Masters Home Improvement Australia Pty Ltd v North East Solutions Pty Ltd [2017] VSCA 88

Masters Home Improvement Australia Pty Ltd v North East Solutions Pty Ltd [2017] VSCA 88 - VSCA 2017 case summary — Zoe

[28]

2.1 Briefing Kit

The Tenant must, as soon as practicable after the date of this Agreement, and in any case on or before 15 January 2010, develop and give to the Landlord the Briefing Kit and the Site Plan.

2.2 Costs Estimate

(a) As soon as reasonably practicable after receipt by the Landlord of the Briefing Kit the Landlord, acting reasonably and in good faith, must:

(i) determine the Landlord's Works Costs and advise the Tenant in writing of the Landlord's Works Costs;

(ii) provide, on an open book basis, its costing of the Landlord's Works Costs; and

(iii) advise the Tenant whether it requires the Tenant to contribute towards the Landlord's Works Costs and the amount of that contribution (if any).

(b) The Landlord and the Tenant, acting reasonably and in good faith, must attempt to resolve any differences they may have in relation to:

(i) the Landlord's determination of the Landlord's Works Costs; and

(ii) the amount that the Tenant must contribute towards the Landlord's Works Costs (if any) and the manner in which this contribution will be made.

(c) If, by the later of:

(i) 20 April 2010; and

(ii) the date which is 6 weeks after the date of receipt by the Tenant of notice of the Landlord's Works Costs, or such later date to which the parties agree, the Landlord and the Tenant cannot agree on:

(iii) the Landlord's Works Costs; or

(iv) the amount that the Tenant must contribute towards the Landlord's Works Costs (if any) and the terms and conditions on which this contribution will be made, the Landlord or the Tenant may:

(v) terminate this Agreement by giving notice in writing to the other; and

(vi) procure the withdrawal of the application for Development Approval.

(d) Termination of this Agreement pursuant to clause 2.2(c)(v) does not prejudice any claim which either party to this Agreement may have arising from the non-compliance by the other party of any of its obligations under this Agreement.

(e) Subject to each party's rights under clause 2.2(d), if this Agreement is terminated pursuant to clause 2.2(c), each party will bear their own legal and other costs and expenses in connection with this Agreement arising before termination.

[132]

5.4 The learned judge erred in making a number of findings and failing to make other findings - leading to the erroneous conclusion that Masters and Woolworths had breached their obligations under clause 2.2(b) and (c), namely:

'Undisclosed budget'

(a) the erroneous finding that Woolworths and Masters should have disclosed the $1.7 million 'budget' to NES (Reasons, [163]);

(b) the erroneous finding that the revised NES offer of 6 April 2010 of $2,941,169 was not accepted because it exceeded the 'undisclosed budget' (Reasons, [122], [151], [175], [266]);

(c) the erroneous finding that the real reason that Woolworths and Masters terminated the AFL was their inability to bring the Clause 2.2(b) amount within their 'undisclosed budget' (Reasons, [87], [122], [178], [183], [187], [212], [213], [215], [216]);

(d) the failure to find (including in Reasons, [213]) that NES was precluded from relying on allegations of breach in relation to the 'budget' in circumstances where the allegations were not included in NES's opening, or put to Mr Macmillan (the relevant Woolworths witness) in cross examination;

Rider Hunt's 'estimate'

(e) the erroneous findings that on 29 March 2010 and 31 March 2010 Rider Hunt provided to Woolworths an 'estimate' of the Clause 2.2(b) Amount in the sum of $3,247,195 million (Reasons, [94], [151], [154], [174], [209], [245]);

(f) the erroneous finding that by reason of a review conducted by Rider Hunt between 12 April 2010 and 18 April 2010, Rider Hunt arrived at a LWC 'estimate' of $11,516,809, which equated to a Clause 2.2(b) Amount of $2,941,169 (Reasons, [265]);

(g) the further erroneous findings that the Rider Hunt 'estimate' was both the reason why Mr Macmillan sought to exclude NES from the negotiations and the reason why Woolworths did not negotiate with NES (Reasons, [122], [183], [187], [215]);

