Helensburgh Property Management Pty Ltd v Brady

Supreme Court of NSW|2016-02-16|Before: Bergin CJ, Ms J

Judgment

In the trial on liability the plaintiff, Helensburgh Property Management Pty Ltd, was successful in establishing that the defendant, Emma Elizabeth Brady, had breached the terms of her employment contract (the Contract) with the plaintiff, including acting in breach of her implied duty of loyalty and good faith in using the plaintiff's confidential information other than in the performance of her duties; and by poaching the plaintiff's clients both during and immediately after her employment with the plaintiff: Helensburgh Property Management Pty Limited v Brady [2015] NSWSC 1861 (the Judgment).
The Judgment dealt only with the issue of liability, the hearing in respect of which took place on 3 and 4 December 2015. These reasons, which should be read with the Judgment, relate to the issue of the plaintiff's entitlement to damages for the breaches of the Contract. The hearing on this issue occurred on 11, 12 and 16 February 2016 when Ms J Gatland, of counsel, appeared for the plaintiff (with Mr T Hale SC on 16 February 2016) and Mr RA Parsons, of counsel, appeared for the defendant. Although the defendant's company, All Over Rentals Pty Ltd (All Over Rentals), was the second defendant, the plaintiff accepted that no claim for damages can be made against it (tr 112). Although it sought to resile from this position I am satisfied the acceptance was appropriate having regard to the failure to plead any relevant cause of action against All Over Rentals. The plaintiff's case is limited to a claim for damages for breach of contract against the first defendant, Ms Brady, to whom I will refer as "the defendant".

