United Petroleum Pty Ltd v Coastal Service Centres Pty Ltd

Court of Appeal (NSW)|2024-03-12|Before: White JA, Harrison JA, Peden J

Background considerations

Formation of Mr Roberts' opinion

United's case, as largely revealed by the cross-examination of Mr Roberts, was that Mr Roberts, as the governing mind of Coastal, had formed a view prior to issuing the cl 8.2.3 notice that he wanted to terminate the lease. The financial analysis, provided in his affidavit of 19 January 2022, was designed to achieve that purpose. That was done by overstating the likely expense of rebuilding and underestimating the likely revenue which would follow upon the rebuilding. The case was put to Mr Roberts towards the conclusion of his cross-examination in the following terms: [52] "Q. I want to suggest to you that the so-called analysis in your affidavit of the rate of return from rebuilding The Rock is not consistent with a genuine consideration of abandoning a long-planned investment. Do you agree with that[?] A. I disagree. Q. When you undertook the process of doing the analysis that you say you did in your affidavit, that was all in a context where you had already decided to issue a notice of consideration, wasn't it? A. It all formed part of issuing the notice of consideration. Q. And you knew, didn't you, that by issuing a notice of consideration, that would give you an extra argument in the proceedings in order to oppose United's attempt to stay on the property[?] A. No, that - that's incorrect. So, the whole basis of it was to - in - in the lease it states that if I find it undesirable and impracticable to rebuild, then I can issue a notice. So, that's exactly what I did. Q. What I'm suggest[ing] to you is that the analysis you say you did was not genuine because at every turn you sought to artificially inflate the cost of the rebuild. A. I - I disagree. I believe in the affidavit there that I - I did under - undertook a lot of - a lot of things there. Inclusive of the concrete, given the reduced rates of the concrete, and everything else. Q. You say the concreting costs should be even more, do you? A. Far more than that, if you do it on the commercial rate, yeah, that's correct. But - Q. But you're never going to be doing it on a commercial rate. A. That - that's why I've given you a discounted rate, yes. Q. You've given me a discount? A. Correct. I was trying to make it work. But, obviously it doesn't work. [Q.] But you've grossly overstated the amount of concrete you'd ever need for rebuilding the damaged building, haven't you? A. That's your opinion, yes. Q. It's your opinion, too. A. No. No, no. I've accurately worked out that that building requires and the car parks, if you redo it all. Then you need about five and a half thousand squares. … Q. I want to suggest to you that some of the inputs you used into the building cost gave a misleading and dishonest overstatement of those costs. A. You can suggest that, but I totally disagree. Q. I want to suggest that that was the case in respect of the Drayton's quote. Do you agree or disagree? A. I disagree. Q. And the emails either side of the Drayton's quote, which you didn't include in your affidavit. A. I disagree. Q. And, your failure to disclose in your affidavit that, as a result of those emails, the build cost could actually be brought down. A. I disagree. I think it would be far more. … Q. And your analysis was not genuine because at every turn you sought to artificially reduce the rental income from the site if The Rock was rebuilt, didn't you? A. That's - no, that's not correct. That's - that's your opinion, yes. Q. And you did so in a misleading in a dishonest way, I want to suggest to you. A. No, I disagree. … Q. It was and remains your intention to rebuild The Rock, but without United. Isn't that right? A. I - I disagree. I've issued a notice because I no longer wish to - desire to rebuild The Rock."
What was not entirely clear from the cross-examination was when the determination to exclude United was said to have arisen. The implicit suggestion was that it predated the determination to issue the cl 8.2.3 notice, a decision which, although stated in Mr Roberts' affidavit as having been made over the course of 17-18 January 2022, he explained in the course of cross-examination had had its origins in a discussion with his accountant on 15 December 2021. [53]
The motive for the affidavit justifying the decision under cl 8.2.3 was suggested to be an attempt to "[shore] up your position so that you could deploy your affidavit in [the proceedings]" in which Coastal claimed unpaid rent and challenged the validity of a notice given by United on 25 March 2021 exercising an option to renew the lease.
The background to that dispute is material and has been set out above. [54] In summary, Coastal entered into a contract to buy the property on 31 May 2018; the fire occurred on 30 July 2018; the sale was delayed but completion occurred on 20 June 2019, with a purchase price adjusted from $6.5m to $5m. At that stage United accepted that Coastal intended to rebuild, as they immediately employed Perception Planning to produce plans and a development application. The value of the works entered on the development application coincided with the reduction in the purchase price, namely $1.5m. The development application was approved in January 2020, shortly before the lockdowns induced by the COVID-19 pandemic.
In his principal affidavit, Mr Roberts gave evidence of a conversation "[a]round the second half of 2019, with an officer of NAB at which time he was advised that the bank would have issues with extending a loan facility by about $1.5 million in circumstances where United were only paying 44% of the lease amount". [55]
During 2020, United reduced its opening hours, which had originally been 24 hours per day, which was a requirement of the lease. [56]
On 25 March 2021 United served a notice exercising its option to renew. Mr Roberts was cross-examined in relation to his desire to terminate the Lease on the basis that in March 2021 he had opposed United's attempt to renew for five further years. The following cross-examination addressed this issue: [57] "Q. Well, you'd already formed the decision that you wanted United out, hadn't you? A. No, that's not correct. Q. You told the Court earlier that since 2021, when Coastal received the notice of exercise of option, ever since then, it's wanted United out. A. No, that's not correct. Q. Are you changing your evidence from before, are you? A. No, no. No, I'm not. So, in - in the prior time, we formed the view that whilst ever the rack rate, the rent hadn't been determined. That if they were going to exercise that option, they needed to be in accordance with the lease. Q. And you were taking that position because your position was that United hadn't validly exercised the lease [sic option]? A. That's correct. They hadn't. Q. And so you were going to take the position, regardless of rack rate [rent?], that United, if it hadn't validly exercised the lease, was out? A. No, that's not correct. … Q. And so you knew if you rebuilt immediately, it wouldn't be all that long before you got 100% of rent from United, would it? A. That's correct. Yes. Q. And you still wanted them out, didn't you? A. No, that's not correct. Q. I'm suggesting to you that it is correct, Mr Roberts. And that if, as you say, it wasn't correct, you wouldn't have opposed the notice of exercise of option since March 2021. A. I - I would've still opposed it due to other circumstances throughout the lease - not - not obligating to the lease. Q. What other circumstances? A. Well, the payment - the payments were still not - not in accordance with the lease, and also the operating times. Q. I'm sorry. The? A. The operating times in the lease. Q. Operating times. You weren't happy with the way United was operating on the site. Is that right? A. No, I was not happy. No. Q. And you'd had enough of them. You wanted them gone. A. No, that's not correct."
The trial judge directly addressed this issue in dealing with Mr Roberts' credibility, stating: "58 I do not accept that the 42 pages of transcript extracts provided by United demonstrate that Mr Roberts was relevantly inconsistent or implausible in his evidence, or ought to generally not be accepted. I consider that it was often obvious that the answers he gave were imprecise because of the questions asked. For example, Mr Roberts was repeatedly asked whether 'he wanted United out' of the Property. The questions may have been designed to elicit an admission from Mr Roberts that Coastal issued the [cl 8.2.3 notice] with an ulterior motive to resist United being able to exercise the option. However, on this topic, I consider that Mr Roberts' evidence was generally consistent. He did not consider United had validly exercised the option, because at the time it purported to do so, it was not paying rent in accordance with the Lease. For that reason, he wanted United's Lease at an end. In light of that cogent reason, it does not follow that Mr Roberts had some ulterior motive."
Much of the cross-examination was devoted to this issue. However, a reading of the transcript does not provide a basis for concluding that the trial judge misunderstood the case being put or otherwise misused her position of advantage in assessing the evidence. The chronology supports the conclusion that the commencement of proceedings involved a bona fide step by Coastal to resolve the outstanding issue of what rent United should pay and whether it was justified in not operating full hours. It is true that Coastal took steps to terminate the Lease based on the cl 8.2.3 notice only after the proceedings with respect to the rental payable had been settled, although there remained an outstanding issue as to whether United, having been paying at a lower rate at the time it purported to exercise the option to renew, was in breach at that time and therefore not entitled to take up the option to renew. That raised a question as to whether the breach should be excused pursuant to the provisions of the Conveyancing Act, as the trial judge ultimately ruled, in United's favour, in the present proceeding. However, the present question was whether the service of the cl 8.2.3 notice in January 2022 involved a change of tactic, in an attempt to terminate the Lease by other means, or, as Coastal asserted, the resolution of the rent issue provided clarity as to the financial circumstances which then allowed Mr Roberts to decide whether to proceed with the rebuilding or not.
The trial judge addressed the direct attack on the genuineness of the analysis undertaken by Mr Roberts in his affidavit as to the financial considerations involved in the rebuilding exercise. The trial judge stated: "63 I do not accept that what is required by a landlord to validly exercise the right in clause 8.2.3 is an analysis of the best sources of information, judged after the event. Rather, the necessary inquiry is whether the analysis was rational and genuine at the time it was considered. Merely because other matters might have been considered, or the analysis could have been carried out in a different way, is not determinative of whether there was a failure to act genuinely or in good faith."
That proposition should be accepted, as must the trial judge's further step in assessing the challenges raised by United to determine whether it should be inferred that Mr Roberts' calculations were "not genuine". It is true that the trial judge did not consider whether the calculations were objectively unreasonable, although for reasons set out above, that exercise was not required. However, it will be convenient to apply that standard against the possibility that a different view may be taken of the correct approach.

