Softwash Castle Towers Pty Ltd v Queensland Investment Corporation

CASES CITED : Softwash Castle Towers Pty Ltd v Queensland Investment Corporation [2009] NSWSC 490

PARTIES : Softwash Castle Towers Pty Ltd (Plaintiff) Queensland Investment Corporation (Defendant)

COUNSEL : C J Leggat SC with B M Zipser (Plaintiff) J W J Stevenson SC with D A McLure (Defendant)

SOLICITORS : Tiernan & Associates (Plaintiff) Allens Arthur Robinson (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

20404/2007 Softwash Castle Towers Pty Ltd v Queensland Investment Corporation (No 2)

JUDGMENT 1 HIS HONOUR: These reasons deal with questions that have been raised by the parties upon my invitation following publication on 5 June 2009 of my judgment in the principal proceedings: see Softwash Castle Towers Pty Ltd v Queensland Investment Corporation [2009] NSWSC 490. In general terms they address the calculation of compensation payable to the plaintiff in light of my earlier decision. Washing machine unit 2 At pars [53] and [87] of the earlier decision I held as follows: "[53] Question 4 should be answered "yes". The plaintiff is entitled to compensation for the washing machine unit even in circumstances where it had removed the unit and sold it following termination of the lease. That compensation would be calculated as the difference, if any, between the sale price of the unit and its value in the hands of the plaintiff at the date of termination. This is examined below in more detail in the answer to question 14(a).

[87] The plaintiff conceded that my answer to question 1 would also produce the answer to question 14. The defendant argued that the plaintiff suffered no loss if it could re-sell a particular item of plant or equipment recovered from the premises because the sale price would represent the value of that part of the fitout to the plaintiff and a sale would cancel the loss. I am not able to accept that submission. The value of the plaintiff's interest in an item of plant or equipment installed as part of the fitout calculated at the date of termination will be the value attributed to that item in the plaintiff's financial and accounting and taxation records, or possibly the records of the partnership in the unusual circumstances of this case. If the plaintiff is able to remove the item and dispose of it at or above that value it will have suffered no loss. If it is only able to recover a portion of its value on sale it will have suffered a loss and will in that respect be entitled to "compensation for the fitout". However, the plaintiff will be required to give credit to the defendant for any such sum recovered on the sale of an item purchased for and installed as part of the fitout." 3 The defendant submitted that the partnership income tax return for the year ending 30 June 2007 recorded the value of this item on its disposal as $301,820 calculated using a depreciation rate of 18.75 per cent. It is not in contest, and I found, that the plaintiff sold the unit for $165,000 pursuant to an agreement made on 22 February 2007. Applying the formula determined by me, the compensation payable on this analysis is $301,820 less $165,000 producing $136,820. 4 The plaintiff disputed this approach. The basis of the disagreement is to be found in the applicable depreciation rate, which the plaintiff contended should be 6.67 per cent rather than 18.75 per cent. That contention arises in the following way. 5 It will be recalled that on 24 December 2008, the plaintiff's solicitors instructed Mr Alameddine of Macquarie Accountants to consider whether certain transactions should be reversed so that the washing machine unit, among other things, could be re-assigned to the plaintiff. On 10 March 2009 Mr Gacomi posted amended tax returns to the ATO. The plaintiff's claimed rate for depreciation had at all times before this occurred been 18.75 per cent but became 6.67 per cent in the amended returns. The plaintiff's first contention is that the amended returns reflect the information in the amended financial accounts and that these are the relevant financial records for the purposes of the calculation as they include the correction of the so-called mistake that was identified by the plaintiff's accountant. The variation of the depreciation rate formed part of that original mistake. 6 Adopting the amended depreciation rate of 6.67 per cent per annum prime cost, which is the depreciation rate recorded in the amended financial reports of the plaintiff for the financial years ending 30 June 2003 to 2006 inclusive, and applying it to the adjusted value of the washing machine unit of $567,868 in the amended 2006 financial report, the decline in value from 1 July 2006 to 22 February 2007 is $32,087. On this analysis it follows that the depreciated value of the washing machine unit at the date of sale on 22 February 2007 was $536,786. Taking into account the sale of the unit for $165,000, the plaintiff's loss becomes $371,786. 7 The plaintiff also submitted that there was in any event an agreement between the parties that the "applicable" depreciation rate was to be 6.67 per cent. This was said to have arisen in the following circumstances. 8 By a notice to admit facts dated 17 September 2008 the plaintiff required the defendant to admit the following facts: "1. In relation to expenditure incurred by [the plaintiff] and its directors in purchasing in 2002 car wash machinery to be installed at Castle Towers Shopping Centre, Castle Hill, the applicable depreciation rate is 6.67% per annum prime cost.