Open Book process

(h) the erroneous findings that the purpose of the open book process was to verify the Clause 2.2(b) Amount and that the open book process had been completed at the latest by 15 April 2010 (Reasons, [119], [123], [154(a), (b)], [157], [174], [177], [178]);

Interaction with Vaughans

(i) the failure to find that Woolworths, who had retained Rider Hunt in relation to assessment of the costs, had reasonably believed that [Vaughans] was the counterpart that NES had retained, and that those two representatives were engaged in a process and dialogue to ascertain which costs were properly characterised as part of the LWC;

Masters'/Woolworths' expectations

(j) the erroneous finding that the $1 million figure put forward by Woolworths and Masters could not have been a genuine attempt to resolve the parties' differences in relation to the Clause 2.2(b) Amount (Reasons, [209], [245]);

22 April meeting

(k) the erroneous finding that the parties never engaged in relation to the issue of the Clause 2.2(b) Amount at the meeting held on 22 April 2010 (Reasons, [162], [189]);

(l) the erroneous finding that the failure by Woolworths and Masters to provide to NES the Rider Hunt report (which Woolworths and Masters had received immediately prior to the 22 April meeting) was indicative of an absence of good faith on the part of Woolworths and Masters (Reasons, [163]);

Mutuality of obligations

(m) the failure to find that, in determining whether the obligations of good faith and reasonableness (which the learned judge accepted were mutual: Reasons, [69], [70]) were satisfied, the conduct of Woolworths was to be informed by the conduct of NES;

Masters'/Woolworths' motivations

(n) the erroneous finding that because the Letter of Offer had referred to payment by lump sum, Woolworths' attempt to vary this payment term was an attempt to bring about a difference between the parties that it could rely on as a basis for termination of the AFL (Reasons, [154]);

(o) the erroneous finding that the real motivation for Woolworths' lack of agreement with respect to the LWC and the Clause 2.2(b) Amount was that its Property Committee wished to pursue the alternative Hume & Iser site instead (Reasons, [108], [222], [223], [225], [236], [240]);

(p) the related erroneous findings that the strategy of pursuing the acquisition of the Hume & Iser site was inconsistent with the Property Committee decision that Woolworths would pursue only one store in Bendigo (Reasons, [100], [222]);

(q) the related erroneous inference, based on the absence of evidence adduced by Woolworths from Mr O'Brien or any attendee at the 9 March 2010 meeting, that a decision had been made by Woolworths to pursue the Hume & Iser site by at least 16 March 2010;

(r) the erroneous finding that Woolworths acted in bad faith in terminating the AFL by inter alia acting on matters which were not contemplated by the AFL (Reasons, [87], [183], [246]);

Other findings

(s) the erroneous finding that Woolworths was unwilling to engage with NES in any meaningful way to seek to resolve any differences with respect to the Clause 2.2(b) Amount (Reasons, [208], [211]).

Matters ancillary to clause 2.2

5.5 The learned judge erred in finding that Woolworths and Masters were not entitled to take into account, in deciding following the meeting on 22 April 2010 to terminate the AFL, issues relating to NES' ability to fund the development (Reasons, [235], [237], [238]) or council opposition to the development (Reasons, [229]).

[148]

A party seeking to establish that an inference ought to be drawn must demonstrate that that inference is the more probable one which arises from the established facts. The inference must be based on evidence rather than speculation.

In Holloway v McFeeters, in the context of a claim for damages for a death caused by a vehicle collision, Williams, Webb and Taylor JJ explained the process the court will undertake when drawing inferences in the following often cited passage:

Inferences from actual facts that are proved are just as much part of the evidence as those facts themselves. In a civil cause 'you need only circumstances raising a more probable inference in favour of what is alleged ... [W]here direct proof is not available it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference; they must do more than give rise to conflicting inferences of equal degree of probability so that the choice between them is mere matter of conjecture... All that is necessary is that according to the course of common experience the more probable inference from the circumstances that sufficiently appear by evidence or admission, left unexplained, should be that the injury arose from the defendant's negligence. By more probable is meant no more than that upon a balance of probabilities such an inference might reasonably be considered to have some greater degree of likelihood'.

