Zoobury Pty Ltd v Cariste Pty Ltd

Supreme Court of NSW|2021-12-17|Before: Parker J, Ronald Young J

Judgment

These proceedings arise out of a dispute concerning the ownership of a shopping centre at Galston, a township on the north-western outskirts of Sydney. The property is known as "Galston Village". It is subject to a contract which entitles one of the parties to a share in the property and the net income it produces. The parties are in dispute about the extent of that share.
The defendant is Cariste Pty Limited ("Cariste"). It is the registered proprietor of the Galston property. Cariste is controlled by Mr Peter Roach, who is a property developer.
The first plaintiff is Zoobury Pty Limited ("Zoobury"). It is controlled by Mr Timothy (known as "Tim") Roach, who is the son of Mr Peter Roach. Like his father, Mr Timothy Roach has been involved in property investment and development; specifically, for present purposes, he has experience in project management. For convenience and without disrespect, I will refer to the two protagonists as Tim Roach and Peter Roach.
The contract out of which the dispute arises is a written one. It is recorded in an instrument styled "Deed of Option to acquire Property Share" between Cariste and Zoobury, which was signed in July 2010. As will be seen, at the moment it is more accurate to describe the instrument as a "purported contract". There may also be a dispute about whether it is in law a deed. For convenience I will refer to it as the "Property Share Contract" or "PSC".
The second and third plaintiffs are also companies controlled by Tim Roach. The claims which led to them being joined as parties to the proceedings are no longer being pressed and I will not refer further to them in this judgment.

Chronology of key facts

The PSC arose out of a redevelopment of the Galston property. The existing building (an older shopping complex) was replaced with the new and larger shopping centre which now stands on the site.
Peter Roach and Tim Roach worked together on the project. Through Cariste, Peter Roach contributed the land and funded the development costs by borrowing from the National Australia Bank ("NAB"). Through Zoobury, Tim Roach managed the redevelopment. The arrangement in the PSC was described by counsel for Zoobury as a form of "sweat equity" under which Zoobury received its profit share as a reward for its contribution to the development.
The initial agreement for the parties to carry out the redevelopment goes back to April 2004. The parties agreed in an exchange of emails that Zoobury would manage the project and receive a share of the property reflecting the increased value (if any) of the property attributable to it; this much is common ground. But it is said on Zoobury's behalf that the agreement lacked finality and was only an agreement in principle.
The development approval for the project was issued in November 2007. The major part of the new building was the ground floor which was to include about 2,000 square metres of lettable area. This was intended to be used as a supermarket which would be the anchor tenancy. The ground floor also included space for four specialty shops. There was to be a basement with two further specialty shops and car parking. Two office suites were to be constructed on the first floor. There was also space for one or two ATMs.
In the PSC, each of these ten retail/office spaces was referred to as a "Shop". The details of the Shops are set out in the following table: Shop Location Type GLA(m²) 1 G Anchor 1,996 2 G Specialty 233 3 G Specialty 35 4 G Specialty 73 5 G Specialty 60 6 G Specialty 62 7 1 Office 58 8 1 Office 58 9 B Specialty 41 10 B Specialty 41 2,657

A pre-commitment for the anchor tenancy was obtained from the Franklins supermarket chain. The development was completed on 24 November 2009 and the lease to Franklins commenced on that date (although it was not formally executed until later).
The first draft of the PSC was prepared in March 2010 by Tim Roach. The final version was signed on 30 July 2010. The Contract took effect from 1 May 2010 (cl 3.2(a)).
By the time the PSC was executed in July 2010, Shop 5 had been leased as a pharmacy and Shop 2 was subject to a letter of offer from a liquor retailing chain. The remaining seven shops and offices were unlet. Together they accounted for gross lettable area of 358 square metres, 13% of the total.
As will be seen, the PSC contemplated that the Shops, or at least nearly all of them, would be leased within twelve months of the date of execution of the PSC (that is, by 30 July 2011). This did not happen. By that date, no further Shops had been leased. I was informed that the process of leasing them took a long time. The last one apparently was not leased until 2020.
The first financial year of the operation of the PSC consisted of the months of May and June 2010. The PSC specified Zoobury's Property Share as 16.51% on an interim basis, and provided for it to be calculated on a final basis at a later stage. Zoobury duly received a 16.51% distribution of the net income from the property for those two months. But no formal determination of the final Property Share took place. Instead Cariste simply continued to distribute 16.51% of the net income from the property to Zoobury in later financial years. This continued up to, and including, the financial year ended 30 June 2019.
The dispute which resulted in these proceedings arose in September 2019. It was asserted on behalf of Cariste that Zoobury's Property Share was in fact 4.85%. In a "settlement" notified unilaterally by Cariste in June 2010, Cariste declared itself entitled to withhold previous "overpayments" and on this basis made only some small further part-payments of the net income from 2019-2020. It seems that no net income has been paid since then.
The proceedings began in this Court in October 2020.

