Sentinel Orange Homemaker Pty Ltd v Bailey, in the matter of Davis Investment Group Holdings Pty Ltd

order made by: STEWART J DATE OF ORDER: 7 october 2022

1. The proceeding be dismissed.
2. The plaintiff pay the defendant's costs.
3. If either party wishes to apply for a variation of order 2, they do so by filing and serving brief submissions and any evidence in support of the costs order they contend for within 7 days of these orders and the other party file and serve brief submissions and any evidence in response within 7 days thereafter, whereafter the application to vary be decided on the papers. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 The plaintiff, Sentinel Orange Homemaker Pty Ltd, is the owner of a large commercial property on the Mitchell Highway in Orange, New South Wales. On 17 August 2018, Sentinel contracted to sell the property to Davis Investment Group Holdings Pty Ltd (DIG) at a price of $3.6 million. After the date for completion under the contract had been extended from time to time, including by mutual agreement most recently on 13 March 2020, on 31 March 2020 DIG purported to terminate the contract. 2 On 17 April 2020, the defendant, Liam Bailey, was appointed liquidator of DIG pursuant to a members' voluntary winding-up. On the same date, Sentinel commenced proceedings in the Supreme Court of NSW to recover the $100,000 deposit paid by DIG to a stakeholder under the contract for sale. On 18 May 2021, after a hearing lasting several days, Darke J in the Supreme Court held that DIG's purported termination of the contract was invalid amounting to a repudiation which Sentinel had accepted, thus entitling it to recover the deposit. The deposit and interest was subsequently paid to Sentinel. No finding was made as to Sentinel's entitlement to any particular sum of damages which was expressly left to be dealt with by proof of debt in the winding up of DIG. 3 On 26 August 2021, Sentinel withdrew a previous proof of debt and lodged a fresh proof of debt claiming damages in the sum of $350,000. Of course, a claim for damages is not a debt properly-so-called; "proof of debt" is merely shorthand for "proof of debt or claim": see s 553 of the Corporations Act 2001 (Cth) and reg 5.6.49 of the Corporations Regulations 2001 (Cth). The sum of $350,000 was said to arise from the difference between the purchase price of the property which DIG had by the contract for sale contracted to pay and the diminished value of the property after the termination of the contract. That value was said to be $3.25 million as at 7 May 2021 which was supported by a valuation report by Matthew McCoy, a property valuer. 4 On 30 August 2021, Mr Bailey rejected the proof of debt. Sentinel thereafter commenced the present proceeding to "appeal" Mr Bailey's rejection of its proof of debt. It contends that the value of the property was $3.25m on 16 April 2020 - it is common ground that that is the relevant date as the last nominated date for completion - whereas Mr Bailey contends that it was $3.6m. Thus Sentinel claims the difference of $350,000 less the $100,000 deposit that has already been paid to it, and Mr Bailey contends that no amount is payable. Sentinel relies in particular on the advent of the COVID-19 pandemic in March 2022 as having led to, or explaining, the diminished value of the property between when the contract for sale was concluded and when it should have been completed had it not been repudiated.

The statutory power and applicable principles 5 The application is brought under s 90-15(1) of the Insolvency Practice Schedule (Corporations), Sch 2 to the Corporations Act. The section states that the court "may make such orders as it thinks fit in relation to the external administration of a company." The section replaced the now repealed s 1321 of the Corporations Act. The case law in respect of the repealed provision remains relevant: Re Azmac Pty Ltd (in liq) [2020] NSWSC 204; 146 ACSR 113 at [41]-[44] per Rees J; 5G Developments Pty Ltd (in liq) v Massie, in the matter of 5G Developments Pty Ltd (in liq) [2021] FCA 791 at [135]-[136]. 6 It is common ground that the hearing is a hearing de novo. The court must decide whether the liability claimed in the proof of debt is a true liability of the company and enforceable against it - it must "make its own decision on the evidence before it and not merely decide if there was error on the part of the primary decision-maker": Marsland v Gamble [2002] WASC 213 at [12] per Barker J. 7 The consequence of the hearing being de novo is that the court may make its decision on evidence that was not before the liquidator: Re Jay-O-Bees Pty Ltd (in liq) [2004] NSWSC 818; 50 ASCR 565 at [60] per Campbell J; Re Young in his capacity as liquidator of Great Wall Resources Pty Ltd (in liq); Capocchiano v Young [2013] NSWSC 879 at [46] per Kunc J; Re Azmac at [42]; and Sands Contracting Pty Ltd v Cant [2021] FCA 638 at [14] per McKerracher J. 8 It is common ground that Sentinel is entitled to loss of bargain damages based upon the difference between the contract price and the market value of the property determined at the date when completion of the unlawfully repudiated contract should have occurred: Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 133; 65 NSWLR 648 at [11] (Mason P, Beazley JA agreeing). There is no dispute that Sentinel bears the onus of proving the market value of the property at that time.

The determination of market value of real property 9 There is no particular dispute between the parties as to the applicable principles in determining market value.

Market value 10 In Spencer v Commonwealth [1907] HCA 82; 5 CLR 418 at 432, Griffiths CJ observed that the test of value of land is to be determined not by inquiring what price a person desiring to sell could actually have obtained for it on any given day, but by inquiring "What would a person desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?" It was said that it is necessary to put oneself as far as possible in the position of persons conversant with the property at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it; or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together. 11 That formulation was adopted in Commonwealth v Arklay [1952] HCA 76; 87 CLR 159 at 169-170 by Dixon CJ, Williams and Kitto JJ.