Costs of rebuilding

In undertaking this exercise, two matters will need to be borne in mind. The first, as noted by the respondent, is that in various respects it is apparent that Mr Roberts erred on the conservative side in calculating costs. To the extent that appears to have been so, it must cast doubt on the proposition that his primary purpose was to inflate the costs to justify a conclusion that rebuilding was impracticable or undesirable. Secondly, it must be borne in mind that the appellant tendered no evidence to demonstrate that any aspect of Mr Roberts' calculations were so unreasonable as not to be genuine, or even unreasonable in the sense that they fell outside a legitimate range.
In its written submissions in this Court United challenged five aspects of Mr Roberts' analysis. It is convenient to commence with one matter as to which the appellant had documentary support for its criticisms.

Drayton's quotation

Mr Roberts' evidence in his affidavit was as follows: "23 In mid-2020, I wanted a quote to check how much it was going to be to rebuild The Rock and to make sure that my initial estimate of $1,500,000 was still realistic. 24 On 7 July 2020, Drayton Group Pty Ltd ("Drayton Constructions") provided a quote to rebuild The Rock. A true copy of that quote is annexed and marked 'C' ('Drayton quote'). The Drayton Quote shows that the price to rebuild The Rock was more than double my initial estimate of $1,500,000. According to Drayton Constructions in mid-2020, it was going to cost $3,280,000 (+GST)."
Drayton's quotation included a significant number of exclusions, some of which were addressed by Mr Roberts' evidence. It also included ten provisional sums, including one for "electrical, comms, security and CCTV" at $440,000. The total of the provisional sums was a little over $1 million, or one-third of the contract price. The copy of Drayton's quote annexed to the affidavit did not contain a qualification to that item which was contained in a copy of the document obtained on subpoena from Drayton in the course of the proceedings. The qualification read as follows: "[t]his seems a very high figure but is based on the electrical plans provided. The lighting to the batten ceiling is very expensive. I have asked the electrician to look at a D&C approach to save money."
Mr Roberts was cross-examined as to how what United described as the "doctored" quote came to be attached to his affidavit. United sought to draw the inference that the exclusion was deliberate, so as to conceal the fact that a major element of the quote might have involved an unreasonably inflated price. United also questioned why a covering email from Drayton was not attached to the affidavit. The covering email included the following: "Please find attached letter of offer for The Rock Roadhouse in accordance with the drawings provided. I must say that the design does seem to be rather complex and expensive, particularly with respect to the services. I have included provisional sums against these items so you can understand how much these actually are. I've also noted a number of other expensive luxury items in the price that you may wish to reconsider from a budget perspective. Happy to catch up and discuss."
A week later, on 14 July 2020, Drayton forwarded a further email with suggestions for reducing the price for the electrical elements to $350,000 by making seven changes to the deposed design. That too was not included by Mr Roberts as an attachment to his affidavit.
The trial judge dealt with Drayton's quotation in the following passages. The first addressed an allegation by United that "Mr Roberts engaged in fraud in intentionally deleting the words in parentheses in order to support his disingenuous assessment of the likely build cost". [58] The trial judge rejected that submission, stating that she was not comfortably satisfied that "Mr Roberts altered the invoice attached to his affidavit or caused that alternation". [59] That conclusion was based upon an assessment of his evidence in cross-examination and on the evidence that it was unlikely that he personally altered the invoice as he was not "good with computers". [60] Nor did the trial judge think that the qualification was of such consequence as to provide a motive for deception.
Taken in isolation, and acknowledging the force of the constraints identified in Fox v Percy on the rejection of an assessment of credit of a witness by a trial judge, there would be little basis for interference with that conclusion. However, it should not be taken in isolation: of greater substance was the failure to include the alternative (and lower) pricing from the electrician, subsequently supplied by Drayton. If there were a basis for concluding that the failure to disclose that document demonstrated a nefarious purpose, the exclusion of the qualification to the quote would need to be reconsidered. That is because the qualification might have suggested the existence of a later and lower quotation.
While it is true that the trial judge did not deal with them together, she did deal with both points, stating: "69 Secondly, I do not accept that Coastal failed to engage in the consideration process because it did not provide evidence of every communication relevant to the planned work. Mr Roberts' evidence was that he did not consider Drayton's suggested saving of costs was reasonable, because overall the cost of construction had risen in the 18 months between receiving the quote, including because of the impact on the construction industry of the COVID 19 pandemic. Mr Roberts is the director of various companies that are involved in the construction industry, and I accept that he would have some knowledge of general prices and increases in prices. United did not tender any evidence of market price increases to show the estimate was objectively wrong."
United challenged that justification on the basis that Mr Roberts had separately applied a 25% uplift to Drayton's price to allow for those factors. That criticism had substance. For that reason, and given the failure to put together the two pieces of evidence, it is necessary to look more closely at the cross-examination of Mr Roberts on this issue. The cross-examination commenced by dealing with the email from Mr Skelly of Drayton to which the quotation was annexed: [61] "Q. And this was the covering email for the quote that you received on 7 July. Is that right? A. Yes. Q. And you see in the second paragraph of this email that Mr Skelly of Drayton said to you, 'I must say that the design does seem to be rather complex and expensive, particularly with respect to the services'. Do you see that? A. Yes, that's correct. Q. And he said, 'I have included provisional sums against these items so you can understand how much these actually are'. Do you see that? A. Yes. Q. And in the third paragraph he said, 'I've also noted a number of other expensive luxury items in the price that you may wish to reconsider from a budget perspective'. Do you see that? A. Yeah. That's correct, yes."