Validation orders

The Court's power to make a validation order following Zoobury's reinstatement derives from the Corporations Act 2001 (Cth) ("CA"), s 601AH(3). That enactment provides that the Court may "validate anything done" during the period of deregistration (sub-paragraph (c)) and "make any other order it considers appropriate" (sub-paragraph (d)).
The effect of s 601AH(5) is that Zoobury is now deemed to have been in existence throughout the relevant period. But neither party suggested that the retrospective restoration of Zoobury's corporate existence, of itself, automatically validated the PSC and the steps taken under it: compare Allianz Australia Insurance Ltd v Viksne [2021] NSWCA 268 at [23]-[25], [36] (Meagher JA); [58] (White JA). It was common ground that an order under s 601AH(3) is required to achieve this.
The power under s 601AH(3) is an ancillary one, to be exercised in aid of the statutory power of reinstatement conferred by s 601AH, and in accordance with the objectives for which that power has been conferred by the legislature. In Re Austral Bronze Pty Ltd (No 2) [2020] NSWSC 1633, Rees J at [70]-[76] reviewed the authorities on the scope of the power. It has been said that the power should be used "principally to remove anomalies or impediments". But it clearly extends to making orders which will have a substantive legal effect. In a case (such as the present) where the controllers of the company are unaware of the deregistration and purport to continue to carry on with its business, the power may be used "to put beyond doubt the validity of transactions supposedly undertaken on behalf of the company during the period of non-existence by means of things actually done purportedly by and for it": CGU Workers Compensation (NSW) Ltd v Rockwall Interiors Pty Ltd (2006) 201 FLR 296 at 300-301 [18].
In Re Moore Murphy Holdings Pty Ltd [2021] FCA 103 McKerracher J stated at [15] that the power in s 601AH(3) exists "for the primary purpose of treating a company upon reinstatement as though it had continued in existence from the date of deregistration". His Honour added that it is not usually necessary to show exceptional circumstances to justify an order, and the discretion is a broad one, to be exercised so as to do justice to all affected parties.
It was common ground between the parties that a validation order should be made to the extent necessary to allow Zoobury to enforce the PSC (subject to Cariste's claim to have the PSC set aside, and the imposition of the limitation condition sought by Zoobury). This was understandable for two reasons.
First, one of the objectives of the reinstatement procedure is to allow a company which has been struck off when it owned assets to recover those assets for the benefit of its creditors and shareholders. The overarching statutory purpose points to validation of entry into the PSC (subject of course to Cariste's claim to have it set aside), so as to avoid the windfall that Cariste would receive if the PSC were unenforceable.
Furthermore, Cariste needs validation of the payments made by Zoobury so as to be able to establish discharge of its obligations to Zoobury, and so as to be able to pursue a claim for restitution. In that sense, validation is in the interests of both parties.
After some debate between counsel, it was agreed that the order validating the PSC should be in the following form: An order validating the execution of the instrument styled "Deed of Option to acquire Property Share" dated 30 July 2010.
Counsel for Zoobury proposed the following further order: An order validating acts done or purportedly done by the first plaintiff pursuant to that instrument.
Counsel for Cariste proposed a different form of further order, which was as follows: Order validating all acts done or purportedly done by or on behalf of Zoobury set out in the Commercial List Statement including for avoidance of doubt its receipt of distributions referred to in paragraph 21.
These proceedings were the occasion for the discovery that Zoobury had been deregistered. The validation order is to be made as a result of an application in the proceedings. But the legal effect of the reinstatement order will last for the rest of Zoobury's corporate life, whereas the proceedings are concerned with the resolution of a specific dispute between Zoobury and Cariste.
To my mind, it is not desirable for the scope of the validation order to be framed by reference to the issues in the proceedings. The order should not require reference to the record of the proceedings to determine its scope, especially as it could arise for consideration long in the future. Having decided that execution of the PSC is to be validated, it is more logical to validate all of the corporate steps purportedly taken on behalf of Zoobury pursuant to the PSC. I therefore think an order in the form proposed by counsel for Zoobury is preferable.
I turn now to my decision not to impose the condition sought by Cariste on the making of the validation order. As framed by counsel for Cariste, the condition would have required Zoobury not to rely on any limitation defence to the claim for relief based on misleading and deceptive conduct advanced in these proceedings.
CA, s 601AH(3) does not expressly give the Court power to impose a condition on the making of a validation order. But the making of such an order is discretionary, and that usually carries with it the power to make the order on conditions: see Re Gia Firenze Investments Pty Ltd [2013] NSWSC 99 per Black J at [12]. I therefore proceeded on the basis that the Court had power to impose the condition in making the order.
The reason why I declined to impose the condition was essentially that I did not see any logical connection between the reinstatement order sought by Zoobury and the exercise by it of its right to plead a limitation defence to Cariste's statute-barred cause of action. There was no suggestion in argument before me that Cariste's failure to make a claim for misleading and deceptive conduct was in any way attributable to the deregistration of Zoobury. Clearly no such suggestion could have been made, as Cariste was at all relevant times unaware of the deregistration.
What had happened was that Cariste, through Peter Roach, had continued to deal with Tim Roach on the understanding that the PSC was in force with Zoobury, and had simply failed to consider whether there were any grounds for challenging the PSC. Cariste was seeking, by the imposition of the condition, to obtain a privilege which would relieve it from the consequences of that failure. I did not think this was justified.
In the course of preparing this judgment, I have looked further into the authorities which discuss the making of reinstatement and validation orders where a limitation period has expired in the time during which the company in question was deregistered. In particular, the issue was considered in depth by Brereton J (as his Honour then was) in Re Regional Planners Developments Co Pty Ltd [2015] NSWSC 1996. In that case the company had been deregistered in April 2010. The plaintiff in the proceedings before his Honour claimed to be a creditor of the company pursuant to a loan agreement made in June 2008. The plaintiff applied for an order under s 601AH(3) suspending the operation of the limitation period during the period of deregistration. The loan was allegedly repayable in August 2008, so by the time the application was made (February 2015) it would have been statute barred.
His Honour discussed the previous authorities involving limitation periods at [16]-[28], concluding that the Court had power to make such an order under s 601AH(3) (this question does not arise in the present case where the Court is not asked to make an order suspending the limitation period but to impose a condition that a limitation defence not be relied upon).
His Honour noted that the first recorded authority involving a limitation period was the English case of Re Donald Kenyon Ltd [1956] 3 All ER 596. That was an application by contributories to have a deregistered company restored to the register. At the time, the companies legislation empowered the court, on making a restoration order, to "make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off" (Companies Act 1948 (UK), s 353(3)). Roxburgh J considered that if the contributories, for purposes of their own, wanted to have the company restored to the register, it was a matter of "common fairness" that the period between the dissolution and the restoration of the register should not count for limitation purposes.
Brereton J also referred at [18] and [19] to several New Zealand decisions. In Re West (High Court (Napier), 15 May 2002, unreported) the plaintiff was applying to have the company reinstated so as to bring an employer's liability claim against it. But the plaintiff had only discovered in February 2002 that the company had been his employer; before that date the plaintiff had believed that his employer was another individual. Ronald Young J made an order restoring the company to the register and suspending the limitation period, but the suspension of the limitation period was limited to the period after February 2002 when the plaintiff was contemplating suing the company. Brereton J stated that, along with the other New Zealand decisions, the judgment: … indicates that one should focus on the impact of the deregistration on the decision not to bring the proceedings, and suggests that it may be appropriate to suspend the effect of the limitation statutes insofar as they have the practical effect of precluding a plaintiff who would otherwise have sued the company from doing so.
Brereton J applied similar reasoning to the case before him. He found that it was not until April 2014 that the plaintiff had first considered suing the company. The earliest evidence of the plaintiff being aware of the company's deregistration was not until 7 May 2014. His Honour made an order reinstating the company and suspending the limitation period, but the suspension was limited to the period after 7 May 2014.
My ruling is consistent with this body of authority. In theory, a condition should be imposed on Zoobury invoking a limitation defence for a limited period. But that period would not begin until Cariste had decided to bring a cross-claim but had found itself unable to do so because of Zoobury's deregistration. It seems very unlikely that this would make any practical difference. If it is important, Cariste may apply under the Rules so as to vary the order which I will make.
In aid of the misleading and deceptive conduct claim (to the extent, which is disputed, that it remains viable), counsel for Cariste invited me to make an order validating the conduct, or alleged conduct, of Zoobury which is the subject of the claim, so that it could be sued upon. Counsel for Cariste proposed the following further order: Order validating all acts done or purportedly done by or on behalf of Zoobury set out in the Amended Commercial List Cross Claim Statement filed on 6 December 2021.
In principle it seems to me to be reasonable that Cariste should be able to have conduct by Zoobury validated so as to be able to sue on that conduct. Of course, the claim may not ultimately succeed. But on an application for a reinstatement or validation order so as to permit a claim by or against a company, the court should not go into the merits of the proposed claim, so long as it raises a triable issue.
There is however a difficulty in formulating the terms of the validation order. The conduct to be validated cannot be so readily described as it can in the case of the contractual effect of the PSC. Furthermore, it is unclear at this stage whether there remains a viable misleading and deceptive conduct claim.
I therefore do not propose to make such an order at this point. That will not do any harm. The Court continues to possess jurisdiction to make further validation orders as required. If the misleading and deceptive conduct claim does eventually proceed then an order can be made at that point, by reference to the conduct then identified as actionable.