Comparable sales 12 One well-recognised method of answering the market value question is referred to as the comparison method. It involves using evidence of comparable sales to form an opinion as to the market value of the subject property via comparison. Such an opinion can only be made on the basis of a reasonably representative group of comparator sales; the sales evidence must be relevant and sufficient in volume: Maurici v State Revenue [2003] HCA 8; 212 CLR 111 at [18] per McHugh, Gummow, Kirby, Hayne and Callinan JJ. That method was more fully described by Wells J in Brewarrana Pty Ltd v Commissioner of Highways (No 2) (1973) 6 SASR 541 at 179-180 as follows: It is general valuation practice for sales characterised as comparable sales to be used as bases for the valuation of lands said to be similar. But allowances must always be made before such sales can be so used. No two parcels of land are identical in all respects: the sale price of any given piece of land is not necessarily the price at which it ought to have been sold, or the same thing as its true value. Before using any allegedly comparable sale, therefore, the valuer must consider whether, having regard to the circumstances … appertaining to the parcel of land in question, and to the transaction of sale, there are sufficient similarities to the circumstances appertaining to the subject land and to the notional sale presupposed by the test formulated in Spencer v Commonwealth … to warrant a court's reasoning from the sale price paid under the allegedly comparable sale, with or without other evidence, to a value for the subject land. Adjustments must, of course, be made every time reasoning of that kind is undertaken. For example, in relation to the land itself and the circumstances appertaining to it, it may be necessary to consider such matters as topography, location, size, shape … land use (actual and potential), scope for, and difficulties of, development … and in relation to the transaction of sale, the valuer must weigh such things as the character, business and relationships of the parties, their motives, the terms and conditions in their contract of sale, and any other special considerations that induced or may have induced them to conclude the contract at the selling price agreed, as well as the dates when the contract of sale and the transfer were concluded or effected. 13 That passage was adopted in Duffy v Minister for Planning [2003] WASCA 294; 129 LGERA 271 at [22]-[25] by McLure J, Anderson and Steytler JJ agreeing. It was explained that there is no hard and fast line separating sales that are comparable from those that are not; it is a matter of degree. Some adjustments are always necessary, but too much adjustment may mean that the particular sale being sought to be used as comparable is in truth not comparable.

Prior sales of the subject property 14 Insofar as any prior sale of the subject property is concerned, factors bearing on its relevance such as proximity in time to the date of the valuation and the bona fide and voluntary nature of the transaction must be considered: Inez Investments Pty Ltd v Dodd (1979) 26 The Valuer 501 at 505 (judgment of Carmichael J in the Supreme Court of NSW, 9 July 1979) (Inez v Dodd). In Penhall v Valuer-General (NSW) (1976) 1 NSWLR 628 at 632, Waddell J held that in the circumstances of that case, the price for which the subject land was sold should be taken to be its value, unless there is cogent evidence that a prudent purchaser at that time would have been prepared to pay more for it. 15 In Commissioner of Taxation v Miley [2017] FCA 1396; 106 ATR 779 at [81], Wigney J explained that when the asset in question has been the subject of a recent arm's-length sale, it is generally unnecessary to hypothesise as to the price at which a willing seller and purchaser would have concluded a sale - "If the recent sale transaction can be said to be one between a willing but not anxious seller, and willing but not anxious buyer, the price that the buyer and seller actually agreed on may generally be taken to be the market price, or at least a reliable indicator, if not the best evidence, of the market price." I adopt his Honour's approach.

Unaccepted offers 16 Finally for present purposes, there is the question of the relevance of an unaccepted offer to purchase the subject property. Historically, there has been some controversy about this question because of the statements of Isaacs J in McDonald v Deputy Federal Commission of Land Tax (NSW) [1915] HCA 15; 20 CLR 231 at 240 that evidence of an unaccepted offer is not admissible as direct evidence of value. Over the years, those comments have been confined in various ways. For example, in this Court in Goold v Commonwealth [1993] FCA 210; 42 FCR 51 at 60, Wilcox J held that evidence of an offer, either to purchase or to sell, if established as genuine, is admissible as evidence of market value but how much weight should be given to such an offer is a question to be determined by reference to the facts of the particular case. 17 It was accepted in Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48 at [128] per Black CJ, French and Tamberlin JJ, that whatever weight may be properly given to evidence of offers for limited or general purposes, it is clear that such evidence is not permissible as direct evidence of value, and (at [129]) that evidence of an offer can be used "in a general way" provided that it is accompanied by an assessment of relevant factors such as the genuineness of the offer and whether it was made at arm's length. 18 With reference to those passages in Cordelia, it was said in Expectation Pty Ltd v PRD Realty Pty Ltd [2004] FCAFC 189; 140 FCR 17 at [90] per Carr, Emmett and Gyles JJ that a vendor's open offer to sell at a particular price might be of some relevance to market value in the same way that an actual unconditional open offer by a purchaser with the means to effect the purchase might have some relevance to market value. Also, a vendor's offer might set the top limit and a prospective purchaser's offer the bottom limit. That was cited with approval in McKay v Commissioner of Main Roads [2013] WASCA 135 at [25] per Martin CJ, Buss and Murphy JJA. 19 In MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; 63 NSWLR 167, Spigelman CJ (Mason P and Hodgson JA agreeing), after a careful analysis of the authorities, and without qualifying the statement in Cordelia that an unaccepted offer is not admissible as direct evidence of value (at [95]), held that in an exchange bargain test of market value as identified in Spencer, offers to purchase and sell, particularly the very property under consideration, may be relevant by fixing a range and, accordingly, are admissible (at [88]). The Chief Justice, in a passage sought to be relied on by the defendant in the present case, went on to say that an offer to purchase "clearly establishes a floor" to value (at [97]). However, it is to be observed that that reasoning was said to apply where a valuation must refer to the special potentiality of particular property for a specific purchaser and an offer is made by that purchaser to purchase that property (at [96]). 20 MMAL Rentals has been cited as authority for the proposition that where a specific purchaser is known to be interested in a property and has made an offer to buy it, evidence is receivable of such an offer and, indeed, may set the floor when determining market value: Crawley v Short [2009] NSWCA 410; 262 ALR 654 at [218] per Young JA, Allsop P and Macfarlan JA agreeing. See also Baiyai Pty Ltd v Guy [2009] NSWCA 65 at [22] per Handley AJA, Beazley and Giles JJA agreeing. MMAL Rentals is nevertheless restricted to establishing an exception to the general rule that an offer is not admissible as direct evidence of value where the offer is relevant to show that there was a specific purchaser willing to pay more than the ordinary market price: Upside Property Group Ltd v Tekin [2016] NSWSC 1260; 18 BPR 36,191 at [116] per Darke J. 21 In McCallum, in the Matter of Re Holdco Pty Ltd (Administrators Appointed) (No 2) [2021] FCA 377; 391 ALR 418 at [259]-[260], O'Bryan J held that neither McDonald nor Cordelia establishes an absolute rule in relation to the admissibility of evidence of an offer to sell or acquire property as proof of the value of that property, but that the probative value of evidence of an offer will depend on the issue to be determined and the circumstances in which the offer is made. His Honour gave the example that if the issue to be determined is the fair market value of property, being the price that would be paid by a willing but not anxious buyer to a willing but not anxious seller, evidence of an offer made by an anxious seller would have little, if any, relevance. 22 It is difficult to extract a coherent set of principles from the matrix of case law on this question that has sought in various ways to restrict the absolute terms of the statements by Isaacs J in McDonald. However, in this Court, with reference to the Full Court decisions in Cordelia and Expectation, and the other intermediate appellate court decisions in MMAL Rentals and McKay, as well as to compelling logic, I accept that a genuine unaccepted offer to purchase or to sell the subject property can be evidence of a floor or a ceiling, respectively, of market value, but that the weight to be given to that evidence will depend on all the circumstances in which the offer was made.