Mr Roberts agreed that the use of western red cedar was a very expensive timber and that there were a few luxury items "that they could definitely cull back on, yeah". [62] With respect to "complex and expensive services" Mr Roberts noted that Drayton had "allowed for the switchboards, to take the larger power upgrades and everything like that. But he excluded all of the external services outside the building". [63]
The cross-examination ended with the following exchange: [64] "Q. And you gave no consideration at all as to whether there may be different or cheaper design options for building the Rock? A. No, I did consider that in my percentage increase, when I said 20 to 30%. Q. I am not asking about your 20 to 30% increase since Drayton. I am asking you about the starting point, which is your Drayton's quote. I'm directing your attention to the starting point of your analysis, which was 3.28 million. I am right in understanding that, am I? A. Yes. Q. That was the starting point for your analysis? A. Yes. Q. You would agree with me, wouldn't you, that when you took that 3.28 million as your starting point, you made no effort to exclude or vary any of the items that Drayton's had described as provisional items in their quote of 7 July 2020. Is that right? A. No, that's not correct. Q. Well you started with the figure of 3.28 million, didn't you? A. That's correct, yes." The line of cross-examination ceased at that point. An implication left open was that Mr Roberts had taken into account the possibility of reducing some expenses in fixing the uplift.
After the luncheon adjournment, cross-examining counsel showed Mr Roberts the original quote obtained from Drayton and asked him to note the variation from the copy attached to his affidavit, continuing: [65] "Q. You are not able to offer any innocent explanation, are you, as to why those words have been deleted in provisional sum 1 of the version attached to your affidavit? A. No, I've got no explanation. No. Q. Well, you're not suggesting that your solicitor had any involvement in altering the document, are you? A. No, I'm not suggesting that. Q. If that's the case, then I put to you squarely, Mr Roberts, that you knew, when you swore your affidavit, that the document at page 429 was a doctored version of the quote, didn't you? A. No, I was not aware. No. Q. But you're unable to offer any innocent explanation? A. I - I can't offer any explanation. No. Q. Well, the fact is the reason you can't offer an innocent explanation is because, to your knowledge, there isn't one, is there? A. There is no explanation. That's correct. Q. Because you caused a version of the quote with those words missing to be annexed to your affidavit, didn't you? A. No, that's not correct."
The cross-examiner then turned to the omitted subsequent email from the electrician forwarded by Drayton to Mr Roberts. He was asked if, "about a week after Drayton gave you the quote, they sent another email" and he responded, "they sent a number of emails, yes". [66] Asked why he did not attach the further email from the electrician, the following exchange took place: [67] "Q. Well, the reason you didn't attach the subsequent email of 14 July 2020, I want to suggest to you, is because it would have had the effect of lowering the build cost below 3.28 million, wouldn't it? A. Yeah, that's correct. Yeah. Q. And that's the reason you didn't attach the affidavit - A. No, that's - Q. - the email to your affidavit? A. No, that's not correct. Q. But you agree, if you'd included it in your affidavit, it would have had the effect of meaning that the starting point to your analysis of 3.28 million as the build cost would need to be reduced. A. Yeah, that's correct. Yes. Q. And the reason you didn't attach the email to your affidavit was because you wanted to inflate build costs as much as possible to try to justify your decision to issue the notice of consideration. A. No, that is definitely not correct. Q. And that's also why you didn't include the covering email of 7 July 2020, in your affidavit, isn't it? A. No. No, that's not the case. No."
In re-examination Mr Roberts gave the following evidence in relation to the provisional sums and his view of the quotation supplied by Drayton: [68] "A. Why I did not, because I believed that they'll be still far understated. So, you got the electrical comms and power there at 440,000. But, with all the infrastructure and everything that goes in it[,] it would be far more than that. So, air condition[ing], mechanical services. You still require air conditioning in the building. So, I wasn't going to take that out, at 270,000. The western red cedar is 126 grand, but an alternative is going to cost you very similar, because building costs have risen. Corten external cladding at 90 grand. That's actually quite cheap for the steel, so, I didn't exclude any of those. I didn't exclude any of those items, because I thought they'd covered off on them."
There can be little doubt that United was entitled to be critical of the way in which Mr Roberts' affidavit had been prepared and the lack of attention to what should properly have been included in it. However, Mr Roberts accepted that it was the "back of an envelope calculation" that he had made in January 2022 and had not attempted a precise costing. On that view, the affidavit, far from being disingenuous, may have provided an accurate account of those matters to which Mr Roberts had regard. On that view, deficiencies in the affidavit did not demonstrate a lack of good faith.
United submitted that there was inconsistency in his evidence in that his explanation for not varying the cost of timber, because the cost accurately reflected the current cost of less expensive timber, was inconsistent with the addition of a 25% markup on the total cost in the quote to account for cost increases over time. That may be so, but his explanation in reply did not accept that the premises should have been redesigned to avoid the "luxury" items.
Further, to the extent that United relied upon the fact that there were a number of high priced "luxury" items, they were a function of the design and, so far as the evidence revealed, the design was prepared by Perception Planning at about the time that Coastal acquired the property and very shortly after the fire. There was no evidence that the design process had incorporated inflated elements for the ulterior purpose of making the rebuilding of the premises uneconomic, nor that in June 2019 when the design was prepared Coastal had any intention other than to rebuild.
Bearing these factors in mind, United did not demonstrate by objective evidence that the trial judge's findings with respect to the credibility of Mr Roberts were glaringly improbable or otherwise unsupportable. Having regard to Mr Roberts firm rejection in cross-examination of knowledge as to how the qualification to one item in Drayton's quotation came to be removed, the judge's acceptance of that evidence should not be reversed. Mr Roberts accepted that he had seen the lesser figure proposed by the electrician, but did not accept it. There was no necessary inference based on an assumed obligation to disclose adverse material that the figures he did accept were inflated or, indeed, unreasonable. By not calling expert evidence, United forewent a demonstration that the figures ultimately adopted by Mr Roberts were unreasonable, let alone manifestly unreasonable.

