Murlam Pty Limited v Roads and Traffic Authority of New South Wales

Murlam Pty Limited v Roads and Traffic Authority of New South Wales - [2009] NSWLEC 1365 - NSWLEC 2009 case summary — Zoe

[18]

15 The evidence was given that an ancillary business, Travelcharge Australia Pty Limited, trading as Travelcharge Taxi Services, operated from the subject property. Mrs Chidiac was a director and 50% shareholder in the company. The Just Terms Act 16 The relevant parts of s 55, s 56 and s 59 of the Just Terms Act are as follows: ""55.In determining the amount of compensation to which a person is entitled, regard must be had to the following matters only (as assessed in accordance with this Division): (a) the market value of the land on the date of its acquisition; -- (d) any loss attributable to disturbance; 56.(1) In this Act: "market value" of land at any time means the amount that would have been paid for the land if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer, disregarding (for the purpose of determining the amount that would have been paid):. .. ""59. In this Act: "loss attributable to disturbance" of land means any of the following: (a) legal costs reasonably incurred by the persons entitled to compensation in connection with the compulsory acquisition of the land; (b) valuation fees reasonably incurred by those persons in connection with the compulsory acquisition of the land; (c) financial costs reasonably incurred in connection with the relocation of those persons (including legal costs but not including stamp duty or mortgage costs); (d) stamp duty costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the purchase of land for relocation (but not exceeding the amount that would be incurred for the purchase of land of equivalent value to the land compulsorily acquired); (e) financial costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the discharge of a mortgage and the execution of a new mortgage resulting from the relocation (but not exceeding the amount that would be incurred if the new mortgage secured the repayment of the balance owing in respect of the discharge mortgage); (f) any other financial costs reasonably incurred (or that might reasonably be incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition."" The Murlam Lease 17 Even though a claim was not made for compensation for the termination of this lease, I consider that the value of this lease, if any, needs to be addressed before dealing with the extinguishment claim.

[27]

31 I am satisfied that prior to 1 November 2006 Mrs Chidiac had no knowledge, whatsoever, of the plans of the RTA which culminated in the subject property being acquired some 14 months later. Reaction to the Pending Acquisition 32 Mrs Chidiac's evidence can be summarised, in her own words, on this aspect (Ex A 2 [43, 44 and 45]): [43 ] ""My husband and I, were devastated and shattered, and at a complete loss as to what to do next..."" [44] ""After receiving the letter (the RTA letter of 13 December 2006) I spend a great deal of time researching the compulsory acquisition process and stressing over an impending situation that could potentially destroy what we, as a family, had worked so hard to build up"" . [45] ""Having invested a substantial amount of money and time to renovate and establish the Platinum Motors and Travelcharge businesses we were devastated and shattered and at a complete loss as to what to do next. We considered the businesses to be our future and the future for our three sons"" . 33 Mrs Chidiac's situation was exacerbated by conflicting advice as to when the acquisition of the property would occur which meant her ability to plan the business activities of Platinum Motors was severely compromised. In addition, Mrs Chidiac, together with her husband, sought alternative premises (Ex A 2 [ 54]) ""My husband and I spent considerable time and energy looking for an alternative site, one approximate in size to the acquired land and a site with the good exposure to passing trade. However, we were not able to locate one that we could afford based on the initial offer by the RTA"" . 34 There were other business problems: [ 55] ""In the lead up to the acquisition, I was mindful that we could not be left in the position of holding on to a full fleet of vehicles (as and when the RTA proposed to physically take the site). That outcome would have involved substantial storage costs for all vehicles. Being prestige vehicles, they could not be left out in the open. The storing of prestige vehicles, without any immediate objective to sell the vehicles would also expose vehicles to significant market pressures and depreciation (with the longer the vehicles are held in storage the greater the depreciation)"" . [56] ""The need to rent or purchase elsewhere meant that funds that would have been used to operate the business were instead used to relocate and eventually purchase another site. This contributed to the business not achieving its target of sales for 2006/2007 financial year"". [57] ""In addition, this was a family business and it was difficult for us to isolate the impending acquisition from our thoughts in order to focus on running the business. As a family our discussions were focused on how to deal with the acquisition rather than reaching our sales targets and working on our advertising and marketing strategies. This was a further way in which the impending acquisition negatively affected the business' performance"" . 35 On a number of days between 17 April and 29 September 2007 the RTA carried out works on Parramatta Road and Bland Street immediately adjacent to the subject property. Mrs Chidiac's evidence was that: [71] "" such works would often block out driveways and cover our display vehicles with dust"" . 36 I accept Mrs Chidiac's evidence as to the detrimental effect of the impending acquisition, and its ramifications, had on her, her two fellow employees, namely, her husband and her son, James (who left the business in August 2007 as a result of ""The constant uncertainty and disruption to the business"" to seek permanent employment) (Ex A2 [69]) caused such a significant distraction and loss of focus that the number of cars sold and gross turnover declined. 37 Four questions immediately arise from the foregoing. o Is there an entitlement to pre-acquisition losses ? o If so, when did the decline in turnover commence? o What would have been the turnover absent the detrimental effects of the impending acquisition? o What was the turnover in the" shadow period" prior to acquisition? Entitlement to pre acquisition losses. 38 Pre-acquisition costs and losses claimed under s 59 (f) were disallowed by Talbot J. in N Stevenson Pty Limited v Roads and Traffic Authority of New South Wales [1994] 83 LGERA 248.

