Whittle & Anor v Filaria Pty Limited & Ors [2004] ACTSC 45

Whittle & Anor v Filaria Pty Limited & Ors [2004] ACTSC 45 | Case summary | Zoe

[105]

The strata titled serviced apartments will be offered for sale with an offer from Jaywood Pty Ltd to leaseback the units from the owner as follows:-

For a minimum of 3 years, at 9% per annum indexed to CPI (capped at 9.25% for the second year and 9.5% for the third year). At the expiration of this period, Jaywood Pty Ltd proposes to offer to manage the apartments for a 10% management fee.

INTRODUCTION:

The Independent Group are pleased to be able to offer investors the opportunity to earn an excellent return from one of Canberra's best known and certainly most distinctively designed hotels. The Canberra International.

The International, however, is now no longer a hotel as such. It is being upgraded by well known Canberra developer Gary Willemsen into exclusive serviced apartments. The apartments are offered for sale with a management offer to lease the units back from the owners at a very attractive rental. The management of The International is to be handled by Jaywood Pty Ltd, an affiliate of one of Australia's largest privately owned specialist hotel management companies, The Castle Group.

As opposed to a unit title motel room as an investment, an owner of a unit title serviced apartment will have the distinct advantage of choice. Apart from the leaseback offer, owners can use the unit for their own purposes, such as a normal tenancy arrangement or occupying the unit themselves. This flexibility allows owners to take advantage of the strongest market at the time.

The 3 year lease to the management company will allow owners to take advantage of the strong growth of tourism in the A.C.T. We have prepared a financial analysis of this option as well as an overview of tourism in the A.C.T., both of which are detailed later in the report.

The Independent Group sell the majority of all major residential developments in Canberra. However, rarely do we have the opportunity to offer such a unique investment in one of Canberra's most famous establishments and in one of the strongest growth industries both here and throughout Australia.

A.C.T. TOURIST INDUSTRY - "WHY INVEST?"

OVERVIEW:

Since the early 1980's, tourism has grown to become a major part of the Nation's economy. The A.C.T. is no exception, with tourism now an important and integral part of our economic growth and development within the Territory. This is evidenced by the information collected from the Canberra Visitors Survey which shows the industry generated in excess of $400 million to the economy during 1990/91, subsequently supporting an estimated 7000 jobs within tourism and related industries. 1990 - 1991 saw a consolidation in the A.C.T., with occupancy levels at 53.18% and 53.5% respectively. Given the pilots strike of 1989 and large increases in the supply of hotel and motel rooms in that time, the A.C.T. has faired well in maintaining these levels. This has been attributed primarily by the opening of the New Parliament House, the National Science and Technology Centre and the National Convention Centre. 1992 has seen strong growth, with occupancy climbing from an annual average of 53% in 1991 to 58.7% in 1992, representing an increase of 9.7%. This growth continued in the December quarter with an occupancy rate of 62.3% being the highest in Australia for that quarter.

SUPPLY AND DEMAND:

Official figures confirm that not only is overall demand for accommodation increasing but there is a very definite swing to serviced apartments. This trend is evident Australia wide. Canberra figures show that overall motel occupancy has increased to 58.7% in 1992, while serviced apartments occupancy has increased to 65.9%.

Noel McCann of McCann and Associates, Valuers, says in a report on investment in Canberra, dated 21 May 1993.

"Our research indicates that the growth prospects for the A.C.T. Tourism market:

* is strong with very few new rooms proposed for development into the market which is assisting the trend of increasing occupancy levels;

* Australia is coming out of the National recession;

* the growth in the number of international tourists into the A.C.T. and Australia (approximately 1.5 million international tourists visited Australia in 1992, this is expected to reach 6 million by the year 2000, excluding the impact of the Sydney 2000 Olympic Bid)."

In May 1993,[sic] the then Capital Motor Inn was converted to strata title serviced apartments. They were released for sale at an average price of $123,000 for the studio apartments and up to $185,500 for a one bedroom apartment. Noel McCann reports: -

"Sale Prices

All units were sold within one hour of initial release with prices ranging from $115,000 for a studio apartment to $185,500 for a large one bedroom suite apartment. Since the initial release, our research indicates that there have been six resales. The most recent resale was for a studio apartment originally purchased fore $121,500 and resold in May, 1993 for $138,000.