Plaintiff's evidence

The evidence of Mr Campion and Mr Rodgers analysed the movement of clients away from the plaintiff to the defendant and All Over Rentals. That analysis is contained in a number of charts and graphs that were relied upon by Mr Fisher in the analysis in his report dated 27 January 2016.
Mr Fisher explained that a "rent roll", also known as a "property management portfolio", is a collection of properties managed by any agent who is licenced to conduct those activities in the particular jurisdiction. The relationship between the client (the landlord) and the real estate agent/licensee is one of principal and agent. It is not in issue that the demand for rent rolls is quite high because they provide a stable income for a real estate agent's office.
In return for a fee (a management commission) a licensee manages the residential and/or commercial properties of its clients. The client and the licensee usually enter into a Management Agency Agreement. In exchange for the fee the licensee provides various management services including: selecting tenants; entering into tenancy agreements on behalf of the client; serving notices to enforce or terminate agreements; collecting monies and issuing receipts; accepting and submitting rent bonds; dealing with defaulting tenants; and attending to repairs of the subject properties.
A rent roll is well recognised in the real estate industry as a valuable asset of any real estate business. The price paid for a rent roll is significantly affected by the size of that rent roll. Mr Fisher categorised rent rolls into: "small" (between 1 to 150 management agreements), "medium" (between 151 to 400 management agreements) and "large" (above 401 management agreements).
A rent roll is valued most commonly by calculating a purchase price based on a rent roll multiplier which is a dollar amount. The multiplier is applied to the annual management fee commission that a managed property generates. The two methods that are accepted generally in the real estate industry for determining the value of a rent roll multiplier are the comparative sales method and the due diligence method.
The comparative sales method determines the multiplier by making comparisons against other businesses (and rent rolls) of similar size, location and similar business characteristics which have been recently sold or valued. The due diligence method attaches a value to the rent roll multiplier by having regard to the demand for rent rolls in general and in the specific areas covered by the management agreements; recent sales of comparable rent rolls; the geographical spread of the properties; the quality and mixture of the management fee structure; the ratio of landlords to managed properties; the level of vacancies; the contribution of letting fees to overall management fee income; the average management fee contribution from the properties managed; and the management of the rent roll including arrears control.
Mr Fisher's report included the following: 7. NATURE OF DAMAGES SUFFERED 7.1 A property management portfolio entitles the managing agent to charge its clients (landlords) an ongoing fee to provide the services detailed above at Items 5.2.1 to 5.2.11. This fee takes the form of a management fee commission and is calculated as a percentage of the rents collected from tenants each month. 7.2 It is also the nature of property management portfolios that tenants vacate managed properties and new tenants are found. On finding new tenants, the managing agent becomes entitled to a letting fee as permitted by the management agency agreement. 7.3 It is my opinion that, as a result of the loss of these management clients, HPM has been denied the benefit of ongoing property management commissions and leasing fees that would have been received if each lost management had continued with HPM. 8. CALCULATION OF DAMAGES SUFFERED 8.1 Annexure B sets out the details of the property managements that I have been instructed have been lost by HPM to AOR. The formula that I have used for determining the value of the HPM lost managements is as follows: Annual potential management commissions x Multiplier on lost managements 8.2 The annual potential management commissions on lost managements is the total indicated in column 4 of Annexure A. By applying the formula at Paragraph 7.1 above, I have calculated the following value for the purchase price paid in respect of the lost managements: $71,857.76 x $3.65 = $262,281 8.3 For the reasons set out above, I am of the opinion that the value of the managements lost by HPM to AOM is $262,000 (rounded) not including GST.
Although Mr Fisher referred to the loss of "leasing fees" in paragraph 7.3 of his report, there was no evidence of the specific leasing fees that were lost in respect of the subject properties. The plaintiff attempted to tender very general evidence about such fees but this was rejected. Annexure B referred to in paragraph 8.1 of Mr Fisher's report listed 55 properties with annual fees totalling $71,857.76. It included 22 properties of Mr Canavan (or his companies) and 5 properties of Mr Dunn, both of whose business had been solicited while the defendant was still employed by the plaintiff.
One of the factors relied upon by the defendant in respect of the valuation of the rent roll is the existence of retention clauses in sale agreements of rent rolls. Retention clauses are included in such agreements to ensure that: (a) management agreements on each of the properties are executed in the purchaser's favour; (b) an assessment can be made of the loss of management contracts for various reasons not known to the purchaser prior to exchange of contracts: and (c) there is time to allow the purchaser to assess if the management contracts purchased can be retained and they are correctly represented in the contract (Ex 1 Confidential Tab 2).
Retention clauses usually provide for an amount (the Retention Amount) to be placed with the vendor's agent on the completion date; to be invested and held for a particular period agreed between the parties (the Retention Period); and distributed to the parties at the conclusion of the Retention Period in accordance with a formula agreed between the parties (the Formula). The Formula takes into account those management contracts that were terminated during the Retention Period (Managements Lost) and calculates their value on the same basis as the valuation of the rent roll (total management fees by an agreed multiplier). In fixing the Retention Amount much will depend upon the attributes of the particular rent roll. However the Retention Amounts in the sale agreements in evidence range from 10% to 80% of the purchase price (Ex 1 Confidential).
Mr Fisher agreed that due diligence by a purchaser of a rent roll would include an assessment of "flight risk" of clients and the risk of a key employee with strong client contact leaving and setting up in competition. Mr Fisher suggested that a purchaser recognising this kind of risk would seek to impose a restraint as its assurance of maintainable revenue. However the defendants submitted that in the circumstances of this case the only assurance a purchaser would have that it was paying for the maintainable revenue would be by the use of a retention provision in the contract for sale.
Mr Fisher agreed that the flight risks of clients and the risk of a key employee leaving to compete are significant matters to be taken into account in purchasing rent rolls. He gave the following evidence in cross-examination (tr 8): Q. You would advise, would you not, in participating in a due diligence with a prospective purchaser of a rent roll that if that were the case that it was not unlikely that a key person with strong client contact within the rent roll would set up in opposition at some future time that is something which you would advise a prospective purchaser to be very cautious about in entering a transaction, true to say? A. That's correct, yes. Q. To take strong measures within the contract to protect themselves if they proceeded at all, correct? A. I agree, yes.
Mr Fisher was cross-examined about the method of establishing a fair market value for a rent roll and the use of the multipliers derived from completed sales (tr 8-9). He gave the following evidence (tr 10-13): Q. Have you, yourself, read any of those contracts where the multipliers in the schedule to your report were derived from completed sales of rent rolls? A. I would read parts of the contract that were relevant to my role in the due diligence process. Q. Have you seen them to contain retention provisions? A. Yes, I have. Q. Retention provisions are usually used - sorry, I should make myself clear. By retention provision I mean a provision whereby purchase moneys or some kind of financial security is retained in the interests of the purchaser against the risk to maintain the maintenance of what's perceived as maintainable revenue. That's what I'm asking about, is that clear enough? A. Yes, that's clear. Q. That might take the form that the payment is staggered and the purchaser doesn't actually pay the full price all at once. Have you seen that form? A. Yes, I've seen that before. Q. Or it might take the form where some kind of security or escrow account or stakeholder account is retained? A. Held in trust, yes, certainly. Q. Or alternatively where there is a contractual clawback where the vendor receives the funds but the purchaser is entitled to have them back in the event that the maintainable revenue has any defined impacts on it under the retention provision. A. I haven't encountered that before, no. … Q. Assuming that it's a case which is not the acquisition of an entity but the acquisition of the rent roll only, please, in a case like that and in your experience the retention provision in the sale agreement would usually be directed at a failure of the incoming purchaser to obtain agreements with the owner clients, would that be correct? A. Yes, that's correct. Q. In your experience the retention provisions would seek to cover the eventuality of client flight, just people who didn't like the change of management? A. Yes, that's correct. … Q. Retention provisions, in your experience, seek to address that risk as well, true to say -- A. That's correct, yes. Q. -- by making provision whereby, in effect, the price of the rent roll is reduced by reference to those clients who undertake flight from the rent roll? A. That's correct. Q. Likewise, if there were a key person, such as I described before, with strong client connection where clients had particular confidence in that particular individual, that would be something, would it not, in your experience, which would exacerbate the risk of flight of the owner clients? A. Yes, it would. Q. In particular, if that particular individual, that key person individual, were to actually leave, that would be perceived by a purchaser as something detrimental to the value of the rent roll and, therefore, to be addressed in the retention? A. Without proper restraint, yes. … Q. In circumstances where some or all of those matters that I've asked you about in terms of risk factors to the maintainable revenue, to the extent that any of those were present, then, in your experience, what happens is that a purchaser makes a stronger or greater or longer retention provision, yes? A. Yes. Q. They would generally insist on that or otherwise walk away from the deal; would that be right? A. Yes. … Q. Would this be right, that, depending on the risk factors that might apply to the maintainable revenue, a retention clause might extend for twelve months or longer, in your experience? A. That would be unusual but it, I have seen that occur. Q. That would be where risks of the type that I've described to you were perceived to be present. A. That's correct, yes. Q. The amount retained could be 30% or more of the actual purchase price of the rent roll in those circumstances; would you agree with that? A. I've certainly seen up to 30% but generally it's less.

The defendants' evidence

Although the plaintiff submitted that little weight, if any, should be given to the evidence called in the defendants' case in relation to what the plaintiff's clients would have done had they known that the defendant was restrained from dealing with them for a period of 6 months, it is necessary to refer to that evidence before considering that submission.