Cost of concreting

Mr Roberts gave evidence that he took Drayton's $3.28 million quotation and added an uplift of 25%, being the midrange of 20% to 30%. He gave evidence that his accountant had told him on 15 December 2021: [69] "The cost of construction has skyrocketed since you were first looking at the rebuilding in 2019. COVID has put construction costs through the roof. I reckon you would be looking at [at] least a 20% to 30% price rise over that last quote you had for $3.2 mill."
Mr Roberts said that he agreed with his accountant's range and took the middle figure, which, applied to Drayton's quotation, brought the cost to $4.1 million. There were additional items not included in Drayton's figure. The largest of the additional items was "the cost of the concreting in and around The Rock, including the carpark area". He said that approximately 5,500 square metres (m2) of carpark and fuel canopy concrete area were required at a market rate of $150/m2, giving a total figure of $825,000. However, using a concrete plant on site would reduce the cost to $85/m2 giving a total figure of $467,500, which he rounded down to $450,000. On its face, as counsel for Coastal submitted, that approach was hardly consistent with an attempt to inflate the costs of the rebuilding exercise.
United's challenge to the inclusion of any figure for concreting was based on three propositions. The first was that no approval for re-concreting was contained in the development application which was approved by Council. The second was that the need for re-concreting put forward by Mr Roberts in his oral evidence was not referred to in his affidavit. Thirdly, his purported reliance on drainage purposes was not something that Mr Roberts expressed with confidence in his oral evidence.
As to the question of development consent, Mr Roberts accepted that the concreting had not been included in the development application, because, he stated, it could be undertaken pursuant to a complying development certificate. That answer was apparently based on there being no expansion of the present footprint, which was subject to existing use rights, as Mr Roberts noted. While agreeing that he did not know if further drainage work would be required, he said that he assumed it would because the development consent required compliance with "current building construction codes". [70] The cross-examination concluded: [71] "Q. I want to suggest to you, Mr Roberts, that it was quite misleading for you to have included almost a half a million dollars for new concrete, when your intention was to use existing concrete. Do you agree with that? A. No, that's not correct. Half a million dollars was based around doing the building as well. Q. Doing the building as well? A. Is it 450,000? Q. Well, you didn't say that in your affidavit. In your affidavit, you said it was for carparking and hardstand areas, didn't you? A. Carparking and hardstand. Well, hardstand is considered the building envelope. That's still hardstand concrete. Q. You knew perfectly well, didn't you, when you made your affidavit, that the figure of five and a half thousand square metres was grossly overstated, wasn't it? A. No, I believe it's understated. So, no."
In the course of cross-examination, Mr Roberts broke the figures down to approximately 3,500 m2 for the building envelope and 2,000 m2 for the rest of the concrete "leading up to the actual hardstands". [72] The cross-examiner asked if he understood the figures correctly to which Mr Roberts stated: [73] "That's - that's about - about correct, yeah. But you'd have to redo all the concrete around, for you should have all different heights and everything for the drainage to work."
Mr Roberts was taken back to the figures in his re-examination and asked to explain how the drainage interacted with the laying of concrete to which he responded: [74] "A. Because any - any level of concrete that you put in, you need any hard standings to have runoff - runoff like the water. Runoff needs to go somewhere off the hardstand, so you need to assess all the drainage to make sure the drainage can cope with all the hardstand that is now feeding the drainage. Q. And does that affect the levels of the concrete that is laid? A. Correct. Yes, it does."
The trial judge accepted Mr Roberts' evidence with respect to the concreting costs. [75] No basis for rejecting that finding has been demonstrated. As the trial judge also noted, there was no evidence to suggest that Mr Roberts' estimates were objectively unreasonable.
While addressing the question of the concreting costs, United submitted that the builder's margin included in Drayton's quotation should have been removed because Mr Roberts intended to use his own company, Coastal Earthmoving, "to control the builder's margin". [76]
Two further propositions were included in that submission. First, "Mr Roberts made no attempt to identify or quantify the margin (if any) that Coastal Earthmoving were charging to Coastal". That was true, but the cross-examination was limited to one question relied upon by the appellant in its written submissions, namely that a reason for putting the development application in the name of Coastal Earthmoving was to control the builder's margin.
Secondly, it was submitted that, "[t]his was despite the fact that, elsewhere in his evidence, in the context of concreting, Mr Roberts said that by using Coastal Earthmoving there would be a saving on 'travel and markup' in the order of 43%".
It is not clear whether that submission was pressed, but it was based on two false premises. The first false premise was that this was a saving which applied across the board, when the figure of 43% was derived from the explanation noted above, that the concreting cost could be reduced by having a batching plant on site. Secondly, as has already been noted, far from ignoring the benefit, Mr Roberts accepted it in pursuing the cost of concreting at the amount of $450,000 not $825,000. The submission ended by the proposition that these matters were not addressed in Mr Roberts' affidavit (which in the latter case was false) or in her Honour's reasons (which, with respect to the second matter was false and, as to the first matter, was not necessary as it was not the subject of any evidence or submissions beyond the one question in the opening of the cross-examination).
The challenge in respect of this item failed.