Current Occupancy Levels

Our research indicates that during the months of March and April, occupancy levels were at approximately 70%. With the management pool currently having an excess of funds over and above that of the minimum guarantee".

Given these already encouraging signs, our research also shows that many existing motel rooms are about to be removed from the market through redevelopment. We have preliminary confirmation of some 600 rooms, all of which are expected to be out of the tourism market within the next few months. In addition there are a further 300 rooms that are distinct possibilities to be redeveloped.

The effect of this anticipated fall in room supply has been plotted on the following graphs. The result is quite startling and should ensure occupancy rates remain high.

Graph 1 shows a conservative net loss of 450 hotel/motel rooms and nil growth in Tourism, yet still demonstrates an increase in occupancy to 64.5%. Graph 2 allows for a projected 4% growth, indicating an occupancy of 69.7%. Graph 3 and 4 take the above two scenarios but with a net loss of 800 hotel/motel rooms, showing occupancy levels of 72.1% and 78.0% respectively. Allowing for the fact that serviced apartments are showing a higher occupancy rate than hotel/motel rooms, the forecast occupancy levels shown in the Projected Financials could be seen as somewhat conservative.

SUMMARY:

Capital Executive Apartments are a good comparison to the Canberra International, although many investors will see significant marketing benefits for the International.

Capital offered a 9% return for 2 years, and are already trading above that figure. It would be a reasonable assumption that the International will show capital gains to at least match Capital, and that the returns after the three year leaseback will have grown significantly, thus further enhancing the growth in value of the individual apartments.

[107]

THE MANAGEMENT COMPANY:

Major hotels are not run by hotel owners but by management groups e.g., Hilton, Sheraton, Raddison, SPHC etc. The management company is a specialist in hotel administration and marketing. The Castle Group is such a company. (Jaywood Pty Ltd is an affiliate of The Castle Group)

To date The Castle Group has concentrated on managing its own hotels and currently owns 8 hotels totalling some 750 rooms. It is one of the largest privately owned hotel groups in Australia. Castle hotels are located in Tasmania, Sydney, Brisbane and Canberra. With the exception of the Great Northern in Launceston the freehold of all hotels are owned outright. The group employs a staff of 500.

Its founder/owner Millie Phillips is one of Australia's most successful businesswomen. Her financial holdings cover a chain of retirement villages, nursing homes, residential and commercial real estate. She is the driving force behind the business. Her interests include mineral exploration and Chairmanship of two publicly listed companies.

Canberra Rex Hotel

Millie Phillips purchased the Rex some 3 years ago. Despite the pilot strike and the recession her team under the leadership of Graham Hoare, Manager, has made the Rex into one of Canberra's most successful hotels.

Canberra International

The International team will be headed by Graham Hoare. It too will become an outstanding performer. The International compliments (sic) the Canberra Rex. As a sister hotel it will bring cost effectiveness of significant proportion with running expenses and marketing (sic). Graham has a proven track record in Canberra, achieving a 75% occupancy rate for the Rex in 1992, way above the industry average.

Marketing Team

The secret of The Castle Group is not only in tight cost control and quality management but in the effectiveness of its marketing team. The Castle Group are (sic) members of Flag International and uses Flag as its national and international reservations system. The Castle Group employs 7 professional marketers to promote its hotels in 5 states. Their professionalism is on level with the top hotel chains. Castle's Manager of Marketing is a Director of ITOA - Australia's umbrella tourism marketing arm (sic). Castle marketers are invited to participate in most of Australia's overseas marketing drives and all mainstream trade shows to promote the industry.

[293]