The questions of whether an inference is open as a matter of probability and whether that inference is the more probable one are to be determined by considering the combined weight of all the relevant established facts rather than by considering each fact sequentially and in isolation from the other facts.

Whether one inference is more probable than another may be affected by the judge's view of the facts relied upon to support or contradict the competing inferences and why any evidence which is important to any of those inferences should be accepted or rejected.

A judge's finding as to the most reasonable and probable explanation for a state of affairs, if it is a correct finding, remains correct notwithstanding that other possible explanations for the known facts cannot be excluded.[57]

[185]

Costs Estimate under the WOW AfL

Sec. 2 (a) (ii)

Last week I provided Woolworths a copy of your WOW Home Improvement Centre estimate in accordance with our AfL provision Sec. 2.2 (confidential extract attached).

I was today advised by my lawyers that my letter to WOW lacked the necessary detail to properly comply with the requirement of Sec. 2.2.

Item 2.2 (a) (ii) required the Landlord to provide its costing on an "open book" basis. The estimate I provided WOW is not considered to be "open book". I am advised that in order to properly fulfil the requirements I am required to provide all the costings to WOW, not just the final figures, or alternately, access to the workings by WOW in the likely event they will ask their assessors/QS to view the file.

Letter of Offer

Our Letter of Offer from WOW for this site requires us to ascertain the construction price of a comparable dimensioned "warehouse style hardware store, (full height pre-cast)" e.g. Bunnings and use that base cost to establish any amount the Tenant is required to contribute to the construction under Sec 2.2 (a)(iii) as the difference between the "Bunnings style" base cost and the WOW cost.

The current estimate provided by Vaughan allows a range of options not currently provided under our current comparable hardware store estimate. Could you please therefore remove the following items from your estimate and provide a fresh estimate with these items separately itemised:

- Power authority head works; and

- Site levelling with a fall greater than 300mm across the site.

This will assist us in providing comparable estimates.

Comparable Estimate

If you are able would you please assist us by providing a comparable D & C estimate for an "alternative hardware warehouse" e.g. Bunnings using the WOW site plan and external dimensions on the following basis:

- Warehouse of total dimensions 10,738m² on a 24,700m² site;

- full height pre cast panels;

- full architectural documentation;

- DA application costs excluded;

- power authority head works excluded;

- fall no greater than 300mm across the site.

Could you also advise if you are comfortable providing the "open book" costings for WOW's inspection.

Please contact me if you have any questions.

[346]

Counsel: This document did not bear any relationship to your discussions with Vaughans in April, did it?

Mr McDonald: This is a summation of all the items we had just been discussing with Vaughans, I think.

Counsel: It didn't bear any relationship to your discussions with Vaughans during the open book process which resulted in you identifying a difference of $3.2 million?

Mr McDonald: This is a different exercise we are doing here. This is not a line by line comparison that was undertaken then, and that $3.2 million, that was still work in progress at the time.

Counsel: That was still a work in progress as at this time?

Mr McDonald: Yes, it was.

Counsel: You had updated various items included in that $3.2 million difference in your discussions with Vaughans in April, hadn't you?

Mr McDonald: We had discussed certain items. We hadn't actually agreed any of the numbers with Vaughans at that stage.

Counsel: But you could have given Mr Macmillan an update of where things stood in relation to the $3.2 million difference, couldn't you?

Mr McDonald : If I was requested for that I could have, yes.

Counsel: That's what you had been working on for the previous three weeks, wasn't it?

Mr McDonald: Up until about a week before this, that's probably correct, yes. We changed direction.

Counsel: Why didn't you give him the update of your work for the first two weeks in April based on the $3.2 million difference?

Mr McDonald: I can't recall why I didn't at the time.