The property 23 Sentinel is the registered owner of the property which is described as Lot 2 in community plan DP 270204. The property forms part of the Orange Homemaker Centre which is a single level, large format retail development that is arranged in a large L-shape across four parcels of land and four building envelopes which present their tenants to a centralised car parking lot. The property is improved with a vacant building which previously housed a Bunnings Warehouse store and was constructed and presented to Bunnings's "small format store" configuration. 24 The building has a total fully enclosed covered area of 6,535.10 m², and the total site area is 16,680 m² including car parking for 234 vehicles. It is zoned as B5 Business Development under the Orange Local Environmental Plan 2011. The objective of that zone is "to enable a mix of business and warehouse uses, and bulky goods premises that require a large floor area, in locations that are close to, and that support the viability of, centres." The property fronts the Mitchell Highway over approximately 101 m.

The contract for sale 25 By contract for the sale and purchase of land dated 17 August 2018, Sentinel sold and DIG bought the property for the purchase price of $3.6 million excluding GST. The completion date was agreed to be 10 business days after the date that the relevant party advises satisfaction with, or the waiver of the benefit of, the last of the conditions precedent. The conditions precedent included DIG obtaining development approval for the change of use to "the carrying on from the Land of the core business of motor vehicle trading, including car yard and showrooms, mechanic workshops and motor vehicle improvement workshops". The conditions precedent were to be satisfied by 5.00 pm on the Conditions Precedent Date, being six months after the contract date (excluding the period from 17 December 2018 to 11 January 2019), or such extended date as provided for in the contract. 26 Although the contract for sale was not subject to DIG obtaining finance for the purchase, a finance facility was in fact obtained from Australian Alliance Automotive Finance Pty Ltd (AAAF) in June 2019 in the sum of $6,160,000 for the acquisition of the property and renovation costs. 27 Several extensions of the Conditions Precedent Date were made, either unilaterally by DIG as it was entitled to do in particular circumstances pursuant to the contractual provisions or agreed between the parties. The penultimate extension of the Conditions Precedent Date occurred on 26 February 2020 when the parties agreed to extend it to 17 March 2020. The last such agreement was on 13 March 2020 when the parties agreed to extend it to 31 March 2020. The extensions were to enable DIG's development application to be approved by the Orange City Council. 28 It was found in the Supreme Court proceeding that although the Council had approved the development application on 17 March 2020, on 31 March 2020 DIG purported to terminate the contract on the pretext that the condition precedent with regard to the approval of the development application had not been satisfied prior to the extended Conditions Precedent Date. On 6 April 2020, Sentinel communicated to DIG that the purported termination was a repudiation. 16 April 2020 remained the nominated date for completion. 29 It was held that although the Council had adopted a resolution to approve the development application on 17 March 2020, as at the expiry of the Conditions Precedent Date that approval was not beyond the recall of the Council with the result that DIG had not obtained the development approval, as defined, by 5.00 pm on 31 March 2020. However, it was held that DIG breached its reasonable endeavours obligation under a particular clause of the sale contract, and that such default caused the condition precedent with regard to the approval of the development application to not be satisfied by that time. In those circumstances, it was not open to DIG to rely on the non-satisfaction of the condition precedent as a basis for the exercise of a right of termination. The termination was therefore invalid and ineffective. DIG's purported termination, and maintaining that the contract was no longer on foot and refusing to proceed to settlement, amounted to a repudiation of the contract, which Sentinel accepted, as it was entitled to do, on 22 May 2020.

