heavily on hindsight when making that assessment. In this respect the following comments by Mr Wright are in point:
“A developer purchasing the property, at the date of valuation [which I would construe as December 1996] would be relatively informed about the market conditions at the time. Such a buyer would have a reasonable feel for the potential for attracting a tenant, leasing the space and with respect to the end value of the property. The same purchaser contemplating the property with development of part deferred until after 2002 would be required to predict market conditions in 2002/2003. Most of us would have found this task very difficult in 1998 [I would substitute 1996]. The difficulty associated with predicting market conditions in 2002/2003 would therefore be reflected in a requirement for a higher level of profit from the venture recognising that this difficulty would translate into a significantly higher level of risk . . .”.
I accept the broad proposition that the limitations imposed by the proviso must give rise to a reduction in market value. Apart from anything else, the proviso reduced development flexibility until after 2002.
[91] Each valuer has come from the opposite end of the spectrum and both seem to have used actual events from 1998 onwards. For example, Mr Wright relies on the actual siting of Leinster House to support his argument that it would not be possible to have three buildings on the site. On the other hand, Mr Sellars used the change of zoning to Business 1 to bolster his argument that it should still be possible to construct three buildings on the site. Of course the hypothetical developer contemplating values in December 1996 would not have that luxury. While the 4.5 metre set back requirement and recession plane would undoubtedly have been a factor, it is equally true that the hypothetical purchaser would have taken into account that a proposed plan had been notified, that the previous owner’s submission seeking a change of zoning to Business 1 had not attracted any cross submissions, and that it was not beyond the bounds of possibility that the set back/recession plane requirements could be overcome by a resource consent. The likelihood that there would be a change of zoning from Living 2 to Business 1 at some time in the future would have also been taken into account. By the same token, I am sure that the hypothetical developer would still have allowed a significant risk factor to reflect an element of uncertainty about the outcome of a resource consent application and the timing of any zoning change as well as the possibility that for some unexpected reason the contemplated change of zoning might not eventuate. These factors lead me to the conclusion that our hypothetical developer would probably not have arrived at either of the figures advanced by the valuers but would have been much more likely to have reached a figure somewhere between.
[92] The Leinster House rental issue also points in the same direction. Mr Wright’s high rental for the relocated Leinster House reflects his view that after the building had been relocated and refurbished new rentals would be negotiated and much higher rentals than are currently being paid could be anticipated. On the other hand, Mr Sellars adopts the view that even if the building was refurbished its rear location would still be a decisive factor and a high rental could not be expected. Again the answer probably lies somewhere between.
[93] Although in the end result a relatively broad brush approach to loss of value is inevitable, that might not be too far removed from the approach of our hypothetical developer who would have probably weighed potential benefits/risks/other relevant considerations, decided upon an appropriate profit margin, and then arrived at an estimated market value. In my opinion the proviso has driven the value of the property down by around $150,000. This is on the basis that the purchase price represented the value of the property in the absence of the proviso. The plaintiff is entitled to damages from the third defendant in the sum of $150,000.
Quantum Of Damages Against Second Defendant
[94] The seven items “out of pocket” costs claimed by the plaintiff can be summarised:
• Item 1: Loss of rental from 1 April 1999 to 1 September 1999 arising from delayed occupation - $34,426.
• Item 2: Loss in rentable area (50 square metres) due to planning restrictions and cost of now providing those additional 50 square metres - $54,000.
• Item 3: Cost of relocating “Brides of Merivale” - $80,000.
• Item 4: Cost of early release of tenants from Papanui Road site - $10,450.
• Item 5: Loss of rental income from Papanui Road villas offset by income received from Leinster Road - $13,920.
• Item 6: Loss of rental income from the higher use value of the Papanui Road site - $71,209.
• Item 7: Additional professional fees - $13,886.
It is alleged that these losses were caused by the second defendant’s failure to alert the plaintiff to the proviso when he should have done so. The plaintiff claims that when the proviso was “sprung” on it in August 1998 it had to switch the Castlereagh development from Leinster Road to Papanui Road without having the time to properly plan that change or to manage it to best advantage.