25% uplift

The challenge to the use of Drayton's quotation plus a 25% uplift was based upon the proposition that the result "would have major implications for United's long-term lease" and that the failure to obtain a second from Drayton "demonstrated a lack of good faith and reasonableness". [77]
The trial judge rejected the proposition that Mr Roberts was not genuine in his consideration of the cost of repairs in failing to obtain an updated quote. [78] The judge noted that Mr Roberts, being "the director of various companies that are involved in the construction industry … would have some knowledge of general prices and increases in prices". That was a short reference to more detailed evidence which had been considered earlier that Mr Roberts had spent the better part of a decade undertaking electrical engineering on major infrastructure projects, before moving to Coastal Earthmoving which had been set up in about 2011 or 2012 to undertake "general earthworks projects, subdivisions, and property development" including building homes. Mr Roberts had stated: [79] "Over the past 18 years, I have built up know-how of the construction industry and have been responsible for, and involved in, quoting and costing hundreds if not thousands of jobs relating to earthworks, subdivision, concreting, building and construction, and landscaping."
In the absence of any evidence that contradicted or cast doubt on Mr Roberts' experience or ability to provide estimates of cost increases over the period of the pandemic and beyond, the trial judge was entitled, if not in practical terms compelled, to accept his evidence given her assessment of his general credibility. His experience in the industry was not challenged in cross-examination.

Inclusion of power, water and fire expenses

Mr Roberts included in his calculation current prices for power installation, new water requirements and new fire requirements, totalling $875,000 (including GST of $79,545). United submitted that the items included "hardware" to be acquired from a third party, but Mr Roberts did not obtain quotations. Further, to the extent that the items involved installation costs, there could have been savings by having Coastal Earthmoving do the works. Thirdly, it was "faulty logic" to have included GST when Coastal would receive input tax credits for GST paid.
In relation to the fire equipment, Mr Roberts explained in his affidavit the costs he had relied on for two new tanks, a new pump, a concrete base slab and ring beam, and additional pipe work. The costs came to $330,000 to which he added GST and then rounded down to $350,000. The cross-examiner took Mr Roberts to Drayton's quotation and obtained a concession that it was exclusive of GST. Mr Roberts then said, "so, I probably do need to add GST to that". [80] The cross-examiner then suggested that "for consistency, you should have stripped out the GST for all of the figures in your affidavit [dealing with power, water and fire requirements]". Mr Roberts responded: "I should have added GST for all those, that looks like." [81]
Mr Roberts confirmed that each was GST inclusive to which the cross-examiner stated, "for consistency with the Drayton's quote, you should have stripped out GST, shouldn't you?" to which Mr Roberts replied: "Well, I only used the 3.28 figure exclusive of GST already. So, I should have added GST to the figure when I worked it."
It was true that Mr Roberts never said "Coastal will have to pay GST on those items", but the point was self-evident and not in dispute. Rather, the cross-examiner elicited a concession that the input credit would involve a reimbursement. [82] The cross-examiner then asked: "Q. So, it would be completely faulty logic to include the GST in any rate of return analysis, wouldn't it? A. So, we - we haven't - so, yes, it would - yeah. You wouldn't [include] GST."
Counsel then suggested that the amount of GST was $120,000, and, asked: "Q. It was quite careless for you to have excluded [sic] the GST figures, wasn't it?"
The question was objected to and withdrawn, counsel for Coastal submitting that Mr Roberts' evidence related to "the costs to rebuild" and said nothing about "input tax credits". The line of questioning was not then pursued.
The concession as to "faulty logic" was of little significance, absent identification of the premises on which it was based. There was no suggestion put to Mr Roberts that he had been dishonest, or had included GST to inflate the costs (which, arguably, it did not do in any event). A suggestion of carelessness was not pursued. As to the amount of the GST, no explanation was given as to how the figure of $120,000 was obtained: the GST on the three items of power, new water and fire may have been an amount of $79,545 if the only elements were equipment, which they clearly were not. The amount of the excess would then be reduced by the rounding down involved in relation to fire equipment by $13,000.
With respect to the inclusion of GST, the trial judge noted that, although input credits might have been obtained, it was not misleading to include GST as a cost, as Coastal would have needed to pay it. United challenged this finding, claiming among other things that the trial judge had "overlooked the fact that at no stage did Mr Roberts give evidence that he included GST because Coastal would still need to pay for it". The submission was trivial and should not be accepted: it was implicit in Mr Roberts' repeated statements that GST should have been added that that was because Coastal would have to pay it.
As to the other expenses, United noted that the trial judge had not addressed them. The reason the trial judge did not address them is apparent from the cross-examination of Mr Roberts which raised no challenge to the amounts claimed, in circumstances where United did not seek to demonstrate that the amounts were not reasonable and appropriate.