Counsel: This is a comparison directly back to the $8.88 million figure that Vaughans had put on the table for a full height precast Bunnings store. This, I suggest, represents the abandonment of the line by line review that you had been undertaking for the previous three weeks, moving to what you have described as the macro level review of square metre cost but then inserting some line items to get the price down. In other words, it's a hybrid approach. It's a mix of the line by line approach you followed after your $3.2 million difference identified but adjusted by taking a macro approach as to the overall cost?

Mr McDonald: I actually think it's quite different, actually.

Counsel: Is it?

Mr McDonald: Yes.

Counsel: I see. You can be asked questions about that in re-examination. Did you ever have any discussion with Mr Macmillan about the $1.5 million difference?

Mr McDonald: I sent this email to him on the morning of 22 April. I'm not sure whether I called him before he went to the meeting or not. I don't believe I did have a discussion with him.

Counsel: You didn't have any discussion with him about this?

Mr McDonald: I sent it in an email to him, and I don't believe I spoke to him. I don't have any recollection of having spoken to him.

Counsel: The bottom line for the Vaughan quote you describe here as 'Adjusted offer, 10.393 million'?

Mr McDonald: Yes.

Counsel: Do you see that?

Mr McDonald: Yes, I do.

Counsel: It's trite to say that Vaughans had never agreed to any such adjusted offer?

Mr McDonald: That's correct.

Counsel: And in fact you knew that the last number Vaughans had agreed to was 11.5 million?[106]

Mr McDonald: That's the last number I had seen from Vaughans; that's correct, yes.

Counsel: And had you informed Mr Macmillan the last number you had seen from Vaughans was 11.5 million?

Mr McDonald: I can't recall whether I exactly informed him specifically or whether he was included in some of that correspondence or whether someone else at Masters may have been.

Counsel: Did you have any discussion with Mr Macmillan as to what was included or excluded in the 11.5 million?

Mr McDonald: I don't believe so. I can't recall.

Counsel: Do you accept, sir, that it would have been appropriate for you to drill into what was included and what was excluded in the 11.5 million before reporting to Mr Macmillan?

Mr McDonald: If time permits. This is work in progress still.

Counsel: Why didn't you tell Mr Macmillan you needed more time to do a proper job?

Mr McDonald: It was still ongoing. It wasn't being concluded at this particular point in time. This was just an update.

Counsel: Did you tell Mr Macmillan on 21 April when you spoke to him that you needed more time to get to the final number?

Mr McDonald: I think on this spreadsheet it says here that there are items here still to be discussed with Vaughans.[107]

Counsel: Did you inform Mr Macmillan when you spoke to him on 21 April that you needed more time to the job done?

Mr McDonald: I believe I would have said that to him, yes.

Counsel: Thank you. Do you recall what his response was?

Mr McDonald: No, I don't recall his response exactly. I imagine it would be he would just accept it.

Counsel: After you sent the email on 22 April did you call him and ask whether he wanted you to do any more work on it?

Mr McDonald: I can't recall whether I spoke to him particularly about it or whether it was Bob. I was seeing some of the people from Masters quite regularly at the time.

Counsel: Is it the case that on or shortly after 22 April you were told, 'Don't do any more work on Bendigo'?

Mr McDonald: I honestly don't recall that, to be honest. We were working on instruction. If I didn't receive instruction to keep going, then by inference I would stop. It's not uncommon in this situation for that sort of thing to occur.

Counsel: If you stopped on 22 April 2010 in relation to Bendigo the job was incomplete, wasn't it?

Mr McDonald: From my perspective, it was still work in progress. We hadn't concluded; that's correct.