Sonya Vere Drysdale

Sonya Vere Drysdale owns an investment property in Helensburgh with her husband which they purchased in 2001. Mrs Drysdale met the defendant in 2010 when she took over the property management of the investment property. Her unchallenged evidence was that the defendant did not inform her of her intention to leave her employment with the plaintiff. The only way Mrs Drysdale came to know of the defendant's departure from her employment was when she found herself dealing with new people at the plaintiff's office. Mrs Drysdale expressed the view that the defendant "proved to be a great property manager".
In June 2015 Mr and Mrs Drysdale's son suffered a severe injury in a sporting accident that necessitated moving into the investment property for a period whilst the family home was renovated to accommodate their son's injuries. After the defendant's departure Mrs Drysdale found it difficult to find someone at the plaintiff's office who was able to assist her with her inquiries about when they could move into the investment property.
Mr and Mrs Drysdale decided to terminate their management agreements with the plaintiff and to instruct an acquaintance at Raine & Horne to manage the properties. It was shortly before Mrs Drysdale approached Raine & Horne that she saw an advertisement at a bus stop in Austinmer with a picture of the defendant on it. Mrs Drysdale then made contact with the defendant and entered into a management agreement with All Over Rentals.
Mrs Drysdale gave affidavit evidence that if the defendant had informed her that she was unable to manage their properties for a period of 6 months she would not have remained with the plaintiff. She claimed that she would have terminated the agreements with the plaintiff and instructed Raine & Horne until such time as the defendant was available to manage their property.
In cross-examination Mrs Drysdale said that the fee in the agreement with the defendant was "roughly similar" to the fee charged by the plaintiff (tr 31-32). She agreed that when Mr Rodgers telephoned her in late 2015 and asked her if there was anything he could do to retain her business she informed him that she was not happy with the plaintiff's services and that she was going to speak to somebody else about taking over the management of her properties (tr 33-34).

Andrew James Smith

Andrew James Smith owns two investment properties located in Helensburgh that he acquired in 2010 and 2014. The selling agent of those properties, Ray White Helensburgh, referred him to the defendant. Although Mr Smith mistakenly thought that the defendant worked for Ray White, he instructed her to manage his properties. Mr Smith gave evidence that the defendant was "an excellent property manager".
In September 2015 Mr Smith read on Facebook that the defendant had resigned from her employment with the plaintiff. As a result of what Mr Smith regarded as a diminution in the quality of service he was receiving from the plaintiff, he decided to terminate the management agreements with the plaintiff. He also decided to take the properties to Raine & Horne in Helensburgh and "give them a go". At the same time he was considering selling one of the properties to reduce his level of debt and decided to discuss this with the sales agent at Ray White in Helensburgh. It was during these discussions that he learned where the defendant was working and how to contact her. He listed one of his properties for sale through Ray White and contacted the defendant by telephone and requested her to manage the remaining property. He later entered into a management agreement with All Over Rentals.
Mr Smith gave evidence that if the defendant had been unable to manage his property for a period of 6 months from the time she left her employment with the plaintiff, he would have instructed Raine & Horne and "would probably have taken" his business to the defendant if she was available and if the service from Raine & Horne had disappointed him in any way.
Mr Smith was cross-examined about a series of emails with the defendant in early September 2015 relating to the management of his properties. In one of those emails Mr Smith informed the defendant that he would need to speak with her at some stage about the prospect of selling one of his properties. On the evening of 7 September 2015 the defendant wrote by email to Mr Smith requesting that he call her the following morning because she had "officially resigned" and would not be able to assist him after lunch the following day (Ex B).
Mr Smith agreed in cross-examination that he terminated his agreements with the plaintiff five days after the email of 7 September 2015. He claimed that in that five day period he would have telephoned the plaintiff's office three or four times because he was concerned about the lease on the remaining investment property expiring (tr 39).
Mr Smith could not recall the level of the management fee charged by the plaintiff nor that charged by the defendant. He said that he was "just happy with the way" the defendant works (tr 38).

Jason Patrick Dunn

Jason Patrick Dunn and his wife purchased an investment property comprising five home units in Bulli in August 2010. The selling agent was Ray White Helensburgh who, it appears, referred Mr and Mrs Dunn to the defendant. Mr and Mrs Dunn instructed the plaintiff to manage the units and dealt with the defendant who was responsible for the day-to-day management of the property. Although it is an investment property Mr Dunn takes an active role in care and maintenance of the property including tending to the lawns and gardens and the painting of the interiors of the units when required.
Mr Dunn gave evidence that from 2010 he had regular dealings with the defendant and built up a professional and friendly relationship with her. He found her to be reliable and efficient. In June 2015 the defendant advised Mr Dunn that she was considering leaving her employment with the plaintiff. Mr Dunn gave evidence that he encouraged the defendant to do so and informed her that he wished her to continue managing his property irrespective of where she was employed. While the defendant was still working with the plaintiff Mr Dunn gave notice to her terminating the management agreements with the plaintiff. Mr Dunn also gave evidence that he asked the defendant to take his files in relation to the units with her when she left the plaintiff's employment.
Mr Dunn also gave evidence that if the defendant had been unable to manage his properties for 6 months following the termination of her employment with the plaintiff he would have terminated the management agreements with the plaintiff and arranged for his wife to manage the properties until the defendant became available.
In cross-examination Mr Dunn gave evidence that the management fee with the defendant was "around about 5.5 %" compared to the 7 % charged by the plaintiff. Mr Dunn accepted that he received a discount from the defendant but claimed that this was not his motivation in moving his business to the defendant (tr 44-45).