Inflation of costs - conclusion

The relevance of the costs of rebuilding was that it formed the denominator in a calculation of the likely rate of return on investment if the building went ahead. The sum of the expenses calculated by Mr Roberts was $5,425,000. When he undertook the calculation of the rate of return, he did not use that figure, but rather $5 million. In other words, there was a rounding down of $425,000, for which United's submissions made no allowance. As Coastal submitted, there was no basis for the submission that Mr Roberts had shown any intention to dishonestly inflate the costs of the rebuilding, nor to do otherwise than undertake a genuine exercise in calculating those costs. Whether the overall costing was within a reasonable range could not be determined on the evidence, except to say that there was no evidence other than that of Mr Roberts; United did not demonstrate that his final figure was outside a reasonable range.

Rental income

The other integer in the calculation of the rate of return was the likely additional rental income that would be obtained once the rebuilding was completed. Prior to the fire, there had been four tenants, namely United, Aussie Bush Camp, Tania Mangion and Subway. Mr Roberts made three estimates with respect to the calculation of income.
First, the effect of the rebuilding would have been to increase United's payments from 79% to 100% of rent provided for in the Lease, being an amount of $108,400 on the basis of the rental for the 2021/2022 financial year. To that he added an amount of $164,000 for rent from other new tenants. Mr Roberts gave an explanation for that figure: [83] "… other tenants (apart from United) would come into other areas of the Rock and start paying rent. I understood that figure of $164,000 as coming from the fact that, prior to the fire, one of the other tenants had been a Subway shop, which had been paying about $60,000 per year (including GST). If the Rock were rebuilt, then the estimate would be to have three tenants each paying around the same as what Subway was paying. That would be a total of $180,000 in rent. Knocking off the GST would leave about $164,000, which is the estimate from Coastal's accountant".
United submitted that the rental income was understated.
Prior to the fire, there were three other lessees (or licensees) of parts of the roadhouse, in addition to United. These were all food outlets, the two apart from Subway being Aussie Bush Camp and an individual, Ms Tania Mangion. Aussie Bush Camp had a kitchen supplying food for some 12,000 children per week attending the camps, which were in a bush area behind the roadhouse. Mr Roberts agreed that the commencing rent in 2009 paid by Aussie Bush Camp was $100,000. However, he noted that the lease expired in 2014 and Aussie Bush Camp had built their own dining area. [84] Mr Roberts was then challenged for not including that information in his affidavit. However, given that it was the cross-examiner who sought to rely upon the existence of a prior arrangement, that complaint, repeated in written submissions, was without substance.
The lease to Ms Mangion commenced in August 2014 and ran for a period of five years at a rental of $108,000 per annum. Ms Mangion operated a takeaway shop. Mr Roberts agreed in cross-examination that that figure was much higher than the figure he had used for calculating his possible rental income, but explained that the rent was high because Ms Mangion also serviced the Aussie Bush Camp. The cross-examination continued: [85] "Q. Did all of that - was all of those considerations apparent to you when you made your affidavit? A. Yes. Correct. They were. Yes. Q. Were they? So, do you say that you were aware that Tania Mangion had a lease of $100,000 a year commencing rent but that that was an artificially high figure because it was unrealistic assumption for her to continue servicing Aussie Bush Camp? A. That's - that's correct, because there was no lease in place when we actually purchased it. It was just day to day, I think. Q. But none of that's disclosed in your affidavit, is it? A. I wouldn't have thought that I needed to. Q. So, you thought it was a safer bet just to take the figure your accountant had given you. Is that right? A. Yeah. We used figures what we thought - to be able to attract - attract cafes or takeaways up to that premise. Yes."
A more effective line of cross-examination relied upon a letter of intent provided by Subway expressing an interest in returning to The Rock Roadhouse if it were rebuilt. On 30 July 2020, Subway provided a letter of intention to lease with a minimum base rent of $60,000 per annum plus GST with a percentage rent of 10% of turnover up to $1 million turnover per annum, and 8% of turnover for more than $1 million per annum. (It did not include payment of any share of outgoings and included an initial six-month rent-free period.)
Mr Roberts remembered that the letter contained a base figure of $60,000 but not the percentage of turnover figures. It was put to him that if the turnover was just short of $1 million Coastal would receive an extra $100,000 in rent. He said: "That's a lot of turnover. Yes. That's what we would receive. Yes." [86]
As he had expressed some doubt about Subway reaching that target, it was put to him that if it reached half the target he would get an extra $50,000 and he responded: "I still think sitting half of it, you'd be doing well. Yes." [87]
The cross-examiner continued: "Q. Well, you know nothing about running a Subway store, do you? A. No, that's right. That's why I'm saying - yeah. No, I don't know any - Q. You're just speculating now, aren't you? A. Yeah, that's correct. Q. And you're doing that to try to shore up your case and make your analysis sound reasonable. A. No, not at all. Q. You didn't use the figures in the letter of intention to lease in your affidavit, did you? A. No. No, we didn't. We - we don't [know] what all the other two suppliers would - would put forward. No. Q. I'm not asking about the other two suppliers. I'm just asking you about Subway. A. Okay. Q. You used Subway as your benchmark, didn't you, for the other two suppliers would pay? A. In my affidavit, I used the accountant's figure that was given to me to use to work out our rate of return. Q. Based on what rent Subway had signed up to back in 2016? A. I - I didn't question what the accountants told me. No. Q. You would accept, wouldn't you, that the figures in the letter of intention to lease were a much more reliable indicator of what Subway would be prepared to pay on the new site, rather than the figures your accountant had given you? A. That one shop? Yes."
Annexed to the letter of intent was a letter from Raine and Horne, Commercial, dated 22 July 2020 which contained a proposal with Subway's amendments and signatures. It did not provide a full copy of the lease conditions, so that the calculation of turnover rent was somewhat obscure. However, it appears that turnover rent was not payable until a turnover threshold had been crossed which was calculated as the gross sales multiplied by the relevant percentage, less the base rent. Accordingly, no turnover rent would be payable until gross sales exceeded $600,000 per annum. There was no evidence before the Court to indicate whether such a figure had ever been reached at The Rock Roadhouse, or would be reached at a rebuilt roadhouse, except Mr Roberts' doubts that $500,000 would be reached. In any event, the assumption that the gross turnover rent was payable from the first dollar of turnover did not accord with the terms of the proposed lease. 2 Blue 532
Mr Roberts gave evidence that the period of rebuilding would have been 18 months. Combined with a rent-free period on the Subway lease of 6 months Coastal had no basis to calculate (or receive) rental income (other than from United) for 2 years. Although that fact was not relied upon by Mr Roberts, it prevents any finding that his approach was objectively unreasonable.
With respect to United's lease, the lines of cross-examination were two-fold. First, it was suggested that the Lease provided for a rent increase of 3% per annum, or market rent, whichever was higher. Mr Roberts agreed that he had calculated the rent by reference to the 3% per annum increase and had not obtained a market appraisal. It was suggested to him that it was "entirely possible that market rent for United, trading from brand-spanking-new premises, would be higher than 3% above the previous year's rent", with which he agreed. He rejected the proposition that had he been genuine in his consideration of the practicability of rebuilding, he would have obtained a "market appraisal".
The second line of cross-examination was that he had relied on the current year rental and had not taken account of the increases for the future. He rejected the proposition that without considering future years, he was not "approaching this consideration in a genuine way". [88]
The trial judge accepted Mr Roberts' explanations of the estimates of likely rent after the rebuild, including his explanation of why previous tenants had been prepared to pay higher rents because the premises were adjacent to their business operations. [89] With respect to the failure to consider future increases in United's rent, based on market rent reviews, the trial judge did not "consider it was inappropriate for Mr Roberts to evaluate the situation as at January 2022, based on United's then rent, which was a known figure that would be relevant to funding the rebuild". [90]
The trial judge concluded: "80 I also consider that Mr Roberts was entitled to be conservative in his estimate of rental. He also was conscious of needing to be able to service the loan during the construction period, during which Coastal would not have been receiving rental income from any tenants other than United. 81 I do not consider United has demonstrated Mr Roberts acted disingenuously when assessing the estimated rental income."
The trial judge's assessment of Mr Robert's evidence as to anticipated rental income should be accepted. Without the opportunity to service the Aussie Bush Camp customers, there were no locked-in tenants other than United. The evidence indicated that United included in its operations a convenience store. The likely rental from new tenants was speculative. There was no reason to doubt the genuineness of Mr Roberts' calculations in that respect.
To the extent that United suggested that its own rent should have been calculated at a market rate, rather than the prescribed 3%, it was the better placed party to provide evidence of an alternative calculation: it did not do so. As to the suggestion that future rental should have been taken into account, Coastal submitted that future income flows would need to be discounted in the usual way. Alternatively, they would need to be assessed against future levels of outgoings and costs incurred by the landlord. The criticism that Mr Roberts failed to undertake such an exercise was without substance.
There being no basis to doubt the genuineness of Mr Robert's calculations, there is also no basis for doubting the reasonableness of the exercise he undertook with respect to future rental income. The only conclusion available to the Court would be that his calculations were not shown to be unreasonable.