2. In relation to expenditure incurred by [the plaintiff] and its directors in installing the car wash machinery at Castle Towers Shopping Centre, Castle Hill in 2002 and 2003 and constructing the business premises:

(a) The applicable depreciation rate is 2.5% per annum prime cost.

(b) The applicable depreciation rate is prescribed by s 43-25 of the Income Tax Assessment Act 1997 (Cth).

3. In relation to the depreciation rates for or associated with the car wash machinery purchased and installed by [the plaintiff] and its directors in 2002 and 2003, the depreciation rates proposed by Macquarie Accountants in section 5.5 of a report dated 12 March 2007 . . . are correct." 9 It appears by clear implication from the terms of a letter sent by the defendant's solicitors on 1 October 2008 that there had been an issue about whether or not the plaintiff was to be limited to depreciated values in its claim for compensation. That letter returned a notice disputing facts, and served a notice to admit facts, with the following relevant comments: "We refer to your faxes dated 15 and 17 September 2008. We enclose, by way of service, our client's Notice Disputing Facts.

Our client's position in relation to the provision of evidence is as follows:

2. Our client has been waiting for some time for your client to advise its position in relation to the issue of depreciation. Clearly, if the parties are able to agree on the issue, our client should not be put to the expense of having to engage an expert witness.

While the notice to admit facts recently served by your client suggests to us that your client now agrees that the various items of expenditure, if compensable under the lease, must be depreciated, the matter is not beyond doubt. Given this, we enclose, by way of service, a notice to admit facts. Whether our client elects to obtain expert evidence will depend on the response received from your client to the attached notice." 10 The defendant's notice disputing facts was in the following relevant terms: "For the purposes of this proceeding only, the defendant admits the following facts specified in the plaintiff's Notice to Admit Facts dated 17 September 2008:

1. To the extent that the Court determines that the expenditure incurred by Softwash and its directors in purchasing in 2002 car wash machinery to be installed at Castle Towers Shopping Centre, Castle Hill, is an item of expenditure which is compensable under clause 30.4(e) of the Lease (as that term is defined in the amended statement of claim), the applicable depreciation rate for that expenditure is 6.67% per annum prime cost.

2. To the extent that the Court determines that the expenditure incurred by Softwash and its directors in installing the car wash machinery at Castle Towers Shopping Centre, Castle Hill, in 2002 and 2003 and constructing the business premises is an item of expenditure which is compensable under clause 30.4(e) of the Lease, the applicable depreciation rate for that expenditure is 2.5% per annum prime cost.

3. To the extent that the Court determines that certain items of expenditure associated with the car wash machinery purchased and installed by Softwash and its directors in 2002 and 2003 are items of expenditure which are compensable under clause 30.4(e) of the Lease, the applicable depreciation rates for those items of expenditure are the depreciation rates proposed by Macquarie Accountants in section 5.5 of a report dated 12 March 2007.

Save as set out . . . the defendant otherwise disputes each of the matters set out in the plaintiff's Notice to Admit Facts dated 17 September 2008." 11 The defendant's notice to admit facts took the issue of depreciation further, and sought the plaintiff's admission of the following facts: "1. To the extent that the Court determines that the expenditure incurred by Softwash and its directors in purchasing in 2002 car wash machinery to be installed at Castle Towers Shopping Centre, Castle Hill, is an item of expenditure which is compensable under clause 30.4(e) of the Lease (as that term is defined in the amended statement of claim), the amount of the expenditure must be depreciated at the rate agreed by the parties over the period from 3 March 2003 until 14 March 2007 to calculate what portion of that expenditure is compensable under the Lease.