John Lawrence McCloskey and Phuong Anh McCloskey

John Lawrence McCloskey and his wife, Phuong Anh McCloskey, own an investment property in Helensburgh that the defendant managed for them until she terminated her employment with the plaintiff in September 2015. Mr McCloskey gave evidence that he regarded the defendant as "an excellent property manager". Neither Mr McCloskey nor his wife knew that the defendant had left her employment until later when Mrs McCloskey spoke with the defendant. They then moved their business from the plaintiff to the defendant and All Over Rentals.
Mr McCloskey gave affidavit evidence that if the defendant had been unable to manage his property for a period of 6 months after the termination of her employment with the plaintiff, he would have left his business with the plaintiff until the defendant became available to manage the property. He would have then terminated the management agreement with the plaintiff and instructed the defendant.
In cross-examination Mr McCloskey agreed that when he terminated the agency agreement on 2 October 2015 he advised the plaintiff that he had "been happy with the services" that had been provided "over the last 2 years" and thanked the plaintiff for managing the property (Ex D). He claimed that this statement was "not correct" (tr 48). He agreed that Mr Rodgers telephoned him in early October 2015 and that he informed him that he had received a discount when he moved his business to the defendant. However he said that he really would have said anything to Mr Rodgers to make him happy because he did not want any hard feelings or trouble (tr 49). He gave evidence that the defendant did not contact him and that he and his wife sought the defendant out (tr 49). He claimed that even if the plaintiff had done "a fantastic job" it would not have been able to retain his business (tr 50).
Mrs McCloskey gave unchallenged affidavit evidence that if she had been informed that the defendant could not manage the property for 6 months she would have left the management of the property with the plaintiff until the defendant was ready to manage it; and that if the plaintiff's level of service did not improve she may have taken the property to another firm until the defendant was available.

Michael Robert Davidson

Michael Robert Davidson owns an investment property in Helensburgh. He was referred to the defendant in 2011 while she was employed with the plaintiff and entered into a management agreement at that time. Mr Davidson was very pleased with the services provided by the defendant and after he found out, via LinkedIn, in October 2015 that the defendant had left her employment with the plaintiff he telephoned her and asked her to take over the management of his property.
Mr Davidson gave evidence that if the defendant had been unable to manage his property for 6 months after she left her employment with the plaintiff he would have left his business with the plaintiff but would "definitely have gone" to the defendant as soon as she was available. In cross-examination Mr Davidson said that the defendant was probably the best property manager he had ever had (tr 54).

Lynette Vivian Stares

Lynette Vivian Stares and her husband purchased an investment property in Helensburgh in about 2006. They subsequently built a second house on the same block of land which was completed in 2013. They engaged the plaintiff to manage the investment property in about 2006 and subsequently met the defendant in 2010. Mrs Stares described the defendant as "an excellent manager". When Mr and Mrs Stares began the construction of the house on the same block of land as the investment property they terminated the management agreement with the plaintiff because they did not believe that they could rent the property while the construction work was going on. At the conclusion of the construction work in 2013 Mr and Mrs Stares entered into a management agreement with the plaintiff and the defendant had the day-to-day management of the property.
Mr and Mrs Stares found out that the defendant had left the plaintiff's employment when Mrs Stares saw a notification on Facebook. Mrs Stares made contact with the defendant and the defendant agreed to manage their properties once the existing agreements they had with the plaintiff had been terminated. Mrs Stares said that she had noticed a diminution of the quality of the service provided by the plaintiff after the defendant had left its employment.
Mrs Stares gave evidence that if the defendant had not been able to manage her properties for a period of 6 months after termination of her employment with the plaintiff she would have "waited out" that period and when the defendant became available she would have taken her business to her.
In cross-examination Mrs Stares agreed that she terminated her agreement with the plaintiff on about 15 September 2015. She agreed that she informed Mr Rodgers that she was leaving because a friend had just set up a real estate business. She was then asked (tr 60-61): Q. It wasn't because you had any problems with Helensburgh Property Management? A. That's - Q. Was it? A. No. Q. But was more that you wished to assist your friend in some way and give her your business? A. Correct.
Although Mrs Stares could not recall the exact management fee in her agreement with the defendant, her evidence was that it was "comparable" with the fee charged by the plaintiff (tr 62).

Diane Terese Smith

Diane Terese Smith and her husband own two investment properties, one in Coalcliff and the other in Sylvania. In 2012 Mrs Smith and her husband decided to rent out the Coalcliff property. It was at this time that they met the defendant who managed the Coalcliff property for them. Mrs Smith described the defendant as "an excellent manager".
At a later time the defendant advised Mrs Smith that she was having problems with the plaintiff in respect of the late payment of rent by the tenants in the Coalcliff property. Mrs Smith claimed that the defendant informed her that the plaintiff was advising her to terminate the tenancy because of late payment of rent. Mrs Smith also claimed that the defendant informed her that she thought it was "foolish" to terminate this agreement. Mrs Smith and her husband were quite happy with the tenants and the agreement was not terminated. In cross-examination Mrs Smith said that when the defendant informed her that the plaintiff's upper management wanted to terminate the tenancy agreement she was "horrified" (tr 66).
Mr and Mrs Smith were unaware that the defendant intended to terminate her employment but found out in late September 2015 when Mrs Smith's husband saw a notification on Facebook that the defendant had started her own business. They then approached the defendant to manage their property. Mrs Smith became aware that "owing to a post-employment condition" in her contract with the plaintiff the defendant was unable to manage the Sylvania property because it was in the Sutherland Shire (clearly a reference to the unrectified restraint clause referred to in the Judgment). However Mrs Smith and her husband entered into an agreement with All Over Rentals to manage the Coalcliff property.
Mrs Smith gave evidence that had the defendant been unable to manage the Coalcliff property for a period of 6 months after leaving her employment with the plaintiff she would have managed the Coalcliff property herself until the defendant became available to do so. Mrs Smith also gave evidence that had the defendant informed her that she was able to manage the Sylvania property she would have terminated the contractual arrangements with the plaintiff and entered into a management agreement with All Over Rentals to manage that property.

David Brian Alexander Downing

David Brian Alexander Downing and his wife owned three investment properties, two in Helensburgh and one in Stanwell Park, that were managed by the defendant for about 4 or 5 years until September 2015. Mr Downing regarded the defendant as "an excellent property manager" and was very happy with the services she provided. Some time in September 2015 he saw on Facebook that the defendant had started her own property management business. He telephoned the defendant and subsequently placed his business with All Over Rentals. Mr Downing said that after the defendant had left the plaintiff's employment he was not happy with the level of service provided by the plaintiff.
Mr Downing's affidavit evidence was that if the defendant had been unable to manage his properties for 6 months after the termination of her employment with the plaintiff, he and his wife would have left the management of the property with the plaintiff until the defendant was available to take them over.
In cross-examination Mr Downing said that between August 2015 and November 2015 he did not have any "specific issues" with the management of the properties by the plaintiff (tr 84). He could not recall what the difference was between the fees charged by the plaintiff and those contained in his agreement with All Over Rentals (tr 87).
The next group of witnesses referred to below gave affidavit evidence and were not cross-examined.

