Reading Entertainment Australia Pty Ltd v Burstone Victoria Pty Ltd & Osr [2004] VSC 546

Supreme Court of Victoria|2004-12-22|Before: WHELAN J.

For the reasons previously explained, I accept Landmark White's "as if complete" valuation of $56,500,000. Thus, had the redevelopment been successfully completed WPG would have had an asset worth $56,500,000.

In order to reach that position WPG would have incurred expenses. Again, with one qualification, I adopt the assessment of expenses which Landmark White adopted based upon the work done to the middle of 1999 by Davis Langdon Australia, the project quantity surveyors, and by Clifton Project Management, the project manager.

The total selling costs and the freehold acquisition costs adopted by Landmark White are $6,441,250. The total development costs, interest expenses, and other costs and expenses are $25,767,882. To that sum I add an additional $1,000,000 to allow for an increase in the contingency for cost overruns from 5 per cent to 10 per cent. I make this increase on the basis of the evidence of Mr Beattie previously referred to. Thus, the total development costs including interest and other expenses are $26,767,882 and the total costs, including freehold acquisition, are $33,209,132. Landmark White reduced those total costs by the sum of $2,186,635, which was Landmark White's assessment of the income that would be received during the construction process. Adopting that figure, the total net cost of completion of the project to WPG is $31,022,497. The value of the property to WPG, less the total of these net outgoings, upon completion is accordingly $25,477,503.

As a consequence of the termination of the joint venture arrangements, the Centre was sold for the sum of $13,000,000. The difference between the net value that might have been realised if the Centre had been completed and the amount actually recovered was, in the first instance, $12,477,503. This calculation, however, overstates the true value of the $13,000,000 sale price. This is because that price was not realised for approximately two years, and during that period WPG's position continued to deteriorate. WPG was unable to meet its obligations over this period and unitholder loans of $1,004,672 each were required to be advanced.

In Mr Smith's report, he produces a comparison of WPG's position in April 2000 with its position in October 2001. His analysis reveals a deterioration in net assets of $2,746,979 (using his actual not his adjusted figures). There are a number of items in the balance sheets that reflect that deterioration. Some of them are non cash items, such as the increase in amortisation and the reduction in the item "Redevelopment costs capitalised". There is an increase in the secured debt (Bank of Melbourne in one case and USIPF in the other) which is largely offset by a substantial reduction in accruals. Most significantly, liabilities between the two dates are increased by over $2,000,000, by the unitholder loans.

It seems to me that the deterioration in WPG's position over the two years between Reading's repudiation and settlement of the sale to Centro is no less than $2,000,000. I am fortified in this conclusion by the fact that $2,000,000 is slightly less than the total of the unitholder loans made during the period. It seems to me that the unitholder loans might be expected to reflect the continuing deterioration in WPG's position and its requirement for additional capital as a consequence.

It might be contended that the two year period of delay was brought about in part by Mr Burr's assertions of a right of pre-emption and by negotiations related to those assertions for the sale of Reading's interest to Burstone. Whilst complaint about Mr Burr's approach might be valid, I do not think that it led to any relevant delay. It is clear from the evidence of the solicitors from Middletons Moore & Bevins that delay would have occurred anyway because of the requirements of Centro and the City of Whitehorse. In the light of that evidence, I find that the period of delay was not relevantly extended by Mr Burr's erroneous assertions of a right of pre-emption.

Accordingly, my calculation of the difference between the value of the redevelopment as planned and the price achieved is $14,477,503.

Probabilities of the benefit being realised - ordinary risks

All property development involves risk. It is for that reason that, when Landmark White calculated their "as is" value they deducted, exactly as if it were an expense, the item "Developer's Margin (Profit and Risk)", which they calculated at 20% of the project costs. The deduction Landmark White made was $8,727,502.

It might have been contended that the developer's margin ought to be included as a cost, exactly the same as every other cost, representing as it does the normal profit and risk allowance that a developer would require. On the other hand, the developer's margin could be treated as an asset of WPG, as if its realisation was certain, the developer being WPG itself. Mr Smith adopts this approach. Indeed he goes even further and recalculates the developer's margin so as to arrive at a significantly higher figure.

In my view, both these approaches are wrong. The developer's margin is not an expense like the construction cost. It represents potential profit and it is compensation for risk. It is a profit that WPG had the opportunity to earn. It is not an expense. Nor is it a certain asset. If it were, property development would be guaranteed to be profitable. It is not.