Construction of Property Share Contract

Zoobury's Property Share was based on a notional realisation of the Galston property, in its developed form, at the completion of the development. The profit from the development was the difference between the End Value (the value of the Galston property in its developed state) and the Development Cost (the aggregate development expenditure). The profit was split 50/50 between Cariste and Zoobury. Zoobury's Property Share was then calculated as a ratio of the End Value.
Thus, if the Development Cost (DC) were $11 million and the End Value (EV) were $15 million, the profit would be $4 million. Zoobury's share would be $2 million. In that event Zoobury's Property Share (PS) would be two-fifteenths of the End Value of the property. This may be expressed as a formula: PS = (EV - DC) ÷ 2 EV 1. The End Value was to be calculated by capitalising the income (to use a neutral term for the moment) from the property at an agreed rate of 7%. The figure to which the 7% rate was to be applied was defined as the "Property Income". 2. The complication was that at the date of the PSC seven of the Shops had not been let. The PSC dealt with this by providing for an interim figure for Property Income (and End Value), taking into account estimated revenue from those shops, which was to be adjusted when the final Property Income was calculated. Similarly, there was an interim value for the Development Cost which was to be replaced by a final value once the 2010 accounts had been completed. 3. The interim Development Cost was $11,106,407. The interim Property Income was $1,160,602 (see cl 3.2(a), quoted at [137] below). This yielded an interim End Value of $16,580,029, resulting in an interim Property Share of 16.51%. 4. As I have mentioned, in the end no final percentage for the Property Share was formally calculated and adopted by the parties. It is agreed that the interim Development Cost was implicitly adopted as the final figure. Zoobury's contention is that the interim Property Income likewise became, by operation of the terms of the PSC, or by the conduct of the parties, the final figure. On Zoobury's argument, this happened on or around 30 July 2011, the twelve-month anniversary of entry into the PSC. 5. The contentions for Cariste were radically different. Cariste's first contention was that the final Property Income was to be equated with the net profit derived from the property for the financial year ended 30 June 2011. The net profit was shown in the 2011 distribution statement provided to Zoobury, the relevant figures from which are set out in the following table: GALSTON VILLAGE Income 2011 Rent - Franklins $758,631.96 Outgoings - Franklins $135,256.06 Recoverables - Franklins $2,690.07 Rent Galston Pharmacy $48,479.74 Outgoings - Galston Pharmacy $2,916.10 Rent Coles Group Galston $117,318.52 Outgoings - Liquorland/Coles G $8,341.89 Total Income $1,073,634.34

Cost of Sales Council Rates - Galston $8,930.34 Insurance - Galston $15,792.70 Land Tax - Galston $29,920.00 Sullage - Galston $12,402.30 Water Rates - Galston $1,788.90 Cleaning - Galston $19,245.60 Repairs & main - Galston $2,626.26 Galston Development $5,669.96 Telephone - Galston $463.21 Security - Galston $37,961.50 Fire Equip/Monitoring - Galston $1,690.91 Electricity - Galston $4,522.88 Advertisement - Galston $10,079.33 Galston Non-Outgoing Expenses $16,702.21 Waste Removal - Galston $2,359.71 Garden Maintenance - Galston $11,317.56 Toilet & Sanitary - Galston $362.50 Legal Fees - Galston $8,814.10 Audit Fees - Galston $900.00 Accounting Fees - Galston $3,000.00 Total Cost of Sales $194,549.97

Expense Legal Fees - Leases $8,114.10 Total Expense $8,114.10

Other Income Interest Income $37.47 Total Other Income $37.47

Distribution - Tim Roach (16.5%) Tim Roach - Non Taxable $95,758.25 Tim Roach - Taxable $47,958.03 $143,716.28