Julie Ann West

Julie Ann West owned an investment property in Corrimal that she acquired in June 2013. She met the defendant in about 2010 and they became friends. Ms West wanted the defendant to manage her property and so she entered into a management agreement with the plaintiff.
Ms West claimed that she later became aware that her agreement was with "the McGrath group based in Cronulla". Ms West advised the defendant that she did not want McGrath Cronulla to manage her property and that she would rather manage her property herself. It was at this time that the defendant informed Ms West that she was "thinking of leaving" the plaintiff's employment. Ms West asked the defendant whether she could "follow" her.
On 16 July 2015 Ms West terminated her management agreement with the plaintiff by sending an email to the defendant. On 10 September 2015 Ms West entered into an agreement with All Over Rentals in respect of the management of her Corrimal property.
Ms West's affidavit evidence was that she would have terminated her agreement with the plaintiff even if the defendant had not resigned from her employment with the plaintiff. She also gave evidence that if the defendant was not able to manage her property for 6 months after the defendant had terminated her employment with the plaintiff, she would have offered the Corrimal property to the defendant "when she was in a position to take it on".

Elleneta Ruth Hocking

Elleneta Ruth Hocking approached the defendant in 2015 to enquire whether she would manage a property that she and her husband own in Mt Annan, while they were overseas.
The defendant advised Mrs Hocking that she was thinking of leaving her employment with the plaintiff and Mrs Hocking informed the defendant that she would follow her if she left. Mrs Hocking entered into a management agreement with the plaintiff in about July 2015 and was very happy with the defendant's management of the property.
In about August 2015 the defendant informed Mrs Hocking that she had resigned with the plaintiff. Mrs Hocking advised the defendant that she wished to "go with" her. No one from the plaintiff contacted Mrs Hocking after the defendant's resignation. Mrs Hocking subsequently entered into a management agreement with All Over Rentals. Mrs Hocking claimed that it was never her intention to leave the property with the plaintiff.

Karen Nicole Joyner

Karen Nicole Joyner and her husband own an investment property in Helensburgh that had been managed by the defendant since July 2014. It was the defendant's employment with the plaintiff that drew the couple to the plaintiff and they had no problems with the management of the property while the defendant was employed with the plaintiff. However in late September 2015 problems began to emerge. Mrs Joyner received a call from the building and contents insurer regarding outstanding insurance payments in respect of the property. Mrs Joyner sent an email to the defendant, who the couple assumed still worked for the plaintiff. After there was no response from the defendant, Mrs Joyner called the plaintiff and was advised of the defendant's resignation.
Initially Mr and Mrs Joyner left the property under the plaintiff's management. However when Mrs Joyner's emails were not answered for 48 hours she became "increasingly frustrated" with the plaintiff and regarded the plaintiff's service as "unsatisfactory".
On 23 October 2015 Mrs Joyner expressed her dissatisfaction to a friend who later that day provided her with the defendant's contact details. Mrs Joyner called the defendant immediately. However the defendant advised Mrs Joyner that she would have to speak to her "later".
On 28 October 2015 the plaintiff sent Mrs Joyner an email informing her that a new staff member had been assigned to manage her property. Mrs Joyner spoke to the defendant the same day and advised her that she wanted her to manage the property. The defendant advised Mrs Joyner that she needed to terminate the management agreement with the plaintiff before this could happen. Later that day Mrs Joyner sent an email to the plaintiff outlining her concerns, as she claimed that she wanted to give the plaintiff an opportunity to respond before deciding to terminate her agreement. However there being no prompt response, on 29 October 2015 Mrs Joyner sent another email to the plaintiff terminating the agreement.
On 30 October 2015 Mr Rodgers telephoned Mrs Joyner, asking how the plaintiff could make amends and offered 3 months free management of the property. Mrs Joyner gave Mr Rodgers a list of grievances and although he promised to call her back about those concerns, he did not do so. Mr and Mrs Joyner then moved the management of their property to the defendant.

Wendy Louise Ristuccia

Wendy Louise Ristuccia and the defendant have been friends for about 20 years. She and her husband own a property in Narellan Vale that the defendant has managed since 2008 at her various places of employment.
In August 2015 the defendant advised Mrs Ristuccia that she had decided to leave the plaintiff's employment. Mrs Ristuccia wanted the defendant to continue to manage the property as there "was no question of leaving it with the plaintiff". On 5 September 2015 Mrs Ristuccia gave the plaintiff 30 days written notice of her termination of the management agreement. Mrs Ristuccia advised the plaintiff that she was going to self-manage the property because she did not want to tell the plaintiff that the defendant was going to be managing the property.
Mrs Ristuccia's evidence was that if the defendant could not manage the property, she would have still terminated the agreement with the plaintiff. She claimed she would have found another property manager closer to the property or, alternatively, self-managed the property.
In mid-October 2015 Mr Rodgers contacted Mrs Ristuccia to discuss her reasons for termination of the management agreement with the plaintiff. Mrs Ristuccia advised Mr Rodgers that there was no "particular" problem with the plaintiff's services and that she was managing the property herself.

Alan Thomas Blackwell

Alan Thomas Blackwell owns two investment properties in Helensburgh. His superannuation fund owns another Helensburgh property. All three properties were managed by the defendant while she was employed with the plaintiff.
After the defendant's resignation from the plaintiff Mr Blackwell transferred his properties to Raine & Horne in Helensburgh because the standard of service provided by the plaintiff after the defendant's departure "diminished".
At the time of trial the management of Mr Blackwell's properties remained with Raine & Horne.