The usual developer's margin calculation does give some guide to the dimensions of the ordinary risks of property development. In effect, Landmark White are expressing the opinion that this project would not be worthwhile unless a profit of at least $8,727,502 was there to be realised as recompense for the risk being undertaken.

In order to reflect both WPG's potential to earn the developer's margin, as calculated by Landmark White at $8,727,502, and to also reflect the allowance for risk implicit in that figure, I consider that a deduction of half that sum, $4,363,751, is required.

Thus, deducting $4,363,751 from the deficiency previously calculated of $14,456,847 produces a figure of $10,093,096, which I round down to $10,000,000.

The figure of $10,000,000 represents my calculation of the difference between the value of the redevelopment to WPG if it had been completed as planned, and the outcome for WPG as a result of Reading's repudiation, the consequent termination of the joint venture arrangements, and the sale of the Centre to Centro after a delay of two years after discounting for the ordinary risks of property developments of this kind.

Probabilities of the benefit being realised - peculiar risks

In assessing the prospects of WPG obtaining the benefit of the redevelopment, discounts must be made beyond the ordinary risks of property development. In the circumstances here there were other factors, factors peculiar to this project and this joint venture, that bear upon the probability of WPG ever obtaining the benefit of the redevelopment.

GE might have rejected the application for take out finance, and there may have been considerable delay in pursuing it. Other bank finance might not have been obtainable in time or might only have been obtainable upon terms which Ms Khor and Mr Burr were unable to meet. The Coles arrangement might not have become unconditional on 20 December 1999, and Coles might have vacated the centre. The Bank of Melbourne might have lost patience and appointed a receiver or otherwise have forced the joint venturers into a sale. Ms Khor and Mr Burr might have refused to repay the loan. They might have resisted contributions of equity when required because they were unwilling or unable to make them at that point. Some further significant dispute, perhaps fatal to the joint venture, could have arisen about a matter entirely unforseen as at October 1999. It may have been over the scope of works or the construction programme. The history of the venture suggests to me that further disagreement was likely. Well before October 1999, the parties had reached a point where Mr Burr was threatening legal proceedings and where the Reading executives held serious suspicions and concerns about Mr Burr and Ms Khor.

On the other hand, there were also circumstances suggesting that the redevelopment might have reached completion. GE was interested in the take out finance proposal and there were prospects that it would have been obtained. The project was one that was capable of obtaining traditional bank finance. Whilst the Coles arrangement theoretically needed to be consummated by 20 December 1999, in fact Coles remained interested in leasing premises in a redeveloped Whitehorse Plaza shopping centre after December 1999 and eventually did so from Centro. The Bank of Melbourne probably had no immediate intention of taking recovery action in the latter part of 1999, notwithstanding the reservation of their position in their correspondence. Ms Khor and Mr Burr could have repaid the Reading loan, if they had been prepared to make a major effort to do so, and could have contributed substantial capital to the project provided they were not required to do so before mid-2000. Given the time needed for the finance arrangement and the time needed to comply with the specialty leasing pre-commitment requirement, this is probably when any substantial equity contribution would have been required.

Generally, once Reading had been put in a position where third parties, whether they be banks or prospective tenants or others, had been given commitments, Reading probably would have forced the project through. Both Mr Cotter and Mr Tompkins displayed in their evidence a particular concern with Reading's reputation in Australia. That is one of the reasons why they were loath to commit to Coles and why they were so disconcerted by the attitude of the Bank of Melbourne/Westpac to Ms Khor and Mr Burr. If the project had got to the stage where some form of commitment had been obtained from a financier or some form of commitment had been given to Coles or to others, Reading would probably have ensured that the project was completed even if that meant taking on additional costs itself.

I have canvassed the facts of this matter in detail. One of the reasons for doing that is because it seems to me that that process reveals the nature and significance of these peculiar risks. It is impossible to catalogue and assess these risks individually because they bear upon and compound each other. There are myriad circumstances that may have occurred which would have prevented WPG from ever obtaining the benefit of the redevelopment.