Conclusions

United has failed in its challenge to the judgment and orders of the trial judge. Accordingly, the Court should make the following orders: 1. Dismiss the appeal from the judgment and orders in the Equity Division. 2. Order that the appellant pay the respondent's costs in this Court.

Endnotes

Coastal Service Centres v United Petroleum [2023] NSWSC 1010 (Coastal v United)
Further amended statement of cross-claim, par 39(a).
Amended defence, filed 4 November 2022, par 60. Although that defence predated the further amended statement of cross-claim, the defence was not further amended.
Affidavit, 19 January 2022, par 19.
Tcpt, p 37(30)-(37), (40).
Affidavit, 19 January 2022, par 12.
Affidavit, pars 23, 24.
Respondent's written submissions, 29 February 2024, par 22.
Coastal v United at [31].
The discussion ran from [32]-[40].
Appellant's reply submissions, 4 March 2024, par 4.
See email from United's solicitors to Coastal's solicitors of 17 January 2022, par 1. 2 Bl 587
Cross-claimant's outline of opening submissions, 14 July 2023, pars 49ff.
[1999] NSWSC 230; 9 BPR 16805, 16809.
(1976) 135 CLR 110; [1976] HCA 24 at p 118.
(1944) 69 CLR 407 at 432; [1944] HCA 42.
[1984] VR 161 at 164.
Elder's Trustee and Executor Company Ltd v Higgins (1963) 113 CLR 426, 449 (Dixon CJ, McTiernan and Windeyer JJ); [1963] HCA 48.
Finch v Telstra Super Pty Ltd (2010) 242 CLR 254; [2010] HCA 36 at [57]-[66].
Buck v Bavone at 119.
Ibid.
(1992) 26 NSWLR 234 (Priestley JA, Meagher JA and Handley JA).
Renard Constructions at 279G (Handley JA).
Renard Constructions at 257C.
Renard Constructions at 258C (emphasis in original).
(1993) 45 FCR 84, 94; [1993] FCA 638.
[2022] HCA 39; (2022) 97 ALJR 40 at [50]-[51], [72]-[73]; see also Kiefel CJ and Gageler J at [22]; Edelman and Steward JJ at [103]-[107].
Renard Constructions at 263G-264A.
Ground 7, par (a).
Appellant's written submissions, par 29(c).
Renard Constructions at 279C.
Renard Constructions at p 279F.
Renard Constructions at p 280A.
Renard Constructions at p 281C.
(1993) 31 NSWLR 91 (Kirby P, Priestley JA and Meagher JA).
(2001) 69 NSWLR 558; [2001] NSWCA 187 (Sheller, Beazley and Stein JJA).
Burger King at [185]; see also [187].
(1998) 44 NSWLR 349 (Sheller JA, Powell and Beazley JJA agreeing).
Alcatel at 363C-E.
(1997) 146 ALR 1 at 36ff.
Alcatel at 368C-D.
Alcatel at 369B.
See fn 14 above.
[2010] NSWCA 268; 383 ALR 577 (Allsop P, Hodgson and Macfarlan JJA).
(2002) 240 CLR 45; [2002] HCA 5.
Royal Botanic Gardens at [37] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ).
Royal Botanic Gardens at [6].
Royal Botanic Gardens at [38].
See at [70] above.
Coastal v United at [47]
(2003) 214 CLR 118; [2003] HCA 22 at [28]-[29] (Gleeson CJ, Gummow and Kirby JJ).
Tcpt, 25/07/23, p 168-171(22).
Tcpt, p 168(30)-169(3).
See "Factual background".
Affidavit, 19 January 2022, pars 19 and 20.
Lease, clause 6.1.2.
Tcpt, p 41(25).
Coastal v United at [54].
Coastal v United at [55].
Ibid.
Tcpt, p 51(15).
Tcpt, p 52(15)-(28).
Tcpt, p 52(33).
Tcpt, p 56(1).
Tcpt, p 58(42).
Tcpt, p 59(35).
Tcpt, p 60(45)-61(18).
Tcpt, p 172(40).
Affidavit, 19 January 2022, par 61 gave the date as "16 December", but that was corrected in a second affidavit of 10 March 2022, par 7.
Tcpt, p 81(20)-(50).
Tcpt, p 82(12)-(30).
Tcpt, p 66(17)-(48).
Tcpt, p 69(5).
Tcpt, p 177(20).
Coastal v United at [71].
Appellant's written submissions, par 46.
Appellant's written submissions, par 54.
Judgment, [66(4)], [67].
Affidavit, pars 7-9.
Tcpt, p 70(38).
Tcpt, p 71(7).
Tcpt, p 72(23).
Affidavit, 19 January 2022, par 72.
Tcpt, p 98(10)-(26).
Tcpt, p 98(31).
Tcpt, p 91(7).
Tcpt, p 91(20).
Tcpt, p 112(13).
Coastal v United at [77].
Coastal v United at [79].