156. Whilst I can readily accept that a purpose clause permitting use of property as residential accommodation should not be taken to authorise the use of such a property as a serviced apartment (North Sydney Municipal Council v Sydney Serviced Apartments Pty Ltd (1990) 21 NSWLR 532), I have some difficulty in understanding why planning authorities might wish to prevent someone from occupying a serviced apartment on a long term or even permanent basis or why the use of the adjective "serviced" in a purpose clause should be taken to have such an effect. In many cases, of course, such accommodation would be quite unsuitable for a family, but the same observation could be made of studio and one bedroom apartments zoned for residential use and there is no obvious reason why a single and perhaps partially disabled person or a professional couple might not take advantage of the facilities made available in relation to such apartments. Purpose clauses are essentially directed to the nature of the use rather than the nature of the tenure under which they are occupied or the period during which they may be used. There may be some clauses which specify that a building may only be used for short term crisis or emergency accommodation but, in the absence of any such provision, it is difficult to see any justification for construing a clause which, on its face, merely limits the purpose for which a building may be used, as involving some implied limitation as to the period during which a particular occupant may use it for that purpose. The term "serviced apartments" does not, of itself, appear to justify the implication of some requirement that they be rented only by the day or week rather than occupied on a more long term basis, let alone the implication of some criterion for determining where the dividing line between short and long term occupancy might be found. I think I am entitled to take judicial notice of the fact that other types of property such as caravan parks or hotels which usually offer short term accommodation may also have a sprinkling of permanent residents and I can see no reason to imagine that, in permitting units to be used as serviced apartments, the Commonwealth was attempting to exclude that possibility. In the absence of any authority directly on the point, I would not be prepared to assume that the plaintiffs could not have lawfully occupied their own unit.

[383]

Actions based on s 52 are analogous to actions for torts. It follows that, in assessing damages under s 82 of the Act, the rules for assessing damages in tort, and not the rules for assessing damages in contract, are the appropriate guide in most, if not all, cases.

In an action for damages for deceit for inducing a person to enter a contract of purchase, which is an action that is closely analogous to an action for damages for breach of s 52, the courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it. Nevertheless, although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date. A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement. Events falling into the former category are admissible to prove the value of the thing, those falling into the latter category are inadmissible for that purpose. Thus, the takings of a business subsequent to purchase are generally admissible, not only to prove that a representation concerning the takings was false but also to prove the true value of the business as at the date of purchase. Even when some difference exists between the conditions under which the business was conducted before and after purchase, evidence of subsequent takings may be admissible, "subject to due allowance being made for any differences in relevant conditions". But if it is established that the decline in takings has been caused by business ineptitude or unexpected competition, evidence of subsequent takings is not admissible to prove the value of the business as at that date, events such as ineptitude, and unexpected competition being regarded as supervening events. In some cases of deceit, it may also be proper to compensate the defrauded party not only for the difference between the value of the thing acquired and the price paid for it but also for losses induced by the fraud and directly incurred in conducting the business. All of these principles are appropriate to the assessment of damages under s 82 where a breach of s 52 of the Act has induced a person to purchase a business.

[403]

236. Gleeson J said, at [13], that the legislation is not intended to protect only the careful or the astute and that negligence on the part of a victim will not provide a bar to an action for damages under s 82 unless the conduct is such as to destroy the causal connection between the contravention and the loss or damage. His Honour then turned to issues relating to the measure of damages, observing that the only express guidance given by the section is to be found in the concept of causation expressed in the word "by" and that the task is to select a measure of damages that confirms to the remedial purpose of the Act and to the justice and equity of the case. The principles of the common law relevant to the assessment of damages in tort were not "controlling" but represented an accumulation of valuable insight and experience that may well be useful in applying the Act. His Honour referred to the principle that if the defendant fraudulently induces a plaintiff to buy grazing land and undertake a pastoral business the defendant does not thereby become an underwriter of all losses incurred by the plaintiff's business for so long as it continues to be carried on, whenever and however those losses may arise. His Honour said that, similarly, a plaintiff fraudulently induced to buy shares may be unable to recover for loss or depreciation occasioned by subsequent events. His Honour cited the passage from the judgment of Gibbs CJ in Gould v Vaggelas which I have already quoted and, unlike McHugh J, cited with evident approval a decision of the House of Lords in Smith New Court Securities Ltd v Citibank [1996] UKHL 3; [1997] AC 254 adopting the view of Win LJ in Doyle v Olby (Ironmongers) Ltd that damage is too remote when the person deceived does not himself behave with reasonable prudence, reasonable commonsense, or can in any true sense be said to have been the author of his own misfortune. The damage that he seeks to recover must have flowed directly from the fraud perpetrated upon him.

At a glance

Court

Decision date

Source

Judgment (443 paragraphs)

Whittle & Anor v Filaria Pty Limited & Ors [2004] ACTSC 45 (11 June 2004)

Parties

Legislation Cited (14)

Cases Cited (41)