131 A copy of an identical Activity Report, accompanied by an identical request, was also sent by Mr Morrissey to Comasters on 20 November 1998. Morrissey Statement document P
132 On 24 November 1998 Comasters sent to Mr Morrissey a document which it described as, "a marked-up (by Edward Lee) copy of the Activities Report" Morrissey Statement annexure S. It was the version of the Activity Report which Mr Morrissey had sent on 20 November 1998, in which Mr Lee had placed some handwritten comments. Against item 11.1 he wrote, "not yet due to structural changes to main agreement". Alongside item 11.2 he wrote, "not yet". Alongside items 11.3, 11.4 and 11.5 a bracket was placed, and Mr Lee wrote, "due to limited audit [illegible], and [high?] percentage of inaccuracies, we have proposed to MKR on 19/11/98 of an escrow amount [$50K]".
(The final dollar figure might be $30K.)
133 On 26 November 1998 Mr Morrissey wrote to Comasters, saying:
"I note on 24th November 1998 you have forwarded a copy of the Action Sheet that I had prepared on 20th November 1998 with Edward Lee's comments on it. I understand the following matters have been attended to:-
…
11.1 Due diligence - I note Mr Edward Lee has indicated that he has not yet finalised you to structure the main agreement. My understanding is that the main Agreement has not been changed. As yet, I have not received a notification of the name of the company which will be assuming the obligations of Portfolio Data. Our client is anxious to be able to complete this transaction by the settlement date as required in the document.
11.2.1 The final statement of the properties in the Parramatta Rent Roll will be provided by Statutory Declaration of Mr Michael Fern on 28th November, 1998.
11.3 Mr Michael Fern will provide a Statement of the income of the Parramatta Rent Roll by 28th November, 1998.
11.4) The comments from your client are not understood by the writer.
11.5) In any event, your due diligence time has expired. Any queries in relation to due diligence to date have been answered.
11.6.1)
11.6.2) No questions raised.
11.6.3)
…"
134 The letter concluded by saying:
"We are instructed to advise our client wishes to settle this matter on the due date, which is 30th November, 1998 - time of which is the essence. It is logical for the parties to effect settlement at that time. The Statement Run is to take place on 28th November, 1998.
Could you telephone the writer to advise your client's position in relation to settlement."
135 Also on 26 November 1998, Mr Morrissey sent to Comasters a copy of a valuation from Robert Bevan & Associates of the rent roll of T&CPMS at Parramatta. That valuation was stated to be as at 23 November 1998. It includes statements that:
"The rent roll comprises approximately 413 established tenancies which are managed on behalf of approximately 285 landlords." and
"The business receives in property management commission approximately $259,104.00 pa from permanent rental management landlords."
136 It stated as well:
"This report and valuation has been prepared based upon the information provided by the proprietors of the business. The valuation is based on information provided by the business's proprietors including the level of income received by the business. This valuation assumes that the information provided is true and correct."
137 Mr Bevan applied a multiplier of 2.5 to the annual income to arrive at a value of $648,000. However, that valuation was on the basis that any sale effected at that price:
"…would firstly be based upon an amount of 20% of the rent roll goodwill being retained for a period of six months from settlement such amount to be utilised to offset any losses of properties managed during that six months period
and
secondly it being a condition of the contract that the vendor agree not to operate or trade as a real estate agent, sales consultant or property manager for a period of thirty six months from the date of sale within a radius of eight kilometres of the business."
138 On 27 November 1998 Mr Morrissey made a file note as follows:
"Spoke to Michael Fern on morning of 27th and he was going to do a statutory declaration which included the following:-
1. A print out of the current rent roll with the deletions on it. A note setting out what the new properties are going on - particularly the Eddy Lee ones that he has poached, setting out a valuation of the rent roll based on $2.3329 cents in the dollar calculated on a yearly basis. Michael should have that done for me mid-morning and I would speak to him then."
139 On 29 November, Mr Lee himself wrote to Mr Morrissey, responding to the letter which Mr Morrissey sent to Comasters on 26 November. He said:
"Reference to JFM's letter dated 26th-Nov-98. I do have comments and concerns as follows,
1. All items listed/noted as "NOT YET DELIVERED / COMPLETED" have to be completed and cleared up before any settlement could take place irrespective of the time issue."