Galina Vladimirova

Galina Vladimirova and her husband purchased a property in Austinmer in about November 2009. The selling agent was Bevan's Real Estate, which was retained to manage the property after the purchase. Mr and Mrs Vladimirova met with the defendant in the latter part of 2013 and moved the management of their property to the plaintiff. They were extremely happy with the defendant's services.
In October 2015 Mrs Vladimirova was informed by a third party that the defendant had resigned from her employment with the plaintiff. She subsequently made contact with the defendant who informed her that she had set up her own property management company. Mrs Vladimirova requested that the defendant continue to manage the property. The defendant agreed and Mrs Vladimirova immediately terminated the management agreement with the plaintiff.
Mrs Vladimirova's evidence was that if she had been informed that the defendant could not manage the property for 6 months she would have self-managed the property through this period until the defendant was available.
The tenant in the property had paid rent 6 months in advance and the plaintiff had received 6 months of commission. After terminating the agreement with the plaintiff Mrs Vladimirova requested that the plaintiff return the commission fees for the period in which it had not been managing the property. The plaintiff contended that it is entitled to this money and has not complied with Mrs Vladimirova's request.

Tony Naughton

Tony Naughton purchased an investment property in Helensburgh in March 2015 and commenced renovations on the property. In the same month he had a meeting with the plaintiff to discuss the management of the property once the renovations were completed. It was at this meeting that he met the defendant.
His initial intention was to self-manage the property. However he changed his mind after meeting the defendant and entered into a management agreement with the plaintiff.
In August 2015 he informed the defendant that the renovations were completed and that the property was ready to be leased. A few hours later the defendant telephoned him and advised that she had found tenants. Mr Naughton was very impressed by this and with the defendant's handling of all aspects of the leasing.
In September 2015 Mr Naughton found out from a local tradesperson that the defendant had resigned from the plaintiff. Mr Naughton telephoned the defendant and advised her that he wanted her to keep managing his property. The defendant advised Mr Naughton that he needed to give notice to the plaintiff and terminate the existing agreement. He did this on 30 September 2015 and transferred the management of his property to the defendant.
Mr Naughton's evidence was that if he had been informed that the defendant could not manage his property for 6 months, he still would have terminated his agreement with the plaintiff. He claimed that he only entered into the agreement with the plaintiff because he was impressed with the defendant.

Conclusions in respect of the defendants' evidence

The evidence given by the defendants' witnesses is of course in part hindsight evidence. In this regard Bryson JA in Seltsam Pty Ltd v McNeill [2006] NSWCA 158 said at [123] that the "strongest theme of dissatisfaction with such evidence is its lack of reliability because of its self-serving nature, given as the evidence is when it is known with hindsight that the subject is of importance to the party who gives the evidence". It is accepted that "retrospective reasoning" should be treated with caution: Ellis v Wallsend District Hospital (1989) 17 NSWLR 553, per Kirby P at 560.
I have no doubt that the witnesses called by the defendants were doing their best to assess accurately what they would have done had they been aware of any restraint on the defendant for 6 months after the conclusion of her employment with the plaintiff. The evidence of some of the clients in greater particularity that they would have given the requisite thirty days' notice, self-managed for 5 months and gone to the defendant after 6 months is to be treated with greater caution than their evidence that they would have moved their business to the defendant when she became available after 6 months. I am not satisfied to the requisite degree of probability that these clients would have left the plaintiff prior to the defendant becoming available at the conclusion of the 6 months. I am satisfied that all the owners of the subject properties (excluding Messrs Canavan and Dunn) would have stayed with the plaintiff for six months and then moved their business to the defendant.
The plaintiff submitted that with the exception of Mrs Joyner there was no evidence to suggest that at the time of terminating their contracts with the plaintiff any of the clients were unhappy or dissatisfied with the plaintiff's performance of its obligations under the management agreements. This submission lacks force having regard to the fact that it was the defendant who had been providing the day-to-day management for each of those clients. There were some witnesses who suggested that after the defendant resigned from the plaintiff's employment the quality of the services provided by the plaintiff declined or diminished.
On reviewing the evidence referred to above I am satisfied that the plaintiff would not have been able to convince any of the lost clients to stay with it. Indeed the defendants relied upon the evidence given by Mr Rodgers of his unsuccessful efforts to convince those clients to stay with the plaintiff. The defendants' submission that ultimately it does not matter if the dissatisfaction expressed by those witnesses is objectively justified has force. It was further submitted that those witnesses' subjective sentiments give support to the fundamental proposition that they would have terminated their agreements with the plaintiff and accordingly there is no need to determine whether their dissatisfaction was objectively justified. I agree with that submission.
The evidence of the defendants' witnesses supports the finding, which I make, that the defendant is an extremely effective property manager. There is further support for this in the 2011 valuation of the rent roll conducted for mortgage purposes when the plaintiff was restructuring. That valuation recorded that although market forces had resulted in rent rolls suffering from a high degree of landlord attrition, the plaintiff's rent roll had grown by approximately 30 new managements since July 2010 (Ex 1 Confidential Tab 2 p 4). The defendants submitted that such a finding supports a further finding that those clients that transferred their business to the defendant and did not give evidence would have left to go with the defendant as soon as practicable. Having regard to the overwhelming evidence in relation to the excellence of the defendant's property management skills, I think it is highly probable that those clients would have also moved their business to the defendant as soon as practicable.

Concessions at trial

Although during the trial the plaintiff relied upon the defendant obtaining the business of Mr Blackwell, Ms West, Mrs Ristuccia, Mrs Hocking and Mr Palmer, these claims were abandoned at the conclusion of the trial. Once these claims were abandoned there remained 20 clients and 50 properties that are the subject of the plaintiff's claim. These are helpfully listed in Exhibit 2 together with relevant information including monthly commissions.