[30]

41 Biscoe J also referred to Shun Fung at [48]: ""Lord Nicholls, in essence, explained that to be compensable a loss must be: (a) caused by the resumption, (b) not too remote and (c) reasonably incurred. As to the third condition his Lordship said at [126]:" The law expects those who claim recompense to behave reasonably. If a reasonable person in the position of the claimant would have taken steps to eliminate or reduce the loss, and the claimant failed to do so he cannot fairly expect to be compensated for the loss or the unreasonable part of it. Likewise if a reasonable person in the position of the claimant would not have incurred, or would not incur, expenditure being claimed, fairness does not require that the authority should be responsible for such expenditure. Expressed in other words, losses or expenditure incurred unreasonably cannot sense sensibly be said to be caused by, or be the consequence of, or be due to the resumption." "" 42 Lloyd J. referred to the ""floodgates argument "" in Fitzpatrick Investments Pty Limited v. Blacktown City Council (No 2) [2000] NSWLEC 139) at [20] in these terms ""Paragraph (f) of s 59 is wider than the preceding paragraphs. It is a "catch-all " provision: " any other financial costs reasonably incurred (or that might reasonably be incurred) relating to the actual use of the land, as a direct and natural consequence of the acquisition ". As a "catch - all" provision, the words "any other financial costs" should not, in my opinion, be read down. This does not mean, however, that this paragraph opens the floodgates. The costs must be " reasonably incurred" and must relate to the actual use of the land, as a direct and natural consequence of the acquisition"" . 43 These cases show that an applicant is entitled to pre-acquisition losses subject to meeting certain conditions. Commencement of Decline in Turnover. 44 Having regard to the decline in normal business activity which occurs in the pre-Christmas period (commencing in about mid November and gathering pace in December) it is reasonable to expect that car sales would also decline. This is confirmed by the RTA statistics in respect of the vehicle transfers (dealer to private), which show a downturn in transfers between November and December 2006 of 6.12% (EX R8). For this reason I believe that it is reasonable to conclude that the full impact of the impending acquisition would have commenced from 1 January 2007. Accordingly, the Business should be considered as trading normally up to 31 December 2006. While the goodwill of the Business must be determined as at 28 December 2007 one of the starting points for that valuation must be the trading performance of the business up to 31 December 2006. Platinum Motors vehicle sales from 1 January 2005 to 31 December 2007 45 An examination of the evidence shows sales were: Retail Wholesale 1 January to 30 June 2005 43 2 1 July to 31 December 2005 59 21 (102) (23) 1 January to 30 June 2006 60 81 1 July to 31 December 2006 40 90 (100) (171) 1 January to 30 June 2007 38 52 1July to 31 December 2007 31 37 (69) (89)

[38]

56 Clearly, relocation of the Platinum Motors business in the form comparable to that conducted from the subject property would be claimable under section 59 (c) but that did not occur. What is Goodwill? 57 Lord Macnaghten in Inland Revenue Commissioners v. Muller and Co's Margarine Ltd [1901] All ER 413 at [416] summarised goodwill as: ""It is a thing very easy to describe, very difficult to define "" . 58 His Lordship then expanded on this statement at [416 - 417], in the following terms: ""It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force, which brings in custom. It is the one thing, which distinguishes an old established business from a new business at its start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has the power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade... For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again"". 59 Common law distinguishes between local and personal goodwill. The goodwill of most businesses comprises both elements. Local goodwill is regarded as attaching to the land while personal goodwill is personal to the owner of the land and will follow that owner to a new location. It is well established that personal goodwill is not compensable; see, for example, The Minister for Home and Territories V. Lazarus [1919] 26 CLR 159. Goodwill Valuations -- Expert Evidence 60 Expert evidence touching on the value of the Platinum Motors Business, and its goodwill, was given by two well-qualified Chartered Accountants , Mr David Ferrier (on behalf of the Applicant) and Dr Rodney Ferrier (on behalf of the Respondent). Mr John Gavljak also gave evidence on behalf of the Applicant. Mr Gavljak is also a Chartered Accountant with particular experience in the motor industry. Experts Joint Report -- Principles 61 In the joint report prepared by Mr David Ferrier and Dr Rodney Ferrier (Ex A 5 [3.2]) they agreed"" that an assessment of the fair market value of goodwill attaching to the Business is equal to the difference between the fair market value of the Business and the fair value of the net tangible assets use by the Business"" and in [3.3] they further ""agreed that the fair value of the net tangible assets used by the business at the compulsory acquisition date should be determined based on the lower of the cost price and the expected net realisable value. They note that this is in line with generally accepted accounting principles."" 62 In [3.9] they state "" After consideration of the circumstances of this matter and the available valuation methodologies, the experts agree that the value of the Applicant's business should be determined with reference to the capitalisation of future maintainable earnings method. "" 63 In [3.10] they agreed that in assessing the value of a business by application of the capitalisation of future maintainable earnings method it is necessary to apply a capitalisation rate ("Multiple") to the expected future maintainable earnings. They also agree: ""that future maintainable earnings are generally defined as future maintainable earnings before interest and tax ("Maintainable EBIT")"" .