Why DIG cancelled the sale contract 30 Sentinel tendered parts of an affidavit deposed to by Benjamin John Davis in the Supreme Court proceeding. Mr Davis explained that he was a director of DIG which was incorporated in July 2018 to own the land proposed to be purchased from Sentinel. He also explained that he and his father, John Neville Davis, were the directors and shareholders of DIG. They were also the directors and shareholders of John Davis Motors Pty Ltd (JDM). The commercial purpose of the purchase of the property was to allow DIG to lease the property to JDM to carry on its car dealership business. 31 Mr Davis's affidavit explained the circumstances that led to DIG seeking to terminate the sale contract in late March 2020. From mid-February 2020, he noticed a drop-off in motor vehicle sales across all dealerships, but the drop-off became particularly pronounced during March. From mid-February, JDM's bank had put it on notice of an anticipated problem in relation to the supply of motor vehicles which had been reported in the USA arising from the COVID-19 pandemic. During March, week by week, as reported COVID-19 infections became greater, sales dropped off further. 32 Sales continued to deteriorate steeply during March. On or about 22 March 2020, announcements were made by the Government that there would be lock-downs and certain businesses would not be able to stay open. There was significant uncertainty in the car dealership industry about future operations, supply of vehicles and the economic outlook. Mr Davis had significant concerns with regard to possible staff lay-offs and did not know at that stage whether JDM would qualify for the government assistance which later became known as JobKeeper. 33 The situation only got worse towards the end of March and into April 2020. Mr Davis explained as follows: In that financial climate of complete uncertainty I and my father, as directors of the Davis Group of companies, were under considerable pressure to preserve the motor dealership business and preserve jobs for our employees. In these circumstances continuation of a $3,600,000.00 contract plus GST was not responsible or viable for [JDM] to rent the premises and the Davis Group of Companies including [DIG] as purchaser of the Property. 34 Towards the end of March 2020, Mr Davis asked AAAF whether it would be possible to settle on the property and immediately pause the repayments for an extended time until business and the economy returned to normal. Seemingly some discussion ensued. In an email dated 1 April 2020, Mr Davis advised AAAF that "we accept your position and we accept that it isn't possible for us to proceed with the purchase and redevelopment of the Bunnings site due to current conditions with COVID-19 and the significant impact this is having on the motor industry and our dealership." In Mr Bailey's first report to creditors he reported that DIG's finance for the property was withdrawn as a result of the declining economic conditions stemming from the COVID-19 pandemic.

Supreme Court proceeding commenced 35 Sentinel commenced the Supreme Court proceeding on 17 April 2020 in which it claimed payment of the deposit of $100,000. It was also on that day that Mr Bailey was appointed as liquidator of DIG.

The June 2020 Davis offer of $3.25m 36 In the context of the cancelled contract for sale and the Supreme Court proceeding being on foot, on 26 June 2020, the Davises (without specifying which company) conveyed an offer to purchase the property. The offer was conveyed by email from the Davises' buyer's agent, Gary Blowes, to Sentinel's sales agent. It was in the following terms (as written): The Davis's Need confirmation of your clients intention, We assume as per our conversation that you are open to negotiation along the fowling: • $3,250,000.00 plus GST with a settlement date of 6 weeks from acceptance. • $3,600.000.00 plus GST with a settlement in January 2021. Your clients response would be appreciated 37 On 1 July 2020, the Davises orally increased their offer to $3.35 million plus GST, saying that they did not "have any more room to move". The next day, Sentinel's agent conveyed to the Davises' agent that the offer of $3.35 million and a six week settlement had the "attention" of Sentinel and that "if there was say $100,000 more that could be offered I feel we could close the loop and all parties could move forward".

The August 2020 Davis offer of $2.9m 38 On 28 August 2020, the Davises' agent conveyed to Sentinel's agent that "based on feedback from Mazda Finance [the Davises'] revised position would be $2.9 million plus GST".

The December 2020 Tipalea offer of $3m 39 In late 2020, the Orange Homemaker Centre, which includes the subject property, was put to market. There was a full marketing campaign. That resulted in Sentinel and Tipalea Private No. 22 Pty Ltd concluding heads of agreement dated 24 December 2020. By the heads of agreement, Sentinel granted to Tipalea a call option to purchase the Orange Home Maker Centre for $24,550,000. The heads of agreement recorded that of the purchase price, $3 million was allocated in respect of Lot 2, ie, the subject property. It is not recorded how or why that allocation of value was made. The heads of agreement also recorded that the parties acknowledged that the agreement "is not intended to be binding" with the exception of clauses that are not presently relevant that deal with due diligence. 40 For reasons not explored in evidence, the heads of agreement did not progress to a contract for sale of the property.

Supreme Court proceeding ended 41 The hearing in the Supreme Court took place on 26-28 April 2021. On 18 May 2021, Darke J gave judgment in Sentinel's favour on the question of termination or repudiation of the sale contract and ordered payment of the $100,000 deposit plus interest to Sentinel.

The June 2021 Davis offer of $3.6m 42 On 2 June 2021, Mr Davis conveyed an offer in an email marked "without prejudice" to Tim Kent, Sentinel's general manager, "to finalise the entire matter" by DIG purchasing the property for the original price of $3.6 million less the $100,000 deposit already paid. Mr Kent rejected the offer on the basis that he understood it as being to compromise all of Sentinel's claim against DIG arising from the unlawfully terminated sale contract.

The July 2021 Kueb offer for $3.7m 43 On 13 July 2021, an unrelated company, Kueb Pty Ltd, conveyed an offer to purchase the property to, curiously, the Davises' buyer's agent, Mr Blowes. The offer was to purchase the property for $3.7 million exclusive of GST, with a deposit of 5% and settlement in six months. The intention was to establish a Storage King mini-storage facility. The offer was not conveyed to Sentinel, but was nevertheless referred to by Mr Bailey in his rejection of Sentinel's proof of debt. Mr Kent gave evidence that had the offer been conveyed to Sentinel, it would not have been accepted. His reasons included that the proposed deposit of 5% was unusual, the six month settlement period was long and the prospective purchaser required occupation prior to settlement.