[552]

In my view, it is clear, as is submitted by NES, that a reasonable person, in the position of Woolworths, which had the object of identifying and resolving differences in the calculation of the Landlord's Works Costs in mind, but no other object, would have, at a minimum:

(a) Invited NES to attend and participate in the open book review process and encourage its involvement, so that NES would be informed of any differences identified during that process and be better able to resolve them;

(b) Informed NES of any differences it had identified in relation to the calculation of the Landlord's Works Costs and Masters' contribution and of any other expectations Woolworths' may have had in relation to those costs;

(c) Communicated to NES the basis of any conclusion that the Landlords' Works Costs or Masters' contribution were "too high" or "unacceptable", particularly where the estimate provided was a detailed estimate from an experienced builder whose estimates were known to be reliable from other tenders;

(d) Assisted NES in identifying and obtaining quotes from alternative builders;

(e) Provided NES with any documentation, such as reports prepared by Rider Hunt, that identified the differences and the basis of the differences Woolworths had identified;

(f) Read, considered and communicated to NES the contents of the Rider Hunt report of 22 April 2010, assuming Woolworths sought to rely on that report as identifying any differences between it and NES in relation to the calculation of the Landlord's Works Costs and Masters' contribution;

(g) If - as Woolworths submits but NES rejects - the open book process had not been completed, adjourned or postponed the negotiations, if necessary, until the open book process had been completed and any differences identified and to enable all parties to consider any reports relied upon by the parties.

I accept that only then could any constructive negotiation to resolve any differences have taken place; a position which was admitted by Mr Macmillan. On any view, on the evidence, Woolworths failed or refused to take any of these reasonable steps before terminating the Agreement for Lease.[173]

[572]

Lonergan comments in The Valuation of Businesses, Shares and Other Equity, that the Capitalisation of Income method assumes a continuation of the rental income at the date of the valuation. For this reason NES submits this method is not applicable for valuing the rent, which was not fixed under the Agreement for Lease. The Capitalisation of Income method also assumes that the potential for rental and capital growth risks associated with investing in the property and any tax deductions available to an owner are all reflected in the yield. While it is accepted that the yield will implicitly incorporate some discount to reflect the purchaser's - or the market - perception of the risks associated with the cash flows from the property being achieved, at the point of sale, it will also necessarily incorporate other dynamics of the market (such as supply and demand, interest rates etc.) at the time of sale. It is for this reason that market yields change over time. These market dynamics bear no relationship to the risks associated with achieving the particular cash flows in question.

This is not to say that the Capitalisation of Income method has no application. On the contrary, NES does accept that where the property is to be sold, or the cash flow capitalised, at or near the time of valuation, at which point the dynamics of the market will be highly relevant to the price achieved, the valuation of the property by this method may be appropriate. It is for this reason that the method is appropriate to value the property at the end of the Lease when it may realistically be sold. In contrast, where the property is to be sold, and the income capitalised, at a much later point in time, under different market conditions, the application of this method, which assumes the risk of cash flows being achieved is reflected in the yield, which yield is derived under different market conditions, may not be appropriate. It is for this reason that NES does not accept the use of the Capitalisation of Income method to value the cash flows of the property 'at the date of completion of the development.' Another reason that the selection of a yield that is reflective of the underlying risks of achieving the cash flows in question is that the Capitalisation of Income method of valuation is extremely sensitive to the yield selected with a percentage change in the yield having a disproportional effect on value.

The Capitalisation of Income method is also highly dependent on there being sufficient sales of 'truly comparable properties' at or around the valuation date to allow an appropriate yield to be identified. The evidence reveals that there had been no sales of Masters stores at the time when Woolworths contend NES's cash flows should be valued. There had been a small number of sales at the date Mr Sutherland derives his yields for the purpose of Mr Stone's end value estimate.

In applying the Capitalisation of Income method the yield to be applied is selected based on observable market yields from the sale of comparable properties. The yield is determined by dividing the price by the rental return.