2. To the extent that the Court determines that the expenditure incurred by Softwash and its directors in installing the car wash machinery at Castle Towers Shopping Centre, Castle Hill, in 2002 and 2003 and constructing the business premises is an item of expenditure which is compensable under clause 30.4(e) of the Lease, the amount of the expenditure must be depreciated at the rate agreed by the parties over the period from 3 March 2003 or purchase (whichever is latest) [ sic ] until 14 March 2007 to calculate what portion of that expenditure is compensable under the Lease.

3. To the extent that the Court determines that certain items of expenditure associated with the car wash machinery purchased and installed by Softwash and its directors in 2002 and 2003 are items of expenditure which are compensable under clause 30.4(e) of the Lease, the amount of each item of expenditure must be depreciated at the rates agreed by the parties over the period from 3 March 2003 or purchase (whichever is latest) [ sic ] until 14 March 2007 to calculate what portion of each item of expenditure is compensable under the Lease." 12 On 14 October 2008 the plaintiff's solicitor wrote to the defendant's solicitor enclosing a notice disputing facts. The letter was relevantly as follows: "At the directions hearing on 9 October 2008, counsel representing the defendant asked whether the plaintiff will rely on opinions expressed in the report of Macquarie Accounting dated 12 March 2007 at the final hearing. The plaintiff's position is as follows:

1. The plaintiff relies on opinions expressed in section 5.5 of the Macquarie Accounting report concerning applicable depreciation rates. It appears that, by recent exchange of notices to admit facts and notices disputing facts, there is substantial agreement between the parties concerning applicable depreciation rates." 13 The plaintiff's notice disputing facts enclosed was in the following relevant terms: "The plaintiff says in response to the defendant's notice to admit facts dated 1 October 2008:

1. Subject to two matters the plaintiff admits paragraph 1 of the defendant's notice to admit facts dated 1 October 2008. The two matters are:

(a) The plaintiff says that 'the rate agreed by the parties' is 6.67% per annum prime cost.

(b) The plaintiff says that the point in time at which the period of depreciation ends is not 14 March 2007 (which was the date the plaintiff vacated the premises) but the date the plaintiff ceased trading in the premises, which was three to four weeks earlier.

2. Subject to two matters the plaintiff admits paragraph 2 of the defendant's notice to admit facts dated 1 October 2008. The two matters are:

(a) The plaintiff says that 'the rate agreed by the parties' is 2.5% per annum prime cost.

(b) The plaintiff says that the point in time at which the period of depreciation ends is not 14 March 2007 (which was the date the plaintiff vacated the premises) but the date the plaintiff ceased trading in the premises, which was three to four weeks earlier.

3. In relation to paragraph 3 of the defendant's notice to admit facts dated 1 October 2008 (which is limited in its application to items of expenditure not covered by paragraphs 1 and 2), the plaintiff says:

(a) In relation to the items of expenditure set out in Appendix II of the report of Macquarie Accountants dated 12 March 2007, to the extent that the Court determines that the items of expenditure are compensable under clause 30.4(e) of the Lease, the plaintiff admits that the items of expenditure must be depreciated at the rates proposed in Appendix II over the period from 3 March 2003 or purchase (whichever is latest) [ sic ] until the date the plaintiff ceased trading in the premises.

(b) The plaintiff admits that it may be appropriate that certain other items of expenditure, to the extent that they involve the purchase by Softwash and its directors of assets, are depreciated at the rate of 6.67% per annum prime cost over the period from 3 March 2003 or purchase (whichever is latest) [ sic ] until the date the plaintiff ceased trading in the premises.