The expert witnesses 44 Sentinel's expert valuer was Matthew McCoy of Savills. DIG's expert valuer was Graham Scrymgeour of National Property Valuers NSW Pty Ltd. Although some effort was made to discredit Mr Scrymgeour's credentials, I am satisfied that both experts were adequately and appropriately qualified to express an opinion on the value of the property. As at mid-April 2020, the relevant date, Mr McCoy valued the property at $3.25 million whereas Mr Scrymgeour valued it at $3.6 million. 45 The experts were directed to confer in conclave and to produce a joint report indicating their areas of agreement and disagreement. For reasons that are not necessary to go into, the conclave process was essentially unproductive and fraught with some difficulty. Two different versions of a "joint report" were produced, although by reading them together it is possible to work out what they disagreed on. The experts did not agree on anything of significance, and neither shifted his position from his previously filed report. 46 Both parties launched full-scale attacks on the credibility and independence of the other party's expert witness. I was not much impressed by those attacks, and I was not satisfied that either expert's evidence should be rejected in toto. As will be seen, there are problems, or doubts, about aspects of each expert's evidence, but those do not infect the whole of their evidence.

Mr McCoy 47 Mr McCoy prepared two valuation reports, and then on the eve of the trial a third report consisting of his second report with several amendments reflected in mark-up was served. The amendments were described by him as correcting "errors and omissions" identified by him in preparation for giving evidence. Mr McCoy employed a market value test, looking at what a willing and not anxious purchaser would pay and a not unwilling vendor would receive for the subject property, taking into account a fully informed market. This is consistent with Spencer. 48 Mr McCoy's first report, dated 14 May 2021, was the one that Sentinel relied on in support of its proof of debt. The valuation was done as at 7 May 2021 for the whole of the Orange Homemaker Centre. Mr McCoy's opinion was that the value of the subject property, being part of the centre, as at that date was $3.25 million. The report was not prepared specifically for the purpose of supporting the proof of debt, but rather for financial reporting and first mortgage security purposes. Mr McCoy denied in cross-examination that that meant that he gave a more conservative, ie, lower, valuation than a genuine market valuation. I have no reason to disbelieve him in that respect. 49 The methodology adopted by Mr McCoy, and the pool of comparable properties, was much the same in both his reports. The result is that there is not much from his first report of present relevance. However, I note the following with respect to his first report: (1) Under a heading "Critical Assumptions", Mr McCoy stated that the market for investment-grade assets had "firmed noticeably over the last 2 years, with yields now considered to be reaching historic lows. At some point it is quite possible that the cycle could move into a downward phase and yields could soften. If this was to occur then values will reduce." That is to say, over the past two years, including over the first year and a bit of the COVID-19 pandemic, the market value of "investment-grade assets" (of which the subject property was considered one) had increased. (2) Mr McCoy noted that the commercial sector of "Hardware & Garden retailing", which would be a possible use for the property, had "been a beneficiary of the COVID-19 pandemic, growing 25.8% over the 12 months to August 2020, which should translate into demand for large format retail" such as the subject property. He also stated that "in the post COVID-19 environment and up to 30 June 2020, the Large Format Retail sector appears to have been one of the most resilient". 50 Turning now to Mr McCoy's second report, including the late amendments to it, the first observation is that it values the property as at 15 April 2020 and 31 August 2021, arriving at the same value for both dates, namely $3.25 million. The report is dated 22 October 2021. 51 Mr McCoy identified seven sales of vacant land between May 2017 and September 2021 in a number of different towns and suburbs around New South Wales, presumably having gone to that effort because he considered that they were relevantly comparable. However, in cross-examination he said that he had not used them in his valuation, and accepted that they were not comparable and should have been omitted from his report. As will be seen, he did in fact refer to one of the sales in the justification for his opinion on value. For what it is worth, he calculated the value rate range to be from $120 per square metre to $636 per square metre of site area. 52 Mr McCoy identified seven sales which he described as "improved site sales which have been offered for sale after Bunnings Warehouse or Masters vacated the properties". I understand that both Bunnings and Masters are, or were, large-scale DIY or hardware stores. He explained that he used these sales because they offer a "direct comparison to the subject property". He explained in oral evidence that the end user or purchaser of a vacant Bunnings is likely to be a "sophisticated investor" that looks at the market on a national level. For that reason, he looked for comparable sales "all up and down the East Coast". 53 As it turned out, one of the seven comparable properties selected by Mr McCoy is in fact a vacant site and for that reason was subsequently omitted from analysis. The remaining six sales have the following relevant details: Address Sale date Sale Price ($) Zoning Area site m² Gross leasable area m² Analysis GLA ($/m²) Analysis Site ($/m²) Homemaker, Lake Haven, Lake Haven NSW June 2021 17,950,000 B4 25,500 8,592 2,089 704 Bunnings, 51 Kingston Road, Underwood, QLD Nov 2020 16,000,000 SCUWoo 29,320 9,492 1,686 546 Masters, 243 Forrester Road, North St Marys Nov 2019 14,800,000 IN2 31,860 12,901 1,147 464 Bunnings, Centre Road, Oakleigh South, VIC June 2018 21,400,000 INZ1 44,073 11,398 1,878 486 Bunnings, High Street, Epping, VIC June 2018 16,200,000 ACZ 31,470 7,042 2,300 515 Bunnings, Gladstone Road, Dandenong, VIC June 2018 16,440,000 C2 30,310 9,733 1,698 542