[95] I accept that if Mr Costelloe had checked the lease as instructed by Mr Yankov (following receipt of Mr Thompson’s letter of 20 December 1996) and advised Mr Yankov that there was a proviso, Mr Yankov would have abandoned his closed mind approach to the demolition clause, faced up to the problem, and set about finding a solution. This would have triggered negotiations with Mr Gill around 18 months earlier than was in fact the case. Perhaps Mr Gill would have been less antagonistic, but that is hardly an issue because Mr Gill was not under any legal obligation to vacate. For present purposes the crucial difference is that the plaintiff would have had the necessary breathing space to properly plan for and manage any development on the Papanui Road frontage.
[96] Limitations arising from the 4.5 metre set back and recession plane requirements represented a significant impediment to any development on the Papanui Road frontage. For that reason the plaintiff examined the possibility of overcoming that impediment by way of resource consent. Unfortunately it was unable to secure the necessary consents from neighbours and decided that it was not feasible to pursue a notified resource consent application because the timeframe that would be involved could jeopardise its arrangements with Castlereagh. In all the circumstances the plaintiff’s decision not to pursue a resource consent application and not to wait for the change of zoning was entirely reasonable and understandable. Obviously the plaintiff could not afford to run the risk of losing a major long term tenant (20 years) and the resource consent process was bound to take time, especially if there was an appeal to the Environment Court. That time was not available. Although there had been discussion about the possibility of temporary accommodation for Castlereagh, the plaintiff was perfectly entitled to adopt the approach that Castlereagh’s target for occupation was 1 April 1999 and any significant slippage could jeopardise the arrangement. Perhaps it should also be added that although a change of zoning might have seemed to be relatively close, the evidence does not suggest that the timing of any change could have been accurately predicted. Once again the plaintiff’s arrangement with Castlereagh meant that the plaintiff could not afford to run the risk of waiting for a change which might take longer than expected.
[97] In the final analysis the Castlereagh building had to comply with the requirements of the Living 2 zone because Mr Costelloe had failed to provide a timely warning that the proviso existed. Had that warning been provided I am sure that the plaintiff would have been able to obtain a resource consent to overcome the limitations imposed by the Living 2 zone. No cross submissions had been lodged in relation to the third defendant’s submission seeking a change of zoning to Business 1 and that zoning was in fact notified in May 1999. There was no challenge to Mr McCracken’s evidence that it is highly probable that the resource consent could have been granted obtained if the requisite breathing space had been available. It should be noted that I have approached the resource consent issue on the basis that the granting of a consent would have been virtually a foregone conclusion if there had been the necessary space to pursue the application and any necessary appeal to the Environment Court. To my mind this is not a loss of opportunity situation but rather a matter of direct causation. If it had been necessary to approach the matter from a loss of opportunity perspective I would have still arrived at the same conclusion because to my mind the lost opportunity was a virtual certainty. Thus I am satisfied that the delay in providing occupation to Castlereagh and the limitations on building design as a result of the need to comply with the requirements of the Living 2 zone were caused by Mr Costelloe’s breach of duty. They were not caused by the Rossendale misrepresentation.
[98] It was suggested that the plaintiff had been the author of its own problems and that it had failed to mitigate its losses. I reject both those propositions. While it might have been unfortunate that Mr Yankov adopted a closed mind attitude towards the demolition clause, I have already found that he would have abandoned that approach and sought a solution if he had received timely advice from Mr Costelloe. Once Mr Yankov became aware of the proviso he promptly took advice and endeavoured to retrieve the situation. Although he took all the steps reasonably open to him to mitigate the plaintiff’s loss, the reality was that the plaintiff had no room to move and had to make the best of a most unsatisfactory situation.
[99] I now consider the seven “out of pocket” losses claimed by the plaintiff.
Item 1
[100] If the plaintiff had been given timely advice by Mr Costelloe that it could not evict Mr Gill until 2002 the Castlereagh building would have always been planned for the Papanui Road frontage and the Castlereagh target date of 1 April 1999 would have been achieved. I do not read any significance into the fact that the building consent was not issued until 19 April 1999. If the building had been planned for Papanui Road throughout delays that arose would have been avoided and the building consent could have been issued earlier.