140 Mr Lee went on to say that his greatest concern related to the structure of the transaction.
"…e) In short, I must see a say $600,000 purchase is registered and seen by the ATO as legitimately my entry price/cost, beyond all doubt. How this is to be done has to come about from the Vendor to the Purchaser without further time erosion nor "eating into my budget due to uncalled for professional time".
f) That is, as soon as item (2e) is fixed for my consideration or confirmation, I could direct Comasters Law Firm and FH Lim for Further Work ;
1 Further Work means to add the following (a) and (b) items as part of the Main Agreement for finalization duly executed
a) Minor Agreement - 1, To include "Retention Period" to replace suggested "Escrow Sum of $30,000" appropriately recommended by Robert Bevan & Associates dated 23rd-Nov-98, and this has been allowed for by the Vendor to the Purchaser of the "King Cross Rent-Roll Package",…"
141 In other words, Mr Lee is here suggesting that, rather than the escrow sum which his handwritten comments on the Activity Sheet had proposed, the sort of structure on which Robert Bevan & Associates had based their valuation (retention of 20% of the price for six months) should be adopted.
142 On 29 November Mr Morrissey met with Mr Horder and Mr Fern "to discuss the various shrinkage and growth managements and identifying matters to be actioned". His notes of that meeting includes the entries:
"Shrinkage
18 MF full list & [lett?] to JFM 20/11/98 with [illegible]
Growth - 3 [illegible] E Lee
DH give a list to MF
MF to give list of new managements"
143 On 2 December 1998 Comasters wrote to Mr Morrissey saying:
"We understand the outstanding points in relation to this matter are as follows:
…2. Edward Lee advised that at 12.30pm today (Wednesday December 1998), Matt Robinson and Edward Lee spoke on the matter of $50,000 deferment. Matt Robinson suggested and Edward Lee agreed that Matt Robinson would provide a personal loan to Edward Lee of $30,000 with a period of up to 15 February 1999 to refund Matt Robinson in full. We understand that in return, the additional rent roll will be provided to our clients at no further cost to our clients. …
6. We note that you were to provide a statutory declaration. We are not sure whether this is still forthcoming. …
9. Our clients request a proper listing of managements for the month of November 1998, ie fees for management agreements and new letting fees.
10. Other items not dealt with so far in the Activities Reports of 20 November 1998 and 26 November 1998 must be completed."
144 On 2 December 1998 Mr Morrissey wrote to Mr Horder saying:
"As you are aware, Matt indicated to Edward Lee on Monday that the receipts for the rent roll for the month of November is approximately $28,000. I indicated you would be able to prepare a print out of the calculations showing exactly what revenue was received from the November rent roll.
Could you attend to that as soon as possible, I have to get it out to Edward Lee and his advisors this morning.
Edward also had made general complaints about the material that he requested and had not yet been supplied."
145 On 3 December 1998 Comasters wrote to Mr Morrissey saying that they had received advice from a tax expert that the structure of the transaction created serious risks for Mr Lee's interests, from a tax point of view. An alternative structure was proposed, whereby a new company would be formed by the purchaser to purchase the 1,000 shares in T&CPMS, and that the new company would also lend $599,000 to T&CPMS.
146 On 4 December 1998 Mr Morrissey wrote to Mr Robinson. By that time, Mr Morrissey had spoken to Mr Julian, of the St George Bank. Mr Julian was prepared to have St George finance Mr Lee, against the security of the rent roll, but St George would advance only 40% of the value of the rent roll. Mr Morrissey's letter concluded:
"5. In respect of the value of the rent roll, Michael Fern shows the annual management fees are now $256,480. This gives a valuation of $641,200. St George will take security of 40% being $256,480 - say $260,000.
6. We may have to add into the rent roll some additional managements. To get the full value we need to add approximately $50,000 per year in commissions."
147 The evidence shows that on 8 December 1998 Mr Morrissey sent to Robert Bevan & Associates a list 15 properties which had been formerly managed from the Town & Country Kings Cross office and said, "our client is intending to include those in the Parramatta rent roll, and asked that Mr Bevan prepare a valuation of the properties contained in the list". On 9 December Mr Morrissey wrote to Mr Bevan again, enclosing a copy of a property schedule. It was identical to the property schedule sent the previous day, save that it did not record that one of the units was vacant. The letter informed Mr Bevan of the total commissions earned on the properties in the schedule, and said, "could you please provide us with a letter increasing your valuation of the Town & Country Parramatta rent roll based on the annual commissions on the properties identified in the schedule."
148 Mr Bevan wrote to Mr Morrissey that day, saying that the additional 15 properties would add approximately $35,500 to the value of the rent roll. Mr Lee does not depose to any of this proposal to add properties to the rent roll being brought to his attention, however. Nor does the evidence disclose whether that intention was actually carried out. The next event, according to the evidence, is the entry of the December Agreement on 11 December 1998.
149 On 22 December 1998 Mr Lee wrote to Mr Robinson and Mr Horder saying, "There are several current, outstanding and overdue issues needing your serious attention." There followed a list of complaints. One of the items on the list was, "I am still waiting from you a final list of rent-roll due to my company under my purchase agreement, and it is well overdue".
150 On 24 December 1998 Comasters wrote to Mr Morrissey asking that he arrange to provide, amongst other things, "End of month Nov 98 statement of rent roll. This is part of the necessary document to reconcile the accounts."
151 Mr Morrissey replied the same day, dealing with some of the requests which Comasters had made, but saying nothing about the request to provide the end of month Nov 98 statement of rent roll.
152 Mr Horder was shown, in evidence, the listing of properties which Mr Lee said had been handed to him in October 1998. Mr Horder denied that he had handed it to Mr Lee in any meeting. However, he confirmed that he had produced the list from his computer, given it to Mr Robinson, and that Mr Robinson had handed that list to Mr Lee. T341-342
153 It will be recalled that the allegations in paragraph 17 of the Statement of Claim related to representations made at the time of entering into of the November Agreement to Portfolio Data Pty Ltd. Portfolio Data Pty Ltd is not a plaintiff. There is no difficulty of principle in A suing for misleading and deceptive conduct in relation to a misrepresentation which has been made to B - provided that A can prove that, in consequence of the misrepresentation being made to B, A has suffered loss and damage. (This happens in that category of misleading and deceptive conduct cases where a trader complains that his trade rival is making misleading and deceptive statements to consumers, in consequence of which the trader is losing custom.) However, before the making of any of the representations pleaded in paragraph 17 of the Statement of Claim could give PFD a cause of action, it would be necessary for them to continue to be operative in the mind of PFD at the time PFD entered the December Agreement. PFD came to play a role in this transaction only after Comasters' letter of 3 December 1998, which proposed the incorporation of the new company. While I would be prepared to assume that any representations which were current at the time that PFD came onto the scene were passed onto PFD, in my view by early December it could not be said that there was any representation that the Parramatta rent roll comprised 407 properties which were then under management by T&CPMS.
154 Nor is there satisfactory evidence of the falsity of any such representation, beyond what the due diligence report had made known to Mr Lee. No attempt was made by the plaintiff to show the number of properties that were actually under management at either of the relevant dates. As Mr Lee took over the business, complete with its records, he would have had the factual material to enable such demonstration. Further, Mr Lee swore an affidavit in these proceedings on 16 August 1999 (at a time before MKR and Mr Robinson were joined as defendants) in which he referred to the purchase, and said:
"At the time of that purchase the plaintiff owned and managed a rent roll … which consisted of 409 residential properties, most of which were located in the Western Suburbs of Sydney and mainly in the Parramatta area. Exhibited to me now and marked "EL1" is a true copy of the Parramatta rent roll as it was at 28 October 1998."
155 As well, Mr Lee gave evidence:
"Q. You would agree that at the time of the purchase of the shares in Town & Country Property Management Services Pty Limited the rent roll consisted of about 409 residential properties?