Given the relationship between the market dynamics and yields, and the critical role that yields play in this methodology, Lonergan, in The Valuation of Businesses, Shares and Other Equity, states that in determining the yields property valuers should consider the underlying supply and demand dynamics of the market including the level of development activity.[186]

[576]

The Capitalisation of Income method views an investment or income producing property as no more than the stream of revenues that it may generate and values those revenues based on the market price for the property at a particular point in time. In this sense, this method uses the estimated market value of a property at a particular point in time as a "proxy" for the value of all future cash flows generated by the property including from its ultimate sale. Importantly, this method does not directly seek to identify or value the cash flows that the property will generate or identify and measure the risks associated with those cash flows being achieved. Instead, the Capitalisation of Income method looks to the relationship between the market price of comparable properties relative to their rent (the yield), which is assumed to incorporate whatever discount that the market would apply to reflect time value of money and investment risks at the time of purchase. The Capitalisation of Income method then applies that same relationship between market price and rent (yield) to the known rental return on a property to estimate the market price for that property, being the value the market would place on the stream of cash flows the property would generate at that point in time. As already observed, the Capitalisation of Income method of valuation is extremely sensitive to the yield selected such that a very small change in the yield will have a disproportionally large effect on value.

The difficulty with the Capitalisation of Income approach, in this case, is that the yield that an investment property is capable of commanding in the market is a reflection of the market's perception of investment risk of the property relative to its income stream as well as other dynamics of the market at a particular point in time when a property is sold. Features of a property such as its location, specifications, age, tenants, rent and outgoings, as well as the dynamics of the market and investor sentiment, will all influence the market value of a property to an investor and therefore the applicable yield. By dividing the expected rental return by a yield based on comparative sales at the date of completion of the development, as a proxy for the value of all future cash flows and residual equity that would be earned by NES, the Capitalisation of Income method implicitly discounts those future cash flows, including the equity that would have been available at the end of the Lease, on the basis of the dynamics of the property market, including the sentiments of purchasers of comparative properties, as at the date of completion.

As stated in the preceding reasons, the evidence is that the Strathdale site would not have been sold on completion of the development. Accordingly, it is not, in my view, appropriate to fix the loss and damage intended to compensate NES by reference to an implicit discount based on market dynamics and sentiment at a time when the property would not have been sold, or the income capitalised. Instead, the Court should, in my view, look to value the actual cash flows NES would have achieved, having regard to when these would have been achieved and the risks of those cash flows not being achieved. Where it is necessary or desirable to apply a yield, for example to determine the market value of the land at the end of the Lease, the yield that should be applied is the yield that best reflects the market dynamics and sentiment at that time, being the time at which the property may otherwise have been sold....

Moreover, to fix NES's loss and damage by reference to a yield as at the date of completion, while simple and expedient as a means of valuation, is inappropriate and unrealistic in the circumstances. The effect of capitalising NES's expected income at the date of completion, by reference to the yield that prevailed at that date, when this date has no relation to the date on which the property might have been sold, and where yields are increasing, will have the effect of undervaluing the cash flows that NES would in fact have obtained from the property. This is particularly so for the residual (capital) value of the land which would not have been sold for some time. In doing so, this method would put NES in a far worse position than the position that it would have in fact been in had NES held onto the Strathdale site, and enjoyed the full cash flows and capital at a lesser discount, as it intended.

The Capitalisation of Income method is also inappropriate in the present case for other reasons, including that the rental income under the Lease was not fixed; there were no comparable sales of Masters stores from which to select a yield; and the assessment of the applicable yield did not, and could not have, taken into account the risks associated with investing in the property and underlying market dynamics as at the likely date of sale, which date had not yet arrived.[190]

[596]

The Masters store in 2052 will be approximately 42 years old. At that time the initial lease term and each further option will have expired. Therefore the value of the property should be assessed on the basis that there is no lease in place and potentially in a vacant state.

Based on my experience it would be reasonable to assume that a 42 year old warehouse of the nature referred to in my instructions may have reached the end of its economic life. A development of this age in my experience would either require considerable upgrading and refurbishment or demolition for redevelopment purposes.

If the property were to be upgraded to be able to secure a tenant and derive an ongoing income stream, a considerable allowance would need to be made for capital expenditure.

If a capitalisation of income approach were to be adopted, the yield would need to reflect that the property is 42 years old. Further the rent adopted for capitalisation purposes should be reflective of a very dated 42 year old building. To simply escalate a rent upwards over 42 years without taking into account the ageing condition of the building is in my opinion and experience incorrect.