(c) The plaintiff does not otherwise admit paragraph 3." 14 Finally, the solicitor for the defendant indicated in a letter dated 17 October 2008 that in the light of the contents of the plaintiff's notice disputing facts it did not expect that the defendant would wish to deliver expert accounting evidence. That expectation would appear to have been correct. 15 Quite apart from the enforceability of the agreement, the plaintiff argued that it relied upon it and took particular steps including calling certain evidence, not calling other evidence and conducting the litigation in a particular manner. According to the plaintiff, each of those actions would have been different if it were not for the agreement between the parties that 6.67 per cent per annum prime cost was the applicable depreciation rate for the washing machine unit claim. In my opinion it is not necessary for the plaintiff to go that far. 16 The defendant was concerned to avoid both the need to call an expert on an issue that could be agreed, if that were possible, and at the same time to capture the plaintiff's agreement to the proposition that depreciation (at whatever rate was agreed or proved) applied to the compensation calculation relating to the item in question if compensation were payable at all. Neither the correspondence, nor the notices requiring admissions or disputing facts, appears to have adverted to the 18.75 per cent depreciation rate claimed by the plaintiff or the partnership at all times up until the amended financial reports and income tax returns were first suggested. Whether the agreement was reached with that rate in mind or despite it, an agreement was clearly reached. The defendant clearly ensured or secured the applicability of depreciation to the calculation at the cost of an argument that the historically applied rate should prevail. Nothing contained in my judgment that held "that the value of the plaintiff's interest in an item of plant or equipment installed as part of the fitout calculated at the date of termination will be the value attributed to that item in the plaintiff's financial and accounting and taxation records, or possibly the records of the partnership in the unusual circumstances of this case" prevails in the face of an agreement between the parties consummated for the specific but limited purposes of these proceedings that particular but different rates of depreciation should apply to the plaintiff's compensation claims. My anticipation in par [86] of the earlier judgment of "the parties' recognition that depreciated values may apply in the calculation of the loss" was neither inconsistent with, nor did it foreclose upon, the parties' ability otherwise to agree upon the rate that should apply in the context of the competing risks and contentions concerning depreciation generally. 17 Even apart from the existence of such an agreement I would have found that the amended financial reports and income tax returns of the plaintiff were the appropriate documents to refer to for the base information, including depreciation rates. As will be apparent, I was satisfied that these documents were the relevant "plaintiff's financial and accounting and taxation records", and accordingly the appropriate records to refer to for the rates in question. I was informed that the plaintiff and the directors have not as yet been re-assessed by the ATO as a result of the filing of amended returns. It is irrelevant for present purposes, just as the amount of any adjustments that may follow from the amended returns is also irrelevant. There is no dispute on the evidence that the amended returns have been lodged and that assessments are anticipated. 18 The plaintiff also claims the sum of $4,656 as money expended by it in order to mitigate its loss realising the car wash machine. The evidence about this is contained in pars 136, 149 and 150 of the affidavit of Nicholas Gacomi sworn 6 June 2008. Mr Gacomi was not cross-examined about this. The defendant accepted the plaintiff's concession that it was obliged to mitigate its loss and the corresponding cost of doing so must fall to be assessed as part of the amount of compensation for the fitout. 19 The total amount of compensation payable for the car wash machine is therefore $371,786 plus $4,656 giving a total for this item of $376,442. Construction/installation 20 The defendant contended that the formula described in pars [53] and [87] of my earlier decision should apply to the calculation of depreciation for these items. It argued as follows in relation to these items. 21 The partnership tax return for the year ended 30 June 2007 recorded that the depreciated value of the construction costs was $423,195 ($255,353 + $129,478 + $38,364). This figure was arrived at from the original cost base of $860,909, which I determined at pars [64] to [66] to be the amount actually paid by the plaintiff to Dynaservice. The payment of $860,909 included a component of $100,000 to Dynaservice for negotiating the lease, which is not compensable. Accordingly, the correct base value of the construction costs was $760,909. 22 The partnership depreciated the construction costs at a rate of 18.75 per cent. For reasons that are not explained, the partnership did not depreciate the construction costs in the financial year ended 30 June 2007. The defendant submitted that it should have done so. The plaintiff did not suggest otherwise and I proceed upon the basis that this is agreed. Had the correct base value of the construction costs of $760,909 been depreciated by the plaintiff each year at 18.75 per cent until termination of the lease, those costs would have had a depreciated book value of $202,116.53. 