[101] The valuers agree that the correct amount to reflect the loss of rental from delayed occupation offset by holding costs is $34,426. I accept Mr Sellars’ point that there should be a further adjustment to reflect rental income from the Papanui Road villas of $25,960 during the corresponding five month period. The plaintiff is entitled to $8,466.
Item 2
[102] Early knowledge of the proviso would have placed the plaintiff in a position where it could have obtained the necessary resource consent to build through the recession plane and thereby achieve an additional 50 square metres of rentable space. Although the valuers have agreed that a figure of $7,500 would represent the loss of income sustained by the plaintiff (provided it is compensated for the cost of now building the additional 50 square metres), they cannot agree about whether that amount should be in addition to any compensation for loss of value. On the other hand, they are in agreement that $47,000 represents the cost of now building the additional square metres.
[103] In my opinion this item of loss is separate from and in addition to the loss of value caused by the misrepresentation. If the second defendant had fulfilled his duty this loss would not have been sustained because the extra 50 square metres would have been authorised by a resource consent and included in the building from the outset. Loss of income has been sustained and the plaintiff now faces the extra cost of $47,000 to set the matter right. The loss has been proved and the plaintiff is entitled to $54,000 accordingly.
Items 3 and 4
[104] These items relate to the cost of relocating the “Brides of Merivale” and the early release of tenants from the Papanui Road site. I cannot see how it could be said that Mr Costelloe caused any of these losses. When the property was purchased the Gill lease was the only lease representing a potential problem. It was the plaintiff’s own actions that created the situation whereby other tenants had to be paid out of their tenancies. There will be no award in relation to these items.
Item 5
[105] This item seems to be founded on the premise that had the development proceeded on Leinster Road the plaintiff would have been better off because it would have retained the two villas on the Papanui Road titles which were producing a higher return than Leinster House. In my opinion this claim is misconceived. The switch from Leinster Road to Papanui Road was caused by the proviso which prevented the plaintiff evicting Mr Gill. The plaintiff has already received damages from the third defendant to compensate for that situation and I cannot accept that there is any justification for a top-up from Mr Costelloe. His default did not cause the switch. The plaintiff is not entitled to compensation in relation to this item.
Item 6
[106] The plaintiff claims that it was forced to sacrifice a higher rental on the Papanui Road frontage because it was already locked into a rental figure with Castlereagh when the decision was made to switch to Papanui Road. This is in the same category as item 5. It was not Mr Costelloe’s fault that the decision was taken to build the Castlereagh building on the Papanui Road frontage. This claim also fails.
Item 7
[107] There does not appear to be any serious challenge to the quantum of these additional professional fees which I accept were caused by Mr Costelloe’s breach. The plaintiff is entitled to $13,886.
Summary
[108] The plaintiff is accordingly entitled to a total of $76,352 from the second defendant.
Contribution Between Defendants
[109] In view of the conclusions I have reached, issues of contribution between the second and third defendants do not arise.
Outcome
[110] The plaintiff has established its misrepresentation cause of action against the third defendant and is entitled to damages against that defendant in the sum of $150,000. The plaintiff is entitled to judgment against the third defendant in the sum of $150,000.
[111] Two breaches of duty were established by the plaintiff against the second defendant: first, by failing to bring the facsimile of 4 June 1996 to the attention of the plaintiff; and, secondly, by failing to check the lease and advise the plaintiff that it included a proviso after having received Mr Yankov’s instructions in connection with Mr Thompson’s letter of 20 December 1996. No loss was caused by the first breach. As a result of the second breach the plaintiff suffered loss in the sum of $76,352. The plaintiff is entitled to judgment against the second defendant in the sum of $76,352.
[112] Liability was not established against the first defendant. The first defendant is entitled to judgment in relation to the plaintiff’s claim against him.
[113] If the parties are not able to reach agreement as to costs, they may submit memoranda to enable that issue to be determined by the Court.
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