On Cariste's argument, the final Property Income was $871,008. This yielded an End Value of $12,442,968 and thus a Property Share of 5.37%.
Cariste's alternative contention was that under the terms of the PSC, the final Property Income could not be determined until all of the Shops had been let. It seems this did not occur until 2020. This contention was introduced at the last minute and was not pleaded (although there was no objection to that). Nor did counsel actually specify the resulting figure, which I suspect has not yet been calculated. This, however, does not prevent me from dealing with the contention as a matter of principle.
The central question is the meaning (or meanings) of the term "Property Income" in the PSC. The PSC contains a definition: Property Income means the nett annual income derived from the Property (including rent outgoings payments and any percentage rent calculated by reference to Lessee's sales for the second year of the term of the Franklins lease) and any other rent, licence fees, charges or other recurring income derived from the Property.

Evidence of "matrix of fact"

In support of their argument on the construction issue, counsel for Cariste relied upon documentary evidence which was said to be admissible as part of the "matrix of fact". Most, if not all, of this evidence was objected to by counsel for Zoobury, on the basis that it was irrelevant to the task of construing the PSC. In this section of the judgment, I summarise the evidence in question before expressing my conclusions on its admissibility.
The first documentary evidence upon which counsel for Cariste relied was the email correspondence between Tim Roach and Peter Roach in 2004 which gave rise to their initial agreement (see [30] above). The emails relevantly said (emphasis added): Tim Roach to Peter Roach - 26 March 2004, 12:25 pm Here is an outline of the proposed agreement between Cariste and Zoobury for the re-development of Galston. [The email set out the tasks to be performed by Zoobury and Cariste] Arrangement Option 1 (no equity for ZMI) 1. Land value attributed $3.82m 2. Construction funding will be attributed a rate of return during the construction phase of the equivalent (cheapest) bank borrowing rate for the period, this will then be attributed to the base cost of the development. 3. Profit Share, development profit to be split 50/50 between Cariste and Zoobury. Option 2 (equity ZMI) 1. Land value attributed $3.82m 2. Construction funding will be attributed a rate of return during the construction phase of the equivalent (cheapest) bank borrowing rate for the period, this will then be attributed to the base cost of the development. Zoobury will have first option to undertake this funding. Cariste may provide funding to ZMI for this purpose. 3. ZMI to be paid 20% development profit as fee. 3. Remaining profit Share, to be split 50/50 between Cariste and Zoobury. Development Profit To be determined by calculating the capitalised value of the property once occupation and full rent commencement has occurred, taking into consideration any turnover provisions that may be negotiated in the lease. Valuation to be based on yields achieved by commensurate properties and tenancies and will include a valuation of all rented premises on the property. Where agreement cannot be reached a valuer may be engaged in accordance with the standard market review mechanism in commercial lease documentation. Ownership Zoobury may at its election take up to 50% of the completed project, in this event the profit share due to Zoobury will convert to equity in the property. The mechanics of this process in terms of valuation/equity contribution need to be discussed by us both. I hope this provides a reasonable outline, it may still need to be fleshed out. Peter Roach to Tim Roach - 5 April 2004, 10:34 pm If it was anyone else I obviously would not be proceeding after the trip home from the farm, or had this project been in the early stages. I am prepared to go with option 1, with the amendment of adding "profit/loss" in para 3. This is necessary to ensure you do not walk away from the project halfway through eg if you cannot foresee a satisfactory outcome. The fact that it will only be commenced with a pre-lease agreement, should guarantee a dev. profit otherwise we should not even start. The project is starting with advantages such as CGT / stamp duty/ agents fees/a known property, and it will have been a disastrous feasibility if it fails to make a profit. Valuations are always tricky and if either party is unhappy with the result the project should go to public auction. Please let me know immediately if this is agreeable, as either way I have to make some decisions prior to my departure on Sat. Tim Roach to Peter Roach - 6 April 2004, 9:30 am I will accept the profit/loss arrangement, however in order to do this I will need to have the ability to take equity as in option 2, so that the loss is not crystallised, I would really like this option in any event. It is then a question of the development fee. Seeing as ZMI would be contributing 50% of the equity I don't see that a 20% fee for the project management/leasing is out of line. What do you think?
By mid-2008, the terms of the anchor tenancy with Franklins had been agreed, development approval had been granted and, it seems, the contract had been let for the construction of the new building. On 7 July 2008 Tim Roach emailed Peter Roach setting out an "outline for Galston on completion and mechanism for determining the equity share". The figures in the email were approximate and used for the purpose of demonstrating the methodology.
The email enumerated costs of the development (including the land, valued at $3.8 million) totalling $10.77 million. It proposed that on completion the value of the development be determined by capitalising the "revenue". The revenue figures were described as "net" figures. The Franklins figure corresponded with the rent payable under the anchor tenancy, and did not include any adjustment for outgoings.
The total was calculated as $1.023 million, made up as follows: Shop GLA(m²) Revenue Franklins 2,036m² $773,600 Specialty Retail 270m² $175,500 Office 120m² $54,000 ATM 2 $20,000 $1,023,100