[46]

73 Thirdly, there are a number of items of expenditure where the projected and actual figures are either identical or closely similar. Especially notable examples are depreciation (projected $4, actual $4, for the year ending June 2005, projected $3734, actual $3,734 for the year ending June 2006) electricity (projected $2500, actual $2487 for the year ending June 2005, $4910 projected and actual for the year ending June 2006, projected $5,254, actual $5,194 for year ending June 2007) insurance (projected $7,300, actual $7,293 for the year ending June 2005, projected $4000, actual, $4064 for the year ending June 2006, projected $3000, actual $2856 for the year ending June 2007) and stamp duty (projected $400, actual $401 for the year ending June 2005, projected $1400, actual $1402 for the year ending June 2006, projected $400, actual $401 for the year ending June 2007) and accountancy fees (projected and actual $3460 for the year ending June 2006). 74 Finally, Capricorn Business Services issued a tax invoice, dated 22 January 2008, which included, as a description of duties ""Analyse and adjust cash flows projection."" Which Approach to Adopt? 75 Having considered the evidence by the two experts I prefer Dr Rodney Ferrier's approach although, as will be seen, my conclusions as to the sales volume and Maintainable EBIT differ. Predicted Retail sales as at 1 January 2007. 76 Mr Gavljak's, evidence was that the industry benchmark for "days supply" per retail vehicle in second-hand car yards is 60 days. Days supply is calculated by dividing the number of sales in a month by the number of cars that the site can display for sale(including both indoor and outdoor spaces) and then dividing the quotient into 30 (being the average days in a month). If a vehicle was held for sale in a car yard for more than 90 days (Mr Gavljak refers to this as the drop-dead date) it should be sold, on a wholesale basis, to another dealer. As the development approval allows for only 17 cars to be displayed for sale at any one time, the adoption of the 60 day benchmark indicates an expectation of retail sales of 102 cars per annum. This figure was achieved in 2005. Retail sales in 2006 amounted to 100. In the months of July, August, September, and October 2006, 35 retail sales were made which is the annual equivalent of 105 sales indicating 58 days supply during this four month period. Predicted Wholesale Sales as at 1 January 2007. 77 171 wholesale sales were transacted in 2006; 90 of the sales occurring in the second half of that year. Conclusion - Predicted Retail and Wholesale Sales as at 1 January 2007 78 In coming to my conclusions of 105 retail sales and 171 wholesale sales per annum as an appropriate estimate for 2007 I have followed the obiter dictum of Dixon J in Commissioner of Succession Duties (South Australia) and Executor Trustee and Agency Company of South Australia Ltd and others [1947] 74 CLR 358 at 373: ""I should like, however, to add for myself that there is some difference of purpose in valuing property for revenue cases and in compensation cases. In the second the purpose is to ensure that the person to be compensated is given a full money equivalent of his loss, while in the first it is to ascertain what money value is plainly contained in the asset so as to afford a proper measure of liability to tax. While the difference cannot change the test of value, is not without effect upon a court's attitude in the application of the test. In the case of compensation doubts are resolved in favour of a more liberal estimate, in a revenue case, of a more conservative estimate"". Predicted Retail and Wholesale Sales as at 28 December 2007. 79 In the absence of evidence of any change in either the of volume of retail and wholesale sales or the benchmark days supply in the Sydney market during 2007, I have come to the conclusion that as at the 28th of December 2007 a prospective purchaser would accept that a reasonable expectation of retail and wholesale vehicle sales for the business would be 105 and 171 per annum respectively. Goodwill Valuation --Spreadsheet Calculations. 80 A spreadsheet, which became Ex R 18, was prepared at my request. It showed 5 scenarios. I was provided with a compact disc, which I have used as a tool for calculating goodwill. The CD included some additional information, namely, an average price per car for retail and wholesale, which I found useful for a purpose to which I will refer to later in this Judgment. These average prices broadly compare with the average prices that can be calculated from Ex R 3. Exhibit R 18 has been reduced to one Scenario showing 105 retail sales and 171 wholesale sales and now forms Appendix A to this Judgment. The spreadsheet shows my predicted sale numbers. There are consequential changes to Total Variable Expenses but otherwise all income and expenditure inputs were agreed by the experts. Salaries, wages and superannuation reflect market rates of pay.