Based on my experience there is a real prospect that in 2052 the underlying value of the land may represent the highest and best use of the property. History demonstrates that in the long term the price of land increases and therefore over such a long period it would not be unreasonable to assume there may be some considerable appreciation in land value.

The prospect of the appreciation of the underlying land value coupled with the depreciation of the building in my experience would suggest that the likely highest and best use of the property in 2052 may be for redevelopment purposes.

A 40 plus year period is also a very long time in which retail and bulky goods trends and designs may change significantly. Over the past 30 years I have witnessed a remarkable transformation of the design and layout of retail stores. With the ongoing developments in technology and innovation I would expect that rate of change to continue.

Therefore in my opinion it would not be unreasonable to assume that in 42 years the nature, design, tenant requirements and customer expectation may change to the extent that the Masters store is obsolete.

In my experience there is also a strong likelihood that a new and superior store would be developed to secure tenants such as Masters and Bunnings in 2052 that would be far superior to a 42 year old store. This would most likely lead to the conclusion that the store could not compete in the market to secure a tenant and reliable income stream.

[598]

NES contends..., in my view correctly, that while the rental figure used by Mr Stone to determine the exit value of the property is the amount that would have been payable for the last year of the Lease, which by definition would have been terminated as at that point, the rental amount is nevertheless the best estimate of what the market rent is likely to be at that time. This is particularly so where the rent under the Lease is fixed at the lesser of CPI or 4 per cent which does not even preserve the real value of the current market rent. It is appropriate for Mr Stone to have calculated the exit value in the way that he did and his estimate should be accepted.

Moreover, Mr Jackson's concerns about the need for capital expenditure to upgrade the site in order for it to be rented are misconceived in that they fail to take into account that more than $2.3 million of "additional costs" of maintaining the property have already been built into Mr Stone's Discounted Cash Flow calculations. Ms Wright conceded in cross examination that it was likely the Lease required the landlord to maintain the premises in good order. When cross-examined on the basis of his conclusion that the appreciation of the underlying land value of the Strathdale site coupled with the depreciation of the building would likely mean that the highest and best use of the property at the end of the Lease would be as vacant land for redevelopment purposes, Mr Jackson was not able to estimate the rate at which the underlying land might appreciate. Mr Jackson admitted that he had not considered that point. Mr Jackson was also unable to estimate what the appreciation of the land might be from his own experience. Having not considered the appreciation of the land or the obligation to maintain the premises, it is difficult to see how Mr Jackson can have drawn the conclusions that he did that the best use of the land at the end of the Lease would be for redevelopment.

I do, however, accept, as a general proposition, when considering the exit value of the Bendigo site, the conclusion of Mr Jackson that, in addition to the net income NES would have earned under the Lease, there would likely have been 'some considerable appreciation in land value' over the term of the Lease which NES would have been entitled to the benefit of at the conclusion of the Lease.[197]

[613]

Failure to distinguish between the value of the opportunity and the probability of realising the opportunity

5.6 The judge erred in assessing any loss of opportunity, by:

(a) failing to distinguish between (a) the value of the opportunity and (b) the probability of realising the opportunity (Sellars discount); and

(b) considering in the assessment of the Sellars discount matters that were properly part of the determination of the value of the opportunity.

Use of alternative methodology

5.7 The judge erred in assessing the value of any loss of opportunity by rejecting the methodology which both parties' expert witnesses had considered to be appropriate, and by adopting an 'alternative methodology' which was not founded in or supported by evidence.

Application of 'alternative methodology'

5.8 The judge erred in applying the 'alternative methodology':

(a) by assessing the likely value of the property in 2052 without any evidential foundation;

(b) by applying a risk-free rate for the entire period of 42 years, without any evidential foundation; and

(c) by failing to account for other findings made which bear on the quantification of loss (irrespective of the methodology applied), such as the judge's finding in relation to the costs required to mitigate any flood-related issues (assuming they could be mitigated), with the result that the learned judge erroneously quantified loss at $14.5 million.