54 It is to be observed that the sales range from June 2018 to June 2021. Mr McCoy explained in his report that with the exception of the property at Lake Haven (June 2021) and Kempsey (September 2021, being a reference back to one of the vacant site sales which he later said that he did not take into account), "recent sales evidence both of vacant land and improved with vacant Bunnings/Masters warehouse accommodation does increase the subjectivity of our assessment." Although Mr McCoy included a discussion of the characteristics of each of the properties in question, it is not necessary to consider those for present purposes. 55 Mr McCoy explained that he used both the rate per square metre of improved building area (also referred to as gross leasable area or GLA) and the rate per square metre of improved site area for direct comparison with the subject property. In respect of the improved building area, he noted that there was a range from $1,147 to $2,300 per square metre. In respect of improved site area, Mr McCoy noted that the range was from $396 to $704 per square metre, although the rate of $396 was for the vacant lot which should have been excluded. The range is therefore really $464 to $704 per square metre. For the subject property, ostensibly employing a direct comparison method, Mr McCoy then adopted the following rates: Useable lettable area Usable site area Adopted rate Assessed value 6,535.10 m² $500 / m2 $3,250,000 16,680 m² $195 / m2 $3,250,000

56 It is immediately to be observed that in each case, being the GLA and the site area, the rate adopted by Mr McCoy for the subject property is less than half of the figure at the low end of the range identified by him with reference to comparable sales (excluding the vacant lot). The justifications that he offered for adopting the rates that he did include the following: (1) The superior quality of the relevant property's location within the dataset when compared to the subject property. (2) The superior market conditions of the majority of the sales within the dataset when compared to the assumed valuation dates for the subject property. (3) The assumed date of valuation of the subject property in comparison to the majority of the sales within the dataset. (4) The lack of comparable improved site sales evidence within regional locations. (5) The site's location within an established homemaker centre. (6) The impacts of the COVID-19 global pandemic at the date of assumed valuation. (7) The site's regional location. 57 Mr McCoy made the following further comments (as written): Given the lack of more relevant sales data in the lead up to 15 April 2020 and 31 August 2021 our view of value for the subject does not vary. We comment that the Novel Corona Virus (COVID-19) Global Pandemic has ensued beginning in Australia in ernest circa. March 2020 and continuing at the date of writing of this expert witness report, this may in part explain the dearth of relevant sales, however we further comment that the majority of the sales evidence relied upon transacted before the COVID-19 pandemic. Another explanation for the lack of directly comparable evidence is simply the result of small or large format Bunnings Warehouse sales being a rare occurrence in the marketplace, they are conditional upon certain leases expiring at certain times and Bunnings being able to acquire nearby sites for the expansion of a new centre. As such the evidence provided is considered the most relevant to the subject and therefor applicable to both dales given they are only approximately 16.5 months apart. 58 Mr McCoy also referred to sales, or potential sales, of the subject property as follows: • We are aware that the subject property was recently under exclusive due diligence to a party who had reportedly applied a capital value in the range of $3,000,000 to $3,500,000 over the land known as Lot 2 in Deposited Plan 270204. • In addition to the above sale an offer of $3,600,000 was made to Sentinel Property Group by a local consortium of Orange investors circa. August 2018. The offer was subject to development approval which was allegedly not forthcoming. Another offer of $3,250,000 was offered by the same group some 18 months later however, again, did not progress to a formal sale process. 59 Mr McCoy said that he obtained this information from a real estate agent, and did not have sight of the underlying documents. That may explain the inaccuracies. The first reference to a sale in the paragraph above is obviously a reference to the heads of agreement with Tipalea, and the second reference is to the August 2018 sale from Sentinel to DIG and the June 2020 offer from the Davises. Although Mr McCoy does not say so in as many words in his reports, it would appear that the information he recorded in respect of these prior sales, or potential sales, weighed heavily in his assessment of the market value of the subject property. Indeed, it is hard to understand, and is certainly unexplained by him, how Mr McCoy came to apply rates in respect of the GLA and the total site area that calculate out at a total market value of $3.25 million which is, on his version, coincidently exactly halfway between what he records as the value range given in his first bullet point and is exactly the same as the June 2020 offer he refers to in his second bullet point. 60 In oral evidence, in the context of explaining why he considered ex-Bunnings sites to be most comparable, Mr McCoy said that in addition to sales of those sites he considered the offers referred to by him, and in particular the on-market campaign of the whole property in 2020. That would seem to confirm that those offers exerted a particular gravitational pull in his analysis.