I have to do the best I can to assess the probabilities of WPG realising the benefit of the redevelopment. If I were deciding this issue on the balance of probabilities, I would conclude that WPG would not have realised the benefit of the redevelopment. The authorities require, however, that where the opportunity lost has some value, which this one does, I must assess the degree of probability of realisation. When dealing with hypothetical events this is never easy. Doing the best I can, I assess the degree of probability of WPG realising the benefit of the redevelopment at 30 per cent of the value of that benefit after making allowance for the ordinary risks of property development. I accordingly assess the damage to WPG for deprivation of the commercial opportunity represented by the redevelopment at 30 per cent of $10,000,000, being $3,000,000.

Discharge, extinguishment, dispensation, events beyond Reading's control

Amongst the matters pleaded by Reading are that Reading was discharged from its obligation to construct the cinemas, or that obligation was dispensed with, by reason of the Burstone parties' failure to procure or permit WPG to obtain finance and their failure to contribute capital. It was also pleaded that Reading's failure to construct the cinemas was by reason of events beyond its control. I reject these defences. Reading was certainly most dissatisfied with Ms Khor and Mr Burr's attitude to funding and with the progress on finance they had made. However, they had no contractual entitlement to walk away from the venture at that stage because of that dissatisfaction. There were still prospects of obtaining finance, and the Reading executives knew it, as Mr Lawson's memo of 1 October 1999 reveals in the plainest terms. They had not bargained for a contractual right to withdraw if they were unhappy with progress on finance or if their joint venturer would not make equity contributions that Reading thought were reasonable. They were not then entitled to act as if they had.

The suggestion that construction of the cinemas was impossible because of events beyond Reading's control cannot be justified on the facts. A point where such a stance might have been justifiable had not been reached at October 1999.

As I have already discussed, the Burstone parties' primary claim for damages was on the basis of an expectation loss suffered by WPG by reason of Reading's conduct. However, the Burstone parties also advanced a claim in the alternative for loss suffered in reliance on Reading's acts in entering the joint venture.

As counsel for Burstone correctly acknowledged, in circumstances such as the present a court need only to consider a claim founded on reliance loss when it is unable to determine the expectation loss suffered by the claimant.[13] No such need arises in this case. Though estimating the damage suffered by WPG is not without difficulty, there is sufficient foundation for the assessment of damage on an expectation basis. [14]

In any event, the claims on behalf of the Burstone parties on the basis of reliance loss were not established by the evidence. In this context WPG claims the following heads of loss and expenditure alleged to have been suffered in reliance on Reading's contractual promises:

* the difference between the value of the Centre at the commencement of the joint venture and the proceeds of the sale to Centro (conceded in argument to be $3.25 million);

* moneys expended for town planning approval, redevelopment expenses and "consulting fees" paid to Madison & Masters (totalling $396,257); and

* income lost to WPG while preparing the property for closure and redevelopment ($2,920,403).

A claim in the alternative founded on reliance loss is also made by Burstone Victoria. The principal claims made by it on this basis were:

* the unrecovered portion of the costs to the Burstone WP Trust of acquiring Gold Koes' interest in the Trust sold to Reading, said to be "estimated at $1,211,000";

* the value of a loan from Angwu of $1.875 million; and

* all interest, costs and other expenses due under the loan agreement.

Ms Khor and Mr Burr also claim for reliance loss, being their liability for interest and costs under the loan agreement.

The major difficulty with the claims made on this basis on behalf of WPG is that they pre-suppose that no development would have taken place were it not for the joint venture with Reading. That is inconsistent with the evidence. The Centre was bought to be redeveloped. The Centre was not bought to be re-sold in its existing condition. Assessing reliance loss in that circumstance would require me to compare the expenditures made with those that would have been made in any event. These expenses would be those incurred in some putative other redevelopment.[15] There is no proper basis in the evidence upon which this task could be undertaken.

The basis upon which Mr Burr and Mr Sim in their evidence sought to establish the loss of profit by WPG was unconvincing and unsatisfactory.

The claim by Burstone Victoria and by Mr Burr and Ms Khor for interest and costs payable under the loan agreement is unsustainable.

The position in relation to the loan from Angwu was never made clear. Indeed, Burstone made no forthright attempt to clarify any of the alleged costs of entering into the joint venture agreement or of transferring the interests of former interest holders to Reading. Some details were exposed under lengthy cross-examination by counsel for Reading. I am satisfied, for example, that Burstone was obliged to pay, and did pay, a $450,000 premium to Gold Koes to transfer its interest in the Trust. However, the tenor of Ms Khor's evidence, in particular, was that the Court should accept her assertions that the expenses claimed to have been incurred were incurred. I would not have been prepared to do that if the issue had required determination.