Date for determination of applicable yield

5.9 The judge erred in holding that in assessing damages, the capitalisation of the net income NES would have earned ought be determined as at the date of judgment, instead of the date of breach.

Sellars discount

5.10 The judge erred in the assessment of the Sellars discount at 25 percent, which did not properly or sufficiently reflect the substantial uncertainties surrounding the commercial opportunity actually materialising, in terms of the prospects that no agreement would be reached between the parties as to the relevant commercial terms of a lease, or that no development approval would be granted, or that no funding would be achieved for the development.

5.11 The judge erred in making a number of findings leading to the determination of the Sellars discount applied, namely:

(a) the erroneous finding that the development would have proceeded and the benefits promised under the AFL would have been realised;

(a) the erroneous findings that the parties would have agreed to pay the revised contribution amount as a lump sum, and that the risk of the parties not reaching agreement in relation to the Clause 2.2(b) Amount, if Woolworths acted reasonably and in good faith, was very low;

(b) the erroneous finding that it was highly likely that Bendigo Bank would have provided full funding for the development (minus any Clause 2.2(b) Amount) to NES, and that the risk that NES would not have obtained funding for the development was low;

(c) the erroneous finding that, had Woolworths and Masters acted reasonably and in good faith and with the contractual object of progressing the development in mind, they would have agreed any changes to the design that were reasonably necessary to mitigate inundation issues;

(d) the erroneous finding that the risk that NES would not have been able to obtain planning approval was very unlikely to eventuate.

Interest

5.12 The judge erred in finding that none of the loss that NES suffered was 'loss or damage to be incurred or suffered after the date of the award' for the purposes of s 60(3)(b) of the Supreme Court Act, and in doing so:

(a) failed to follow appellate authorities which require the Court to undertake a practical inquiry, rather than a juristic or conceptual approach; and

(b) failing to find, on the practical analysis, that the loss suffered by NES was, as to a small part pre-judgment loss, but predominantly post judgment loss.

[675]

[40] NES summarised those findings as follows: Woolworths did not wish openly and willingly to engage in the clause 2.2 process; Reasons [182]. Woolworths sought to exclude NES from the clause 2.2 process until such time as the construction costs could be reduced to a level that was within Woolworths' approved but undisclosed budget; Reasons [183], [187], [204]. Woolworths refused to respond to repeated requests for information as to progress of the open book process by NES; Reasons [184]. Woolworths did not attempt to identify or negotiate differences as to the LWC at the 22 April 2010 meeting; Reasons [189]-[190]. Any differences that Woolworths may have had in relation to the LWC were never identified by it or articulated to NES thereby preventing negotiation to resolve any such differences; Reasons [191]. It would have been reasonable and appropriate for Woolworths to advise NES of the differences identified in the 22 April 2010 Rider Hunt report as to the LWC and for attempts to be made by Woolworths to negotiate those differences and that did not occur; Reasons [193]. As was conceded by Mr Macmillan, on behalf of Woolworths, it was for Woolworths to negotiate with Mr Blake to attempt to resolve the differences as to the contribution to the LWC; Reasons [206]. Woolworths were not willing to provide NES with any detailed or transparent information in support of the bare assertion that NES estimate of the LWC was too high or unacceptable that would enable NES to negotiate in any meaningful way to resolve any differences; Reasons [208]. Woolworths, did not attempt to negotiate or actually negotiate the LWC at the 22 April 2010 meeting; Reasons [209]. Woolworths, with some other object in mind and not being faithful to the contractual obligation in clause 2.2, breached the obligation to act reasonably and in good faith; Reasons [216]. The lack of agreement in respect of the contribution to the LWC was Woolworths' own creation as a basis for terminating the AFL, and this occurred for a variety of reasons that had nothing to do with any inability to resolve differences in relation to the contribution to the LWC; Reasons [246].

At a glance

Court

Decision date

Before

Source

Judgment (703 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (29)