The capitalisation rate proposed was between 6.5% and 7.5%. On the "net revenue" figure, this yielded a valuation of between $13.6 million and $15.7 million. It should be noted that the GLA for specialty retail, as ultimately constructed, was significantly higher: 696m² for the ground floor tenancies and 82m² for the basement tenancies.
The email then contained a calculation of the development profit based on a valuation of $14 million (towards the bottom end of the scale). This yielded a development profit of $3.23 million. The parties' 50/50 shares in the profit were $1.61 million each. This equated to "equity in the finished product" for Zoobury of 11.5%.
The email continued: Operatively, this translates to TR receiving 11.5% Equity in the property and 11.5% on property revenue. These numbers are based on estimates only at this stage and will need to be adjusted once finalised/finished and revenue streams are known. Of course there is no allowance for any turnover provisions to kick in .... I don't know how this could be achieved?? It may be good to have an earn out provision enables us to revalue the property at say 18 months after completion when all costs and revenue known, anyway let me know your thoughts.
About two months afterwards, in September 2008, a valuation report was obtained from Knight Frank ("KF"). At this point vacant possession of the property had been obtained, or was being obtained, to enable the construction work to proceed. The report stated that it had been prepared for "CGT purposes". The evidence did not identify which particular CGT event the parties had in mind.
KF valued the property on three separate bases. The first was the "as is" value of the existing site, ignoring leasing income and redevelopment potential. The second was an "as is" valuation by reference to the leasing potential of the existing building. The third was a valuation as a redevelopment site pursuant to the existing development consent and having regard to the lease pre-commitment obtained from Franklins.
On the first basis, KF valued the land at $850 per square metre based on a comparable sales analysis. This yielded $3.5 million.
KF's second valuation was undertaken on the basis of capitalising the existing revenues. On a fully leased basis, these were estimated at about $390,000. A capitalisation rate of 9% was used and a reduction was made for the costs of a minor refurbishment ($400,000). The resulting value was $3.95 million.
KF's third basis began with "potential rental income" of $960,680 made up of: 1. the supermarket (2,036 square metres @ $380) $773,760; 2. six specialty shops (total 314 square metres @ $500) $157,000; 3. two offices (total 120 square metres @ $250) $30,000. Each of these figures was described as "per annum net". As it happened, the GLA for specialty shops ultimately constructed was higher, and allowed for seven such shops rather than six.
KF capitalised this potential rental income figure at 7% to produce a gross valuation of $13.724 million. A reduction was then made for letting costs, including agents' fees, and a six-month rental shortfall, for the specialty shops and offices. A further reduction of 15% for "profit and risk" was applied. The net figure was $11.525 million. Allowing for development costs, finance charges, purchase costs and stamp duty resulted in a final valuation figure of $4 million.
By June 2009, construction work was under way. On 17 June, there was an exchange of emails between Tim Roach and Peter Roach which went as follows: Tim Roach to Peter Roach - 17 June 2009, 6:02 pm As discussed on site yesterday I would like to formalise our agreement and investigate the appropriate vehicle to hold the property in bearing in mind the options you raised yesterday ie super fund, CGT free etc. Before I head off to find the most appropriate party to give the legal/accounting advice, I would like to put in place the general understanding of how the arrangement will work as follows; Total costs which include; Land $3.82m DA Fees approx $120k subj to finalisation Construction Costs approx $6.8m subj to finalisation Interest on construction finance drawdown since Oct 08 (to be determined as per NAB charges) Net Revenue which includes; Total net revenue of the centre once fully leased (this may need some adjustment after initial settlement as there will be some tenancies ie liquor and ATM's that may not be formalised when this agreement is drafted.) Profit share Profit = (Net Revenue of the centre capitalised at 7%) - (Total costs (as above)) Profit share on 50/50 basis, where my portion is then scaled back to its relative share of the total cost base and converted to equity. To get my total interest up to 50% I would then borrow the difference between 50% of the total cost base and the converted equity (profit share) and pay this to Cariste. Can you let me know your thoughts. Peter Roach to Tim Roach - 17 June 2009, 8:47 pm Because you are my son I am not going to argue over the cap rate (ie the valuation) which would normally be struck as of completion on yields at that time, which on my investigation are not pretty at the moment. As I see it - and I think I clarified this previously, the deal is as follows: If the costs (any normal costs which should include water, rates, land tax, interest, etc) [are] 12m and the value is 16m then you have made 2m. As a % of the project from then on your share is 2/16. Half is worth 8m, you already own 2m, so you would need 6m to attain 50/50. Over to you.
Counsel relied on a further email from Peter Roach dated 5 August 2009. The email was a response to an email from Tim Roach with a further proposal which does not appear to be in evidence. From the context, the proposal appears to have related to Zoobury acquiring a 50% ownership of the property.
Mr Roach's reply began by agreeing that "we split the profit 50/50". He suggested the appropriate capitalisation rate was between 8% and 8.5%. The email then went on to argue against Zoobury receiving a 50/50 share of the entire project. Mr Roach pointed out that Cariste had supplied the land and funded the whole cost of the development. He described the arrangement as already involving a "risk free" way of Zoobury making $2 million based on what he described as the "theoretical figures at completion" supplied by Tim Roach.
By 16 March 2010, Tim Roach had prepared a preliminary version of the PSC. Peter Roach sent the draft to his solicitor, Mr Richard Staniland, for advice, but the issue was deferred until May to meet Mr Staniland's other commitments.
In the meantime, NAB, the development financier, obtained a valuation of the Galston property from Mr Andrew Duguid of M3 Property International. The valuation was sought by the bank for the purposes of a "proposal to provide a credit facility" to Cariste.
Mr Duguid's valuation was completed on 15 April. Cariste's contact person for the valuation was nominated as Tim Roach. It is not admitted that Peter Roach saw it at the relevant time.
Mr Duguid valued the property at $12.3 million. This was based on two valuation methods: capitalisation of income ($12.270 million) and discounted cash flow ($12.372 million).
For the purpose of the capitalised income valuation, Mr Duguid assumed tenancies on the terms specified in the Franklins anchor tenancy lease (which at that point had still not yet been formally signed), the pharmacy lease for Shop 5, and the liquor store letter of offer for Shop 2. Mr Duguid noted that the Franklins lease provided for a tenant's contribution to all usual outgoings, except for management fees. The pharmacy and liquor store leases provided for recovery of all usual outgoings. Mr Duguid described the rental and outgoings contributions as "passing income".
For valuation purposes Mr Duguid assumed that all of the other tenancies would be let on a "fully net" basis, meaning that the tenants would pay rent and contributions towards all usual outgoings. On this basis, Mr Duguid calculated the "market income" at $1,153,085. This was made up as follows: Shop Type Net rent 1 Anchor (Franklins) $758,632 (actual) 2 Specialty (Liquorland) $169,143 (actual) 5 Specialty (Pharmacy) $42,840 (actual) 3-4, 6, 9-10 Specialty (Other) $142,490 (est.) 7-8 Office $34,980 (est.) ATM - $5,000 (est.) $1,153,085