A. That's correct." Transcript 105
156 There is also some evidence from Mr Kaltoum that he remembered the number of properties under management as at September 1998, when his employment ceased, as being "around 400". Transcript 195 At the end of November 1998 there was a "statement run" performed. This process produces statements of income and expenditure which are posted to individual landlords. As well, Mr Horder gave evidence:
"Q. What accounting record is generated by the month end run that remains in your hands?
A. The copy of all the statements, a full cashbook, receipts and payments, landlord ledgers, tenants ledgers and an audit trail, all of which were performed and supplied and left in the office."
157 It could not be said that Mr Lee was, at that time, relying on any such representation. Mr Lee did not expressly state that he had relied on any such representation about the number of properties. In an appropriate case, a court can infer reliance, even if there is no express evidence of it (Huntsman Chemical Company Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242). However, in the present case, I would not be prepared to make such an inference. By early December 1998 Mr Lee had the results of the due diligence, which showed clearly that the list of properties was unreliable. Mr Lee had proposed two alternative methods of dealing with that unreliability, namely the escrow amount and the retention period. Each of those proposals had fallen on deaf ears. He had been promised more up to date information, but had not received it. He went ahead with the settlement regardless.
158 Nor was there any representation that the properties were the subject of management agreements made between T&CPMS and its landlord customers which were valid, current and enforceable. No such representation was made in those words or any similar words. The structure of the due diligence, provided for by the November Agreement, was that the purchaser had to satisfy itself about that matter.
159 Again, there was no express evidence from Mr Lee of reliance on any such representation. Again, I would not be prepared to infer that Mr Lee had, in fact, relied on any such representation. The due diligence showed that there was a very serious deficiency, even in the very limited sample which was examined, in T&CPMS having management agreements for all its properties.
The "Not Aware of any Disentitling Circumstances" Representation
160 The plaintiffs do not contend that a representation of this type was made expressly. Rather, it is said to have been made impliedly, or by silence. I do not find that any such representation was made. The structure of the sale agreement was that the purchaser was to be entitled to perform a due diligence. No limit was placed upon the depth of investigation that might be involved in that due diligence, save that the due diligence was required to be completed on or before 17 November 1998. It was specifically agreed that the purchaser would "ascertain the status of the management agreements which comprise part of the rent roll" (clause 9.4.2) and it was specifically contemplated that by 17 November 1998 a number of the management agreements might have been terminated, in which case an appropriate adjustment would be made to the purchase price, or the entire Agreement rescinded. Mr Lee must have been aware of the possibility that landlords might leave after the purchase was completed - he noted that Mr Bevan had valued the business on the basis of setting aside twenty percent of the price for six months and using the fund so created to, "offset any losses of properties managed during that six month period", had tried to persuade the vendor to include such a provision in the contract, and had failed in that attempt.
First Alleged Breach of 'No Disentitling Circumstances' Representation - Telephone Lines
161 Three different breaches were alleged concerning this representation. The first, related to the circumstances in which the telephone and facsimile services of the premises came to be interrupted. Those services were cut off for more than five days in the period between 12 December 1998 and Christmas 1998 Lee affidavit 12 April 2000 paragraph 12.
162 The premises at 255 Church Street Parramatta consisted of a ground floor and a first floor. During the time that a company controlled by Mr Robinson carried on business there, the sales and property management functions of the business were spread over both floors. The Agreement For Sale Of Shares And Business dated 3 November 1998 made provisions for how the space would be utilised when Mr Lee's company had purchased the shares in T&CPMS.
"12.3 The Vendor and its related corporation shall while they occupy part of the First Floor, 255 Church Street, Parramatta:-
1. Allow the Company to have the use at no charge - one quarter of the window space of Shop 1, 255 Church Street, Parramatta.
ii. Share the costs (as to half to the Company and half to the Vendor and its related corporations) of a receptionist. The Company shall pay all its telephone costs and expenses of its half use of a receptionist. The Vendor and its related corporation shall provide a desk and office equipment for the receptionist.
iii. Allow the Company and its employees access to all staff amenities and electricity, water and light. The Company shall pay part of the electricity and water usage relating to the part of the premises it occupies.
iv. Provide air conditioning to the premises."
163 The Agreement said nothing about there being a transfer of existing telephone services, or that there was to be any sharing of existing telephone lines. The provision in clause 12.3(ii) that, "the Company shall pay all its telephone costs" could conceivably be made to operate in a situation where the property management business shared telephone lines with the ongoing sales business, but it would be highly impractical - it would require keeping an account of which entity had made every single telephone call on the shared line. The preferable view is that the Agreement contemplated that Mr Lee's company would make arrangements for its own telephone service.
164 On taking over the business, Mr Lee made no arrangements to obtain independent telephone lines for it. He continued to use the existing telephone lines, which were services concerning which an entity associated with Mr Robinson had a contract with the telephone company. The telephone lines were cut off because one of Mr Robinson's companies had failed to pay the October 1998 telephone account Transcript 352. Mr Horder said that there was a dispute (the precise nature of which was not explained, save that the bills in question, were bills of MKR, not of T&CPMS Transcript 353) with the telephone company.
165 In my view, there was no misrepresentation involved in Mr Robinson, or anyone on behalf of MKR, failing to tell Mr Lee about that dispute with the telephone company, or about the failure to pay the October 1998 telephone bill. Nothing in the evidence discloses that anyone in Mr Robinson's camp should have realised that anyone in Mr Lee's camp would have an ongoing interest, after settlement, in whether Mr Robinson's companies had paid their telephone bill. Mr Horder gave evidence:
"The phones were supposed to have been separated between the two businesses. We weren't providing phone services for Mr Lee, they were to the downstairs office which we were continuing to operate."
166 For these reasons I find that, even if there had been representation of the type alleged, it was not breached by the circumstances in which the telephone lines came to be disconnected.
Second Alleged Breach of 'No Disentitling Circumstances' Representation - Termination of Management Agreements
167 The second alleged breach of this representation concerned the existence of notice of termination of management agreements in relation to some properties.
168 On 30 November 1998 Sonenco No79 Pty Ltd wrote to Mr Robinson complaining about the way T&CPMS had managed two rented home units. The letter gave 30 days notice of termination of management agreements in relation to all the properties of that lessor.
169 That lessor had a large number of properties managed by T&CPMS. Mr Robinson agreed that that lessor was, "one of your major landlords" Transcript 270. Mr Robinson did not tell Mr Lee about the notice of termination. Instead, he went to see Mr Fayad (the man behind the lessor), and paid some compensation for the matters that the letter of 30 November had complained about, with the result that the notice of termination was withdrawn. Even if there had been a representation of the kind sued on, it would not be breached by these circumstances.
170 In April 1999 Mr Lee prepared, and gave to Mr Robinson, a document which sets out management agreements which had been lost up to that time Document O, transcript 277-278. That document identifies the number of days notice given in relation to each such management. According to that document, prior to the settlement on 11 December 1998, management agreements relating to 39 properties had actually terminated. Further, landlords of an additional eight properties had given notice to terminate, which was exercised after 12 December 1998. (Mr Lee's document includes nine properties in this latter category, but one of them involves a termination on 16 December 1998 where the owner gave "nil" days notice, so it must be excluded.) Thus, there were a total of 47 properties in relation to which notice had been given prior to 12 December 1998. However, not all of those 47 properties are ones which appeared amongst the 409 properties listed on the rent roll. It appears that 17 of them were not listed on the rent roll (14 properties at 27 Inkerman Street Parramatta, 56 James Ruse Drive, 1/74 Stapleton Street Wentworthville and 1/29 Manchester Street Merrylands. There are an additional three (those shown in Mr Lee's document as 2/29 Manchester Street Merrylands, 3/164 Station Street Wentworthville and 17/164 Station Street Wentworthville where there is not a complete correspondence to an address on the rent roll, but a somewhat similar address appears on the rent roll, so that these three entries might involve properties on the rent roll in relation to which there has been a typographical error of some sort.)
171 In relation to these notices of termination, Mr Robinson gave evidence that all the files were made available for due diligence Transcript 278. That is in accordance with the regime which the Purchase Agreement provided for due diligence.