Mr Scrymgeour 61 Mr Scrymgeour's report is dated 24 November 2021, and arrives at a valuation of $3.6 million as at 16 April 2020. He adopted a market value definition consistent with that adopted by Mr McCoy. 62 Mr Scrymgeour's principal method of valuation was by direct comparison with comparable sales. He identified seven sales of property that he regarded as comparable, although in evidence he accepted that one of the sales was not comparable so he then excluded it. All the comparable properties considered by him were in Orange save for one in Bathurst and one in Dubbo. The sales spanned the period April 2017 to August 2021. There was no overlap between his pool of comparable sales and Mr McCoy's. 63 Mr Scrymgeour calculated the rate per square metre of the improved site area for each of the comparable properties. The range was from $132 per square metre (for a property at 426 Mitchell Highway, Orange) to $912 per square metre (for a property at 344-348 Summer Street and 123 Endersleigh Street, Orange). Mr Scrymgeour also recorded his understanding that the subject property sold for $3.6 million (referring to the August 2018 sale from Sentinel to DIG). 64 It is noteworthy that Mr McCoy accepted that one of Mr Scrymgeour's selected properties, namely that at 25 Leewood Drive, Orange, would have been a "good" comparison, although it was in his view superior to the subject property. On Mr Scrymgeour's information, there was an agreement for sale of that property in 2017 reflecting a rate per square metre of improved site area of $263 per square metre, and a subsequent sale in February 2020 at $281 per square metre - both being well above Mr McCoy's adopted rate of $195 per square metre. 65 Although not reflected in his report, in evidence Mr Scrymgeour explained that by looking at the properties in his pool of comparable sales and comparing them to the subject property, he arrived at a rate per square metre of improved site area that he considered appropriate for the subject property. That produced a value which he could not recall but it was greater than $3.6 million. He then gave particular weight to the actual sale of the property for $3.6 million and regarded that as giving the best evidence of market value - referring to Inez v Dodd in that regard. That reflects a rate of approximately $216 per square metre of improved site area. It is to be observed that that is towards the lower end of the range of his comparable properties and less than half the low end of Mr McCoy's range. 66 I find Mr Scrymgeour's explanation of having arrived at an appropriate rate for the subject property from having analysed the sales of the properties in his pool of comparable sales to be troubling. On the one hand, having gone to all the effort to assemble a pool of comparable sales, it makes complete sense that he would try to arrive at a value for the subject property based on an analysis of those sales. Indeed, he stated that he was employing the comparable sales method. However, it makes no sense at all that he would not reflect that process in his written report, including identifying the rate per square metre of improved site area and the ultimate value that he arrived at. That is made worse by the fact that in evidence, he could not remember what figures he had arrived at. 67 Having concluded that the prior sale of the subject property was likely to be the best evidence of its value, Mr Scrymgeour then adopted what he described as a "check method". He had regard to the Valuer General's assessment of the unimproved land value of the subject property as at 1 July 2020 of $3,010,000 million and calculated that $650,000 (being 6,535 m² at $100 per square metre) reflected a conservative estimate of the depreciated added value of the improvements on the property. On that basis he concluded that a market value of $3.6 million was fair. 68 Finally, Mr Scrymgeour made some general remarks concerning COVID-19. First, he said that given the unknown future impact that COVID-19 might have on markets, he recommended that the valuation be reviewed periodically. Secondly, he quoted commentary by the Royal Institute of Chartered Surveyors as follows: The outbreak of COVID-19, declared by the World Health Organisation as a "Global Pandemic" on the 11th March 2020, has and continues to impact many aspects of daily life and the global economy - with some real estate markets having experienced lower levels of transactional activity and liquidity. Travel, movement and operational restrictions have been implemented by many countries. In some cases, "lockdowns" have been applied to varying degrees and to reflect further "waves" of COVID-19; although these may imply a new stage of the crisis, they are not unprecedented in the same way as the initial impact. 69 Finally, Mr Scrymgeour commented as follows: The COVID-19 pandemic and measures to tackle it continue to affect economies and real estate markets globally. Nevertheless, as at the valuation date property markets are mostly functioning, with transaction volumes and other relevant evidence at levels where enough market evidence exists upon which to base opinions of value. In recognition of the potential for market conditions to move rapidly in response to changes in the control or future spread of COVID-19, I place emphasis on the importance of the valuation date.