23 At par [65] of my earlier decision I said this: "[65] Not all of the $860,909 paid by the plaintiff was for the fitout. The payment included the $100,000 component for Dynaservice negotiating the lease with the defendant dealt with in response to question 9. This reduces the fitout cost in the invoice to a maximum of $760,909. Depreciated at the agreed prime cost rate of 2.5% for 47 months produces a figure of $74,506, leaving a depreciated amount of $686,403." 24 The defendant's current submissions adopt the figure of $760,909 to which I referred in that paragraph but revert to the depreciation rate of 18.75 per cent rather than the rate that had been agreed. Consistently with what I have already said, however, the lower rate or 2.5 per cent should apply to the calculation in accordance with the parties' agreement. 25 The plaintiff promoted the application of the lower depreciation rate as agreed but was not otherwise content with that analysis. Instead, the plaintiff wished to argue that the starting point for all of the money spent on these items should be higher, so that the appropriate sum in par [65] should have been $885,000 after deduction of GST. The plaintiff then sought to argue that this sum should be reduced further so that the amount payable to Dynaservice fell from $1,776,500 to $1,700,000 and then to $1,650,000 with a further adjustment of the $100,000 figure for establishment costs to $97,059 to reflect a reduction of the same proportions. The sum of $1,650,000 is derived from the evidence of Mr Gacomi and the Dynaservice-Softwash Deed exhibited to his 6 June 2008 affidavit. Taking into account all of these changes the plaintiff contended that it agreed with my calculation in par [65] of the earlier judgment except that the appropriate sum to include in it should be $710,788 so that the paragraph should notionally have read as follows: "[65] Not all of the $885,000 paid by the plaintiff was for the fitout. The payment included the $97,059 component for Dynaservice negotiating the lease with the defendant dealt with in response to question 9. This reduces the fitout cost in the invoice to a maximum of $787,941. Depreciated at the agreed prime cost rate of 2.5% for 47 months produces a figure of $77,153, leaving a depreciated amount of $710,788." 26 The net difference on the plaintiff's calculations therefore became the difference between $710,788 and the earlier figure of $686,403 or $24,385. In my opinion the plaintiff's contention is correct with the exception of the reduction of the figure of $100,000 as asserted. The amount claimed should be calculated by substituting $100,000 for the sum of $97,059 where it appears in the proposed version of par [65] appearing in the preceding paragraph. I can be informed of the figure that this calculation produces when appropriate. Items not installed 27 At par [87] of my earlier judgment I rejected the defendant's contention in respect of "item[s] of plant or equipment installed as part of the fitout". The defendant emphasised the italicised word in that expression and contended that the following items were not installed as part of the fitout and accordingly are not compensable: * Item 3, the vending machine; * Item 6 - 9, furniture; * Items 15 and 16, ladders; * Item 23, washing machine; * Item 25, cash register; * Item 30, fridge, microwave and phone; * Item 32, urn and food/drink heater * Item 35 extension cords; * Item 39, video recorder; * Item 40, printer and photocopier; * Item 41, filing cabinet; * Item 42, television; * Item 60, bins. 28 The plaintiff argued that but for the defendant's exercise of its right to terminate the lease pursuant to the demolition clause, it would still be conducting the carwash business and utilising these items of equipment. Clause 30.4(e) of the lease provides that "the landlord must pay the tenant compensation for the fitout of the premises". It does not say "the landlord must pay the tenant compensation for items of plant and equipment installed in premises as part of the fitout". The plaintiff argues that the defendant's attempt to derive support from the words that I used in par [87] is ill-founded. 29 I disagree. The items listed above were items of equipment that the plaintiff used in the business. They never became part of the fitout of the premises. The concept of the fitout in light of the terms of the lease and cl 30.4(e) in particular is one that contemplates more than the casual physical location of items such as these at the premises where the fitout was carried out. These items came to the premises as items of furniture or the equivalent and they are removable from the premises by the plaintiff as such without loss. The fact that the plaintiff may have suffered a loss by reason of their purchase for use in a business that has now been forced to close and that has ceased to operate does not make them items that are compensable as part of the fitout for the purposes of cl 30.4(e). Management costs 30 These are now agreed in the sum of $25,800 and no further consideration is required. Conclusion 31 The parties should bring in short minutes of order to incorporate and give effect to my findings on all issues.

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