Loss suffered

There is no issue that the loss that has been suffered by the plaintiff is the loss of the clients to the defendant. There is no real issue that the defendant's conduct caused the loss. The real issue is the quantification of the loss and the appropriate method to be adopted in all the circumstances.

Quantification

The plaintiff is to be restored to the position it would have been in if the defendant had not breached her Contract: Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64 per Mason CJ and Dawson J at 80 citing Robinson v Harman [1848] 154 ER 363.
The plaintiff claims that it had a capital asset, the rent roll, the value of which has been diminished by the defendant taking away the management of fifty of the properties (the subject properties) in breach of her Contract. The plaintiff claims that the appropriate measure of damages is the consequent reduction in the value of the rent roll.
The plaintiff claimed that the rent roll was a valuable asset that it could have sold as at September 2015. However there was no evidence that the plaintiff was intending to sell the rent roll. The plaintiff also claimed that the defendant obtained the benefit of part of that asset without purchasing it for value and was able to earn the income from the management of the subject properties.
The plaintiff accepted that over time in the course of a rental property management business there would be losses and gains to the rent roll. It was submitted that losses typically arise when a property is sold to a new owner who wishes to appoint a different property manager or where the property is to be left vacant for development, or where the property is to be managed by the owner themselves or no longer used as a rental property. Alternatively partial or whole rent rolls can be sold off to other real estate businesses.
Mr Campion's evidence was that the underlying "leakage" of clients from the plaintiff between July 2014 and September 2015 was between zero and six per month, not including sales of clients on the rent roll to other agencies. The plaintiff contended that Mr Campion's evidence demonstrated that it was never more than eleven properties that were lost. This was contrasted with the losses in October 2015 when more than thirty seven property management agreements were terminated and all but two of them were as a result of clients having terminated in favour of taking their business to All Over Rentals.
The plaintiff also accepted and has submitted that there can be gains to a rent roll arising from attracting new business, referrals from local real estate agents who have sold a property to a new landlord, changes in the use of a property so that it becomes available for rent and the purchase of another real estate business' rent roll.
The plaintiff claimed that the loss incurred from the termination of fifty property management agreements (nearly a quarter of the rent roll) was not merely from the lost income stream arising from those agreements, but also from the diminution of the value of its remaindered asset. The plaintiff does not concede that any leakage from its rent roll would have been lost had the defendant acted in accordance with her Contract.
The plaintiff emphasised the defendant's admission that she solicited some of its most significant clients (namely Mr Canavan and Mr Dunn) some months prior to giving notice of her intention to terminate her employment. Additionally the plaintiff submitted that the very distinctive increase in attrition rates immediately after the defendant's departure could not be accounted for by mere dissatisfaction.
The defendants claimed that the appropriate measure of damages is the lost income from the management of the subject properties from the time they were taken away to a date 6 months after the termination of the defendant's employment (the expiry of the restraint period). The defendants contended that in any event the vast majority of the owners of the subject properties would have left the plaintiff and moved their business to the defendant at the expiration of six months.
The defendants submitted that the plaintiff's approach to the assessment of damages contains an assumption in relation to a contingency, namely that the owners who in fact terminated their agreements with the plaintiff would have remained stable clients of the plaintiff absent the defendant's breaches. In this regard the defendants relied upon the following passage of Brennan J's judgment in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 101: To apply the hypothesis that "the contract had been performed" in such a case, it is necessary to find whether the condition would have been fulfilled or whether the contingency would have occurred or, if the fact cannot be found, to make some estimate of the possibility of non-fulfilment of the condition or the occurrence of the contingency.
The defendants submitted that the value of the rent roll was impacted by a number of factors quite separate from the defendant's breaches. These included: the strong personal connection of the owners to the defendant; the defendant's good standing with the owners; that the defendant was an excellent property manager, a fact well recognised by the owners; and the peculiar position of the defendant being under no demonstrable restraint upon termination, the restraint being rectified some months later.
The defendant accepted that her conduct in breaching her Contract included liaising with eight clients and persuading them to "go with her" by terminating their management agreements with the plaintiff.
The defendants submitted that after the six month restraint period, she would be free to compete under the rectified clause 18; within the restraint period some of the owners would leave the plaintiff for want of the personal attention of the defendant; and all who have left were likely to terminate their agreements with the plaintiff by the expiration of the restraint period.
In assessing damages it is necessary to determine in terms of the degree of probability whether the subject clients would have left the plaintiff in any event: Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 643 per Deane, Gaudron and McHugh JJ.
As I have said above the defendant is an extremely effective and efficient property manager and it is obvious that she has a very loyal following. I am satisfied that even if the defendant had left the plaintiff's employment and complied with her obligations both during and after her employment, it is highly probable that the owners of the subject properties would still have moved their business to her. I am satisfied that even if the defendant had not breached her Contract the twenty owners of the subject properties would have terminated their agreements with the plaintiff and instructed the defendant to manage their properties at the conclusion of the restraint period.
In support of its contention that the appropriate method to quantify the plaintiff's loss is in accordance with Mr Fisher's valuation of the rent roll, the plaintiff relied upon Southern Real Estate Pty Ltd v Dellow and Arnold [2003] SASC 318; (2003) 87 SASR 1. In that case the defendant decided to resign as a director of the plaintiff but prior to doing so she prepared a list of fifty eight clients that were on the plaintiff's rent roll and sent letters to each of them informing them of her departure from the plaintiff and inviting them to make contact with her. Fifty seven of those clients transferred the management of their properties to the defendant.