A number of other matters were pleaded, or were raised at some point during the trial, which were not persisted in. Amongst those matters were:

(a) Allegations by the Burstone parties:

(i) concerned to establish a right of set off between the obligations under the loan agreement and damages for repudiation of the joint venture agreement. The primary claim eventually contended for by the Burstone parties was that the loss was WPG's, as to which no issue of set off arises;

(ii) that Reading refused to cooperate in obtaining finance and/or made it impossible to obtain finance. Save for the repudiatory conduct itself, which rendered it impossible for the entire redevelopment to proceed, this allegation was not established by the evidence; and

(iii) that Reading is estopped from contending finance would not have been obtained, or that agreements or events required in the future would not have been made or would not have occurred. Again, no foundation for these pleas was established by the evidence.

(b) Allegations by the Reading parties:

(i) that misrepresentations had been made by the Burstone parties prior to entry into the joint venture agreement. No basis was established for these allegations by the evidence; and

(ii) that the effect of the Bank of Melbourne securities (assigned to USIPF) and the mortgage securities securing the loan agreement becoming enforceable was to preclude all of the defendants' counterclaims. Whilst raised a number of times in the trial, no authority was cited in support of this proposition, and no submission was directed to it in final submissions by Reading's counsel.

Orders

After the parties have had the opportunity to consider these reasons and to make submissions as to the appropriate form of orders, I will make orders in favour of WPG against Reading Australia and Reading Properties for $3,000,000 plus interest, in favour of WPG against Reading Australia for $100,000 plus interest, and in favour of Reading Australia against Ms Khor, Mr Burr, and Burstone Victoria for $2,200,000 plus interest, and such other orders as are necessary to give effect to these reasons.

I will hear submissions on questions of interest and costs, and as to the further hearing of the related matters.

[1] Mackay v Dick (1881) 6 App Cas 251 at 263; Butt v M'Donald (1896) 7 QLJ 68 at 70-71 and Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 607.

[2] Scammell and Nephew Ltd v Ouston [1941] AC 251; Y_ork Air Conditioning and Refrigeration (A/sia) Pty Ltd v Commonwealth_ [1949] HCA 23; (1949) 80 CLR 11; Thorby v Goldberg [1964] HCA 41; [1964] 112 CLR 597; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429; Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] VicRp 55; [1994] 2 VR 106; Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239.

[3] Niesmann v Collingridge [1921] HCA 19; (1921) 29 CLR 177 at 185; Perri v Coolangatta Investments [1982] HCA 29; (1982) 149 CLR 537 at 542, 557; The Laws of Australia, Chapter 7 para [139], Anson's Law of Contract, 28th ed, p 69.

[4] Compare York Air Conditioning and Refrigeration (A/sia) Pty Ltd v Commonwealth [1949] HCA 23; (1949) 80 CLR 11 at 53-54; Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 20.

[5] York Air Conditioning and Refrigeration (A/sia) Pty Ltd v Commonwealth [1949] HCA 23; (1949) 80 CLR 11 at 53-54.

[12] Bhagat v Australian Securities Commission (1995) 16 ACSR 536; Lidden v Composite Buyers Ltd (1996) 67 FCR 560; Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432.

[13] Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at 85 per Mason CJ and Dawson J, at 104-105 per Brennan J, at 126-127 per Deane J, and at 163, 172 per McHugh J.

[14] See McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377 at 411-412; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at 83.

[15] Compare McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377.

Foran v Wight [1989] HCA 51; (1989) 168 CLR 385, applied. TRUSTEE - Action by beneficiary - Trustee's cause of action - Trustee defendant - Order made in favour of trustee. Lidden v Composite Buyers Ltd (1996) 67 FCR 560; Lamra Pty Ltd v Katian Pty Ltd (1998) 44 NSWLR 432, followed. DAMAGES - Measure and remoteness of damage in actions for breach of contract - Deprivation of a commercial opportunity of some value - Degree of probability of benefit of redevelopment being realised. Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332; Malec v JC Hutton Pty Ltd (1990) 169 CLR 38, applied.

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Cases Cited (17)