Analysis of the market value of the subject property 70 There are a number of reasons why I am ultimately not satisfied that Mr McCoy's opinion that the subject property is properly valued at $3.25 million as at the middle of April 2020 is adequately justified. 71 First, I am not satisfied that Mr McCoy's approach to assembling a pool of comparable sales is justified. He explained that he considered that vacant possession sales of ex-Bunnings or ex-Masters warehouses were the most relevant comparable sales because those properties were part of a national market with a national pool of sophisticated investors. In evidence, he commented that there were no other vacant ex-Bunnings stores in Orange that could be used as a comparable sale. In taking this national market approach, Mr McCoy discounted factors in the local property market in Orange. That seems to me to be incorrect because it is plain that the availability for sale of comparable properties in or near Orange, whether or not they happen to be vacant ex-Bunnings or Masters warehouses, may have a material impact on the market. 72 In a sense, the point was conceded by Mr McCoy in his concession that the property at 25 Leewood Drive, Orange (which was included in Mr Scrymgeour's pool of comparable properties) was a good comparison. It was not an ex-Bunnings warehouse, which is presumably the reason why he did not include it in his pool of comparable properties. Further, Mr McCoy acknowledged that although most ex-Bunnings warehouses were re-purposed as "large format retail" stores, he was personally aware of one ex-Bunnings site that had been sold and used as a car show room, suggesting that it is not just a national pool of sophisticated investors that should be considered when selecting comparable sales. Indeed, DIG's interest in the property was for that purpose and DIG would not be considered an investor with a national, or whole of the Eastern seaboard, interest in ex-Bunnings or Masters warehouses. 73 Also, Mr McCoy sought to justify the low value of the subject property compared to the other sales on the basis of its "inferior location" in Orange, which seems to accept that there are factors peculiar to Orange (or the other towns in which his comparable properties are situated) that may be relevant. 74 Secondly, having established his pool of comparable properties, Mr McCoy's justification for selecting a rate per square metre for the subject property at less than half that of the figures at the low end of his range in respect of both the GLA and the improved site area is inadequate. Even at a value of $3.6 million, the GLA and improved site area rates are less than half the low end of the range. If the properties were indeed comparable, one would expect the value of the subject property to be somewhere within the range. But even if it was thought to be outside the range, to be so much outside the range with little explanation for that leads to the conclusion that the rates selected for the subject property lack justification. Indeed, as mentioned, it would appear that the rates were most likely selected, whether consciously or otherwise, as reflecting the prices in the sale information of the subject property available to Mr McCoy. 75 In short, the properties in Mr McCoy's pool of properties would appear to be so far removed in value from that of the subject property that they are not usefully comparable at all. 76 Thirdly, the sale information of the subject property taken into account by Mr McCoy is not in any reliable sense indicative of the market value of the property. The Tipalea heads of agreement in December 2020 was non-binding and dependent on due diligence, which indicates that it can barely be treated as an offer indicative of a floor of value. But perhaps more significantly, there is no explanation of the basis on which, or the reasons why, a value of $3 million out of the indicated purchase price of approximately $24.5 million for the whole Centre was allocated to the subject property. It may well have been influenced by factors unrelated to market value. On that basis, I consider the Tipalea heads of agreement to be worthless on the point in issue. 77 Mr McCoy seems to have discounted the sale price of $3.6 million for the property in August 2018, describing it as an "offer" and saying that it was subject to development approval which was allegedly not forthcoming. His information was incorrect in that regard, as development approval was granted by the Council. That sale price should have been material in Mr McCoy's analysis. His reference to the June 2020 offer of $3.25 million can also barely be treated as a floor to value, let alone evidence of actual market value. That offer was made at the same time as an offer for $3.6 million, albeit for a longer settlement period, it was made in the context of the existing dispute between the parties about the termination of the contract and DIG's liability which may have influenced the level of the offer, and the evidence of Mr Davis in his affidavit in the Supreme Court proceeding reveals that the offeror was in difficult financial circumstances at the time. The "offer" was also put as being a basis to "open negotiation", which is not a genuine offer to purchase in the requisite sense. 78 For those reasons, although Mr McCoy may not have known it at the time, the prior sales information of the subject property relied on by him was unreliable and the June 2020 offer was not indicative of market value. 79 Fourthly, Mr McCoy's evidence does not support Sentinel's case theory that because of the impact of the COVID-19 pandemic in March 2020, the value of the property dropped significantly from the arm's length sale of $3.6 million that had been achieved in August 2018. Mr McCoy's reports, as with Mr Scrymgeour's, selected comparable sales from before and after the advent of the pandemic and they drew no distinction between them. That is to say, neither Mr McCoy nor Mr Scrymgeour sought to explain that the comparable sales selected by them from before March 2020 should be treated any differently from those after that date. Mr McCoy even said that the value of investment-grade properties such as the subject property had "firmed" over the period covering the advent of the pandemic. 80 Mr McCoy's first report and the original version of his second report did not refer to COVID-19 in such a way as to justify the relatively low value of the subject property arrived at by him. To the extent that the amendments to his second report sought to introduce such a justification, I do not accept them as actually forming any part of his reasoning. They were added very late in the day at a time when he had long since expressed and sought to justify his opinion on the property's value. 81 For the above reasons, I do not accept Mr McCoy's opinion as reflecting the market value of the subject property in mid-April 2020. 82 Sentinel sought to support its case theory with regard to the impact of COVID-19 on the property market with reference to the particular circumstances DIG faced, and the reasons for DIG resiling from the purchase from Sentinel. However, those circumstances are particular to a motor dealership. One can perhaps generalise from DIG's circumstances to a conclusion that motor dealerships were hit hard by the pandemic, but the same is not true of other potential purchasers of the subject property. As mentioned, the evidence of Mr McCoy was that the Hardware & Gardening retailing sector had been a substantial beneficiary of the pandemic. It is also to be noted that neither party adduced any expert evidence with regard to property value trends as a consequence of the pandemic. The result is that it is simply not established that the pandemic caused the market value of the subject property to decrease. 83 With reference to the authorities identified earlier, the arm's length sale of the property from Sentinel to DIG in August 2018 is its market value at that time. There was no serious contention to the contrary. I do not consider the fact that the sale did not ultimately proceed to completion as detracting from that conclusion because the reasons that the sale did not proceed are peculiar to the purchaser and are not reflective of the market; I do not regard it to be a reflection on the market value of the property that the sale fell through because the purchaser's finance was withdrawn for reasons peculiar to the purchaser. 84 On one view, which was embraced by Sentinel in opening submissions (T15:5), the final mutual extension of the Conditions Precedent Date on 13 March 2020 fixes the market value as at that date at $3.6 million. However, I do not accept that. At that time the parties had been in a contractual relationship with each other for some 18 months, a substantial time investment, and it was known to them that approval of the development application, being the sole outstanding condition precedent at that time, was imminent. The property had been off the market for a long time, and for Sentinel to not agree to the extension of the date and have to re-market the property would not have been an attractive option. For those reasons, I do not accept that the final extension to the date is indicative of market value at that time. 85 The offers referred to in the factual findings section of these reasons, other than the ones relied on by Mr McCoy and already discussed, are also not evidence of even a floor to the subject property's value. They therefore play no role in my analysis. The June 2021 offer of $3.6 million was to compromise Sentinel's claims against DIG, and the Kueb offer in July 2021 was not even conveyed to the vendor or its agent. It is not possible to assess its genuineness. 86 The best evidence of the market value of the subject property, albeit as at August 2018, was the actual sale of the property at $3.6 million. For the reasons I have given, I am not satisfied that the market value depreciated in any material way thereafter. On the evidence before me, the market value of the property in mid-April 2020 therefore remained $3.6 million excluding GST.

Disposition 87 For those reasons, the proceeding falls to be dismissed. 88 I am not aware of any reason why the costs should not follow the event. The plaintiff should therefore pay the defendant's costs of the proceeding. 89 In the event that either party wishes to revisit the costs order on the basis that there are facts relevant to the question of costs of which I am not presently aware, they should apply to do so by filing and serving short submissions and any evidence they rely on within seven days of orders being made dismissing the proceeding with costs. I certify that the preceding eighty-nine (89) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.