172 Further, the plaintiff has not attempted to show to what extent, if any, there were new managements added to the rent roll during the period of the due diligence. Thus, I cannot be confident that the net number of properties lost during that period was equal to the gross number lost.
173 In the circumstances where it was the purchaser's obligation to investigate the status of the management agreements, I am not of the view that the failure to disclose expressly that notice of termination had been received in relation to these properties, amounted to misleading and deceptive conduct.
174 The third way in which this particular breach is alleged to have occurred, is by not disclosing the release from the restrictive covenant which had been given to Mr Kaltoum. This should be considered with the fourth representation.
Representations Re the Kaltoum Covenant
175 I have already recounted (paragraph 25 above) how, before the Agreement of 3 November 1998 was entered into, Mr Robinson had told Mr Lee that Mr Kaltoum had entered into a restrictive covenant with T&CPMS. However, the terms of that covenant were not disclosed. I have already held that the covenant was effective, though Mr Robinson had given Mr Kaltoum permission to operate a property management business at Merrylands provided he did not deal with clients who were on the Parramatta rent roll. In these circumstances it was true that there was a restrictive covenant in force with Mr Kaltoum. The precise circumstance which existed, namely that there was a restrictive covenant created by a document, which had been partly relaxed, so as to permit Mr Kaltoum to open a real estate office at Merrylands provided he did not deal with any clients from the Parramatta rent roll, was well within the scope of the extremely vague representation which Mr Robinson made to Mr Lee.
176 Mr Robinson gave oral evidence that he told Mr Lee that Mr Kaltoum would be operating at Merrylands Transcript 257. This is evidence which was not given by Mr Robinson in affidavit form. Mr Robinson's counsel did not put it to Mr Lee in cross-examination. My impression of Mr Robinson is that I would be wary of accepting his evidence when it was not corroborated. I am not prepared to find that Mr Robinson had this conversation which he alleges with Mr Lee.
177 Neither am I prepared to find that Mr Lee has suffered any detriment in consequence of what Mr Robinson told him about the Kaltoum covenant. During a period between the entering of the contract on 3 November 1998 and its completion on 12 December 1998, it seems to have been at, or close to, the bottom of the list of priorities of Mr Lee and his solicitor, to find out what the terms of the restrictive covenant were. The sale was completed without Mr Lee finding out the terms of the restrictive covenant (though with the benefit of a promise to disclose it later - see paragraph 31 above). While that promise required the restrictive covenant to be disclosed within three days of completion, it was not until 12 days after completion that Mr Lee's solicitor made a request for it. While it was the belief of Mr Lee, at the time settlement occurred, that Mr Kaltoum had entered into a restrictive covenant, he had no idea what its terms were. Further, Mr Lee cannot recollect receiving any advice from his solicitor, in the period between 3 November 1998 and 12 December 1998 about any restriction of competition with Mr Kaltoum Transcript 83. In these circumstances I am not prepared to hold that the belief that Mr Lee had about the existence of the restrictive covenant was a cause of Mr Lee causing his companies either to enter the Agreement of 3 November 1998 or the Agreement of 11 December 1998.
178 In the result, each of the claims of misleading and deceptive conduct fails.
Was there a Breach of the Lease?
179 As part of the settlement effected on 11 December 1998, MKR leased to PFD, for a period of two years commencing on 11 December 1998, the first floor of 255 Church Street Parramatta. For the first two years, the rental was $2,333.30 per month, payable in advance. Document C; schedule item 12; clause 5.2 The lease also contained the following provision:
"17.1 On the commencement date the Lessee must either pay to the Lessor an amount equivalent to three (3) months rent payable under this Lease ("security sum").
17.2 The Lessor can call on the security sum and the interest earned in whole or part satisfaction or any moneys payable to the Lessor under Clause 5.1.
17.3 If the Lessor calls on the security sum, the Lessor will promptly deposit additional funds to the Lessor so that the Lessor's security is maintained at an amount equal to three (3) month's rent.
…"
180 The amounts of rent which PFD actually paid were;
December 1998 $2,333.33
12 March 1999 $4,666.66
19 April 1999 $4,666.66