Amendments 03 June 2024 - Removed paragraph number at [52]; i.e. paragraph [53] now [52]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 June 2024

or tribunal: Supreme Court Jurisdiction: Equity - Real Property List Citation: [2023] NSWSC 1010 Date of Decision: 23 August 2023 Before: Peden J File Number(s): 2019/373788

HEADNOTE [This headnote is not to be read as part of the judgment] In July 2018 the appellant, United Petroleum Pty Ltd (United), operated a service station at "The Rock Roadhouse" on the Pacific Highway at North Arm Cove. The previous owner of the property had entered into a lease with United, which had commenced on 1 July 2016. On 31 July 2018, a fire destroyed the buildings, but not the fuel pumps and tanks. On 31 May 2018 the respondent, Coastal Service Centres Pty Ltd (Coastal), had entered into a contract to buy the property, subject to various leases, including the lease to United. Following the fire and further negotiations, the sale settled on 20 June 2019. Following the fire, United briefly halted trading before resuming business in December 2018 using demountable buildings. Relying on a rent abatement clause in the lease, United paid 44% of the contractual rent; while Coastal invoiced 75% of the rent. The dispute over the rent abatement was settled by agreement on 17 January 2022, with consent orders being made on 27 January 2022. Pursuant to cl 8.2.3 of the lease, Coastal was entitled to serve on United a notice if satisfied that the fire damage made repairs "impracticable or undesirable", with the effect that Coastal could then terminate the lease on 14 days' notice. On 18 January 2022, Coastal served a cl 8.2.3 notice. By a cross-claim in rent recovery proceedings commenced by Coastal in the Equity Division, United challenged the validity of the notice and thus the entitlement of Coastal to terminate the lease. On 23 August 2023, the trial judge, Peden J, dismissed United's claim. On 9 November 2023, United filed a notice of appeal. The issues for determination on appeal were whether the cl 8.2.3 notice was served by the lessor: (i) within a reasonable time; (ii) acting reasonably, and (iii) acting in good faith. The Court (Basten AJA, White and Harrison JJA agreeing) dismissing the appeal, held: As to (i) (1) There was no dispute that the cl 8.2.3 notice needed to be served within a reasonable time; the first issue was whether a reasonable period ran from the event causing damage to the property (as contended by United) or from the date that the lessor formed the opinion triggering the entitlement to serve the notice (as contended by Coastal). The lease required that each step be taken within a reasonable time: at [37], [40]. (2) The second issue was whether Coastal in fact acted within a reasonable time in assessing the practicability of rebuilding. The activities undertaken by Coastal from June 2019 to November 2021, on which United relied to prove unreasonable delay were steps which it was reasonable to undertake in order to make a firm decision as to whether rebuilding should proceed. The steps included resolving the rent abatement dispute which was appropriate as that issue was not an insignificant issue. The focus must be on reaching a state of mind; not merely considering the issues: [37], [45]-[48]. (3) There was no significant delay after Mr Roberts determined that rebuilding was not practicable or desirable: [42]. As to (ii) (4) The terms of cl 8.2.3 did not invoke a standard of objective reasonableness, but rather the exercise of a power in good faith based upon the subjective belief of the lessor: [56], [102]-[106]. (5) Although there are cases which require a principal asserting a breach of contract to act reasonably, as well as in good faith, that element will turn on the proper construction of the contract and not an implied condition imposed by law: [97]-[101]. The reasoning is not transferable to non-breach cases; nor is it necessary to imply a constraint to prevent a principal acting on trivial or insignificant breaches: [86]-[88]. No different conclusion is required by the lease cases: [95]. Buck v Bavone (1976) 135 CLR 110; [1976] HCA 24; Karger v Paul [1984] VR 161; The King v Connell; Ex parte Hetton Bellbird Collieries Ltd (1944) 69 CLR 407; [1944] HCA 42; applied; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5 considered. Burger King Corporation v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 distinguished. (6) If a reasonableness standard were to be applied, it was satisfied: [113]-[116], [147], [154]. As to (iii) (7) The lessor was not required to take the lessee's interests into account: [102], [104], [111]. Nor was it required to engage in an analysis of building costs and rental income that utilised the best information in hindsight but rather to conduct an analysis that was rational and genuine at the time of consideration: [105], [127]-[128], [144]. Burger King; Renard Constructions applied. (8) The appellant failed to (i) provide any expert evidence regarding building estimates, (ii) challenge the respondent's own experience and expertise in the field and (iii) challenge the credit findings made by the trial judge about the respondent. Accordingly, the genuineness of the respondent's analysis could not be overturned: [126]-[128].

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