At first instance the defendant was held liable to the plaintiff albeit that the basis of that liability was not clearly articulated. The plaintiff's claim was for equitable damages or equitable compensation. The Full Court (Debelle J, Nyland and Lander JJ agreeing) concluded that the basis upon which damages were to be assessed would turn on the nature and content of the respondent's duties as a director. The Full Court determined that the respondent was liable for breaches of her duties as a director, both fiduciary and statutory, in failing to act in good faith and in the best interests of Southern and in using her position as a director improperly to gain an advantage for herself and to cause detriment to Southern: per Debelle J at [32] (Nyland and Lander JJ agreeing at [60]-[61]).
Debelle J said: 50. The loss in this case is a substantial reduction in the number of clients remaining on the rent roll of Southern Real Estate. Ms Dellow's conduct caused that loss. She is, therefore, liable to restore Southern Real Estate to the position in which it would have been had she not acted in breach of her duties. Southern Real Estate does not require an account of profits. The most appropriate method, therefore, of assessing that loss is to assess the diminution in value of the rent roll.
After referring to the fact that there is a "market" in rent rolls and reviewing the relevant authorities in assessing equitable compensation Debelle J said: 54. It is apparent that the real value of the rent roll is influenced by factors such as a restraint of trade clause and, more relevantly for present purposes, whether the property manager takes up employment with the purchaser or remains with the vendor. In this case it is clear that Ms Dellow had established a very good working relationship with many of the landlords on the rent roll. For the whole of the time since Southern Real Estate commenced its business she had been the property manager, a period of over six years. She had in that time established a degree of personal goodwill. As Mr Robertson, a director of Southern Real Estate, said in his evidence, Ms Dellow had built up the rent roll. 55. As Ms Dellow was intending to establish a property management business in competition with Southern Real Estate, the value of the rent roll would be discounted by that fact. She obviously had the capacity to attract clients. Unfortunately, the question as to what discount should have been allowed for this basis was not examined fully at the trial. In all of the circumstances I think it is appropriate to make a discount of one third from the value of the rent roll to reflect that factor. That reduces the value of the customer's list to $40, 626 [from $61,093.80], say, $40,500 for these reasons, I would assess the loss to Southern Real Estate at $40,500.
Although in that case there was no reference to retention clauses in purchase contracts there was a recognition of the need to apply a discount to the value of the rent roll by reason of the defendant's intention to establish a business in competition with Southern. However it appears that this was not examined fully at trial (at [55]). In the present case the defendants have called extensive evidence from numerous clients and it is clear that the clients who are the owners of the subject properties would have left the plaintiff irrespective of the defendant's breaches. The question arises as to whether in those circumstances it is appropriate for the plaintiff to recover the capital value of the lost clients.
In AMP Services Ltd v Manning [2006] FCA 256 and AMP Services Ltd v Manning (No 2) [2007] FCA 82, a case in which many of the plaintiff's clients moved their business to the competitor that the defendants had joined after leaving the plaintiff, Finkelstein J considered the bases on which damages could be awarded. The plaintiff claimed that the capital worth of the business had been diminished by about $4.3 million and sought to recover that amount from the defendants. Although dismissing a number of the plaintiff's claims, his Honour was satisfied that the first defendant had breached her duty to the plaintiff in approaching its clients to entice them to deal with her once she went to work with the competitor ([2006] FCA 256 at [60]). His Honour referred to Southern Real Estate Pty Ltd v Dellow and Arnold and determined that the critical question was the plaintiff's actual loss due to the defendant's breach ([2006] FCA 256 at [64]).
Finkelstein J was satisfied that the plaintiff would not have been able to convince any of the subject clients to remain with it ([2006] FCA 256 at [70]). I am satisfied that this is also the position in the present case. In that case the relevant period before the clients could have moved to the competitor was one month. In the present case the relevant restraint period is six months. Finkelstein J addressed three possible heads of compensation: (1) capital loss arising from the loss of the clients; (2) the income lost in the one month period; and (3) the value of the lost opportunity to retain the clients ([2007] FCA 82 at [5]). His Honour was satisfied that it would not be possible for the plaintiff to recover the capital value of its lost clients because the clients would have been lost even if there were no breach ([2007] FCA 82 at [6]). His Honour assessed damages on the basis of the lost income for the relevant period. In a passage relevant to the circumstances of this case his Honour said ([2007] FCA 82 at [29]): The value of the lost clients must be considered from the perspective of a potential purchaser who … is willing to pay for an income stream that he is confident will continue to be received in the foreseeable future. From the moment Ms Manning tendered her resignation no reasonable purchaser would so regard the income received from Ms Manning's clients. Nor would a reasonable purchaser be encouraged into thinking the income was maintainable by the type of strategy Mr Regan had in mind [including writing to clients and holding meetings with them and the defendant]. A purchaser might be willing to pay a token amount for the client list, but he would do so more as a wager than as payment of a reasonable amount for an asset.
I am satisfied that it is not appropriate to assess damages on the basis contended for by the plaintiff as this would be awarding damages for the capital value of the lost clients. Having regard to my findings that the clients would have been lost after 6 months irrespective of the defendant's breach of the Contract, the plaintiff is not entitled to recover the capital value of its lost clients: AMP Services Ltd v Manning (No 2) [2007] FCA 82 at [6].
It is appropriate to assess damages on the basis of the commissions lost. In doing so it is necessary to take into account that Mr Canavan gave notice whilst the defendant was still employed with the plaintiff. This also applies to Mr Dunn. Damages will be assessed on the basis of the loss of commissions for seven months in respect of Mr Canavan's properties ($12,122.04) and Mr Dunn's properties ($2,487.24) and the loss of commissions for six months for the balance of the properties ($19,131.54). That yields a figure of $33,740 (rounded). The plaintiff is entitled to the entry of judgment against the first defendant in the amount of $33,740.
I will hear the parties on interest and costs when the matter is listed for final orders to be made at 10 am on 24 March 2016.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 March 2016

At a glance

Court

Decision date

Before

Source

Judgment (24 paragraphs)

Parties

Cases Cited (9)