[50]

85 Retail sales are the profit driver in the second-hand car business (gross profit $4065, net contribution $2941 per vehicle compared with a gross profit $895, net contribution $774 per vehicle for wholesale sales). I estimate that the negative value of the goodwill of the business, as calculated by Mr David Ferrier, will only return to neutral if retail sales were increased to some 120 cars per annum indicating days supply of 51 assuming that wholesale sales remain unchanged. It would only be if retail sales could be further increased (above 120 per annum) that the business would have any goodwill, assuming, again, that wholesale sales remained unchanged. It was submitted that the business was in growth phase and while growth may be a possibility, very substantial growth would have been required before the business could be said to have any goodwill. Substantial growth in retail sales would mean a corresponding substantial reduction in days supply which, based on my understanding of Mr Gavljak's evidence, would be difficult to achieve. 86 As I have concluded that the Platinum Motors business is just on the verge of profitability I can understand why Mrs Chidiac, having initially embraced the challenge of relocating the business to 360 Parramatta Rd Burwood, decided not to proceed, taking into account the best interests of her family especially when James Chidiac left for permanent employment, obviously at market rates of pay, in August 2007. Conclusion -- The Extinguishment Claim. 87 As the Platinum Motors business has no goodwill, the claim of $892,000 for extinguishment cannot be substantiated. The Business Impact Claim. 88 This is in two parts, firstly, loss of profits and, secondly, loss on sale of vehicles, in stock, at date of acquisition. Loss of profits. 89 The Applicant claims a loss under this heading of $363,006. Reduction in Turnover 90 The business records, referred to earlier, show that sales in 2007 comprised 69 retail and 89 wholesale compared with my projected figures in that year of 105 retail and 171 wholesale sales. I consider that the loss of 36 retail and 82 wholesale sales can be attributed to the detrimental effects of the impending acquisition. The consequence of those turnover losses are compensable as they meet the requirements, in my opinion, of the three tests enunciated by Biscoe in Caruana at [48]. Loss in Net Contribution. 91 I have calculated the loss in net contribution to the business as a consequence of the reduced sales as follows: Retail 36 sales at a gross profit of $4065 per car $146,340 Less net variable expenses per retail unit, 36 cars at $622 per car ($22,392) percentage of gross profit at 12.35% ($18,073) Total, net variable expenses $40,465 Loss in net contribution $105,875

[63]

117 s 34 is in the following terms: "" 34 . (1) A person who was in lawful occupation of land immediately before it was compulsorily acquired under this Act and to whom compensation is payable under this Act is entitled to remain in occupation until: (a) the compensation is duly paid to the person; or (b) the authority of the State makes (in accordance with any other provision of this Act) and advance payment of not less than 90% of the amount of compensation offered by the authority; or (c) the authority of the State makes (in accordance with any other provision of this Act) a payment into the trust account kept under Pt 3 of not less than 90% of the amount of compensation offered by the authority, whichever first occurs. (2) Any such person is entitled to remain in occupation of any building that is the person's principal place of residence or the person's place of business, for 3 months after it is compulsory acquired, even though the person has ceased to be entitled to remain in occupation under subsection (1). However, if the Minister responsible for the authority of the State is satisfied that the authority requires immediate vacant possession of the land, the authority is entitled to immediate vacant possession even though the 3-month period has not expired. (3) The terms on which a person remains in occupation of land that has been compulsorily acquired under this Act are, in the absence of agreement, such reasonable terms as are determined by the authority of the State (including terms as to the rental to be paid and the restrictions on use of the land). The Residential Tenancies Act 1987 does not apply to that continued occupation. (4) Any such unpaid rent or other money due to the authority of the State may be set off against compensation payable under this Act."" 118 The rental offset sought by the respondent has been calculated in accordance with the rent previously paid by Murlam under the terms of its lease. The applicant maintains that following acquisition Murlam was not in ""occupation"" of the subject premises as the business had been extinguished. However, it was agreed that five cars were stored in the showroom and this was the only use made of the subject property.

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Judgment (68 paragraphs)

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