The rental income was then adjusted for outgoings ($221,000) and recoveries ($180,000), a net expense of $41,000 (presumably attributable to the unrecovered share of the management fee). The report adopted "market income" of $1.112 million. A capitalisation rate was applied of 8.75% resulting in a value of $12.71 million. This was then adjusted to cover the period of time required to lease the centre (which assumed the whole centre would be leased within two years), the cost of tenant improvements and the like. This adjustment totalled $0.437 million. The resulting valuation figure was $12.27 million.
On 5 May 2010 Peter Roach wrote to Tim Roach concerning the draft deed (see [93] above). The draft itself is not in evidence. Mr Roach wrote (emphasis added): I have now had an opportunity to go through the deed you submitted. I needed a holiday to clear the head. In doing so I have re-read the emails that formed the spirit of the arrangement. It seems quite clear that the principle [sic] part of the arrangement was that Zoobury would have an equity in the development at completion equivalent to 50% of the development profit. I also agreed the value to be determined on a 7% nett yield. To this end the property can and should be valued now and the proportion owned by each determined, so that we can move forward. It is now 6 months since it was finished and considering marketing starts on these projects well before completion - there has been ample time to lease the property if the market is being met. A fair method to commence is the following: 1. A benchmark date of 1 May 2010, is the date for determination of the valuation and hence the shares/proportions. 2. a realistic nett lettable figure should be attributed to each tenancy, and the 7% cap rate applied so as to get an interim valuation of the whole property. 3. The necessary calculations can then be made to determine the share proportions. Could you please provide the breakdown of the costs you submitted. 4. When tenancies are leased up in the future, the nett rent (and valuation) should be recalculated to take into account all incentives and a reversion of that figure on a CPI basis (or 4%) to 1 May 2010 for the purposes of recalculating the final share proportions. This can be done preferably in one hit when all is leased or after say 90% is leased, if both parties agree on the 10% vacant tenancies achievable nett rental. Once these proportions are determined (and they must be by 1 September 2010 - they are permanent). It is important that all the remaining tenancies be leased asap. 5. The deed should then reflect Zoobury's interest on a proportional basis, and set out the mechanism for benefitting from nett income, depreciation, capital gains, etc., and the mechanism if Zoobury wants the title deeds to reflect its interest. If Zoobury elects to do this it should pay both parties legals and stamp duty, as I consider this unwarranted. 6. Any future growth will be reflected in the ownership proportions. 7. If the parties end in dispute then the property should go to public auction or by other means only if both parties agree the method ... and this can be triggered by either party giving 21 days notice. The nett proceeds distributed according to share holding proportions. 8. Zoobury can commence as Property manager but if either party is dissatisfied then an independent manager should be appointed with 30 days notice. Obviously it would be far preferable to have Tim as the manager. 9. Zoobury and Cariste as joint owners will be responsible for all matters and pay out money from the income of the property. In summary I think the above reflects more accurately the spirit of the agreements reached Initially. These are the main points, obviously the finer details need fleshing out.
Tim Roach then re-drafted the deed, which was the subject of a conference between Peter Roach and his solicitor Mr Staniland on 13 May. Tim Roach was present for most of the conference by telephone.
According to Mr Staniland's file note, he was worried that, even though the deed only provided for Cariste to grant Zoobury an option over part of the property, because the income was to be shared immediately, the instrument could be stampable as a declaration of trust. As an alternative, the parties discussed transferring the share immediately. They worked out that Zoobury's share would be worth about $2.5 million. The stamp duty would therefore be about $100,000. It was agreed that Tim Roach would go back to his accountant to see whether it would be better instead to retain the property in the existing discretionary trust structure.
On 25 June, Tim Roach emailed Peter Roach stating that he thought the deed worked up before the meeting with Mr Staniland would be sufficient for the parties' purposes. He went on: "As per discussion with Andrew [Tim Roach's accountant?] we should execute this and keep it in the drawer".
The email gave the parties' shares of the property, "based on the current numbers", as 83.49% to Cariste and 16.51% to Zoobury. Tim Roach went on to give the net income figure for the property since the beginning of the Franklins lease on 24 November 2009 as $480,012. He asked for payment of 16.51% of the figure to Zoobury, being $79,239, and Peter Roach obliged (the parties do not seem to have taken account of the fact that the PSC came into effect only on 1 May 2010).
The email stated that it attached a spreadsheet detailing the calculation of Zoobury's 16.51% share. According to Peter Roach, he did not receive the attachment, although a copy of it was separately produced. The figures in the spreadsheet are in fact the same as the interim figures in the PSC as executed (see [70] above).
The email ended by proposing that, if Peter Roach was happy with the deed, the parties execute it. As already noted, that happened about a month later, on 30 July.
It appears that, consistently with the plan to keep the deed "in the drawer", neither party had it stamped. Counsel for Zoobury gave the usual undertaking to do so. This was sufficient to make the deed admissible despite the parties' discreditable conduct. But before any equitable relief is given, it will be necessary to consider whether arrangements have been made to ensure that capital gains tax has also been paid. This will be an issue to be considered in due course.
The final documentary evidence upon which counsel for Cariste relied was correspondence between the parties after the dispute had arisen in 2019. Two items of correspondence were relied upon.
On 17 October 2019 Tim Roach wrote an email to Mr Duguid, who had provided an opinion in support of Peter Roach's position in the dispute. Attached to the email was a document which was effectively Tim Roach's position statement. Under the heading "the agreement" it referred to the email of 5 May 2010 (see [100] above), stating that that email outlined "a summary of the agreement" which had then been "incorporated" in the PSC. Tim Roach also stated that the agreement had been "operative" for more than nine years.
The second document was a letter written by Tim Roach's solicitors the following year (11 March 2020). The letter referred to the KF valuation. It stated that the valuation "formed the basis of the agreement reached between our clients in September 2008", which applied a 7% capitalisation rate to the shopping centre's income in the agreed formula.
The solicitors went on to refer to the email of 5 May 2010 as an email from Tim Roach "memorialising his understanding of the agreement". They stated that on 30 July 2010 (the date of the PSC) the parties "entered into a deed that memorialised the agreement between them".
Counsel submitted, based on this evidence, that: 1. the parties agreed to split the profit or loss from the development 50/50 between them; 2. they also agreed however that the property should not be sold and that Zoobury would instead receive equity in it representing its share of the profit; 3. that equity share would represent the proportion of the value of the property attributable to Zoobury's share of the profit following the development; and 4. the value of the property was to be determined by capitalising the "income" or "net income" from the property.
In counsel's submission, this agreement was merely confirmed by the parties' entry into the PSC. It therefore informed the construction of the term "Property Income" in the PSC.
It is convenient to deal with the last part of counsel's argument first. The argument is based on the statements made in the correspondence by, or on behalf of, Tim Roach in 2019 and 2020. Counsel relied on what Campbell JA, speaking for the Court of Appeal, said in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at 682 [323]-[324]. A fact which forms part of the matrix of fact must exist before the contract is entered into. But like any other relevant fact it may be proved via an admission made afterwards.
This premise may be accepted. But in order to apply, the post-contractual "admission" must be an admission of a matter of fact forming part of the matrix.
In the present case, the fact which was the subject of the "admission" was not spelt out. It would seem, based on counsel's argument, that the relevant admission was that the 2004 agreement was an enforceable contract and the parties intended that the PSC would relevantly have the same meaning. Ultimately, this is a conclusion of law. It depends upon the legal construction of the language used in the 2004 emails and the PSC.
The use which can be made of an out-of-court admission of a legal conclusion (in that case breach of a duty of care) was discussed by members of the High Court in Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317. If the conclusion necessarily involves an identifiable factual premise, an admission of the conclusion may be some evidence of that factual premise. But otherwise the witness' statement will be inadmissible. Usually the witness will not be familiar with the application of the legal standard in question: see at 340-341 [70], quoting Glass JA in Grey v Australian Motorists & General Insurance Co Pty Ltd [1976] 1 NSWLR 669 at 676. But in my view, even if the witness happens to be a lawyer familiar with that legal standard, the application of the standard to the facts as found is a matter for the court. I do not see how the witness' opinion (and that is all it would be) could be admissible.
In this case the "admissions" came almost a decade after the PSC was entered into. This underlines the practical difficulty in discerning in them some acknowledgement of a relevant pre-contractual fact. Counsel's argument did not identify the facts which were supposedly admitted in the correspondence. In my view no relevant facts were admitted. Tim Roach, or his solicitors, were at most expressing conclusions or opinions about the legal effect of what had occurred. In my view such conclusions said nothing identifiably relevant about the matrix of fact.
The rest of counsel's argument focused on what counsel characterised as a consistent element of the agreement between the parties, namely the use of "net income" or "income" for the purpose of determining Zoobury's profit share. Counsel submitted that this was relevant to determining the meaning of the term "Property Income" in the PSC.
In support of this argument, counsel relied on the Court of Appeal decision in Cherry v Steele-Park (2017) 96 NSWLR 548. That case concerned the interpretation of a guarantee given by the directors of a company which was purchasing land. The guarantee was given as part of a variation agreement under which the time for completion was extended and the company was to make an additional payment on top of the purchase price under the original contract. The question was whether the guarantee covered the whole of the company's obligations or only the obligation to make the additional payment.
Correspondence between the parties in the course of negotiations suggested that the commercial purpose of the guarantee had been to secure the company's obligation to make the additional payment; this had been the only obligation mentioned in the correspondence. Counsel for the director guarantors sought to rely on the correspondence to support their argument on construction. White JA considered that the correspondence was inadmissible on the construction issue. But Leeming JA, with whom Gleeson JA agreed, held that it was, although in the end that did not overcome the language of the agreement, which was held to extend to all of the company's obligations.
In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Mason J referred to what he described as a "difficulty" with using evidence of prior negotiations to construe a commercial contract (at 352): Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.
Analysis of Leeming JA's judgment shows that his Honour did not intend to cast any doubt on the principles stated by Mason J in this passage. At [66] the judgment actually quoted the first three sentences of the passage. In his reasoning at [60]-[67] Leeming JA pointed out that, consistently with those principles, in some circumstances a communication between the parties can itself be admissible as part of the matrix of fact where it shows the "aim" or "genesis" of the transaction; his Honour considered that the communications in question fell into this class (or at least the initial proposal did, and there was no argument that subsequent communications should be treated differently).
There may be a question about how far the receipt of evidence of negotiations between the parties goes when it is said to be relevant because it discloses the "aim" or "genesis" of the ultimate contract. If the negotiations were oral, there may be a factual contest about what was said. Even where the negotiations were in writing, there may be an argument that it is necessary to refer to further matters of background, or earlier dealings between the parties, to put them into proper context. It might be thought that these are precisely the sort of collateral enquiries that the parol evidence was designed to exclude. But there was no need to consider this in Cherry (note, however, the comments at [67]). As will be seen, I have not found it necessary to do so in the present case either.
As Leeming JA pointed out in Cherry at [89]-[90], where a party seeks to have evidence admitted as part of the matrix of fact for the purposes of construction, that party ought to be able, readily and precisely, to identify how that evidence bears on the construction issue. It follows that it is critical to identify what the construction issue is.
The present dispute concerns the meaning of the term "Property Income" in the PSC, specifically for the purpose of determining the End Value of the property, and consequently, Zoobury's Property Share. It arises in the context of a valuation which depends on a formula expressly prescribed in the PSC. It is therefore an issue which is highly dependent upon the way in which the PSC was framed.
The problem for the argument by counsel for Cariste is that most of the documents which counsel tendered pre-dated the actual process of drafting the PSC. As such, their applicability to the particular language and structure used in the PSC is speculative and contestable at best.
This is clearly seen in the case of the 2004 correspondence (see [77] above). It may be accepted that that correspondence establishes that ultimately the "origin" of the PSC was an agreement by the parties that Zoobury would be remunerated for its project management work by receiving a share of the property corresponding with 50% of the development profit, and the development profit was to be determined by subtracting the costs of the development from the value of the property in its developed state.
The debate in the present case, however, arises because in the PSC a particular method was used to determine the value of the property following development. That was to capitalise the "Property Income" at an agreed rate of 7%. But while a valuation of that type was proposed by Tim Roach, it was only proposed in general terms. More importantly, it was not agreed between the parties. Peter Roach expressly suggested that the valuation might end up being determined by a public auction of the property. It is clear that the parties regarded the method by which the property was to be valued as a secondary question which should be left for later determination. In my view it would be futile to try to use the correspondence to understand the meaning of the language used when, six years later, they actually set out to record the valuation formula in a formal contract.
Similar observations apply to the 2008 and 2009 correspondence (see [78] and [90]-[92] above) and the 2008 valuation by KF (see [84] above). Although the correspondence adopted an assumed valuation based on capitalisation of income, the precise formula for determining the value was still left open. In particular, it was acknowledged in Tim Roach's email of June 2009 that not all of the shops and offices might have been leased when the development was complete and the valuation method might need to accommodate this possibility. Again, this was left for later decision.
The KF valuation was of course not undertaken for the purpose of determining the development profit but for some other purpose to do with CGT. While KF's third valuation basis did involve a capitalisation of estimated income on completion of the development, the parties did not say anything about using KF's formula for the purpose of the valuation exercise in their contract. At least one element of KF's formula (the adjustment for contingencies) would, on the face of it, have been quite inappropriate for that purpose.
Mr Duguid's April 2010 valuation (see [95]-[96] above) and the communications between the parties recorded in the emails of May and June 2010 and Mr Staniland's file note (see [100]-[106] above) all post-dated the first draft of the PSC. There is thus more to be said for receiving them as evidence. But it is not agreed that the valuation or the spreadsheet referred to in the 25 June email were seen by Peter Roach, and they cannot form part of the matrix of fact for that reason alone.
On the authority of Cherry, the remaining communications are potentially admissible to the extent that they show the "genesis" or "aim" of the transaction recorded in the PSC. In a general sense, they clearly do. But the problem is to identify how what they say is relevant to the construction issue before the Court.
The point can be illustrated by reference to Peter Roach's email of 5 May. The email began by confirming his agreement to a valuation based on a "7% nett yield". It went on to suggest a regime which involved the parties agreeing a "nett lettable figure" for each tenancy and adjusting those figures upon the tenancies being leased. This broadly corresponded with the actual approach in the PSC, but the correspondence was not exact. Nor did the proposal address the problem which has arisen in the present case from the failure to lease the other tenancies. The email also stated that if the parties "end[ed] in dispute" the property should go to public auction, although it was unclear whether this was to apply in the events which have happened.
In short, the proposal in the email does not address the specific contingency now in issue. Furthermore it was not adopted, or at least fully adopted, in the PSC. The reasons for that are not clear in the evidence. In these circumstances I think the proposal, on its own, casts no real light on the meaning of the term "Property Income" in the PSC.
In my view the evidence relied on by counsel, taken as a whole, does not disclose anything relevant to the matrix of fact other than the general ideas behind the transaction, which are not in dispute and probably appear clearly enough from the PSC itself. In particular the correspondence does not assist with the meaning of the term "Property Income" in the PSC. It is largely, if not entirely, irrelevant.

Construction

The calculation of Zoobury's Property Share was dealt with by cl 3.2 of the PSC. Subclause (a) provided for an interim calculation based on an agreed interim figure for the Property Income: Property Income (a) To determine the interim Property Share the Property Income shall be calculated as at 1 May 2010 to include the net revenue of existing lease agreements and agreements to lease as well as an estimate of achievable net rental for any Vacancies on the following basis: (1) Shop 1 - Franklins lease net rent being $758,632. (2) Shop 2 - Liquorland Letter of Offer, net rent being $160,990. (3) Shop 3 - Estimated income $27,360. (4) Shop 4 - Estimated income $66,300 (5) Shop 5 - Galston Pharmacy lease, net rent being $43,920 (6) Shop 6 - Estimated income $43,400. (7) Shop 7 - Estimated income $21,000 (8) Shop 8 - Estimated income $21,000 (9) Shop 9 - Estimated income 10,500 (10) Shop 10 - Estimated income $7,500 Total Property Income = $1,160,602
Of the ten Shops identified, the three which were let, or treated as let, counted for 83% of the total interim Property Income. The lease to Franklins is in evidence and from that it can be seen that the "net rent" figure for Franklins did not include contributions to outgoings. It seems clear enough that the same was true for the other two leased Shops.
Calculation of Zoobury's Property Share on a final basis was dealt with in subclauses (b) to (c). This involved a final determination of the Property Income: (b) Once actual lease agreements have been signed on the Vacancies listed in 3.2 (a) then the actual rents achieved will be used to adjust the Property lncome and determine the final Property Share. (c) Where after 12 months from the date of this agreement there are minor remaining Vacancies and the parties can agree on an estimate of the achievable rent, then the agreed estimate shall be used to finalise the Property Income and the Property Share shall be adjusted accordingly and finalised.
Subclauses (d) to (e) contained an expert determination provision: (d) The parties must promptly meet and in good faith seek to resolve any disagreement. If resolved, the Property Income is to be the amount agreed in writing between the parties. If the parties do not agree, either party may request the president for the time being of the Institute of Chartered Accountants in Australia to appoint an independent expert based in Sydney to determine the dispute. The accountant must: (1) be a member of the Institute of Chartered Accountants in Australia of at least five years' standing, (2) make a written determination including his or her reasons; (3) may receive written submissions from either party if made within 10 Business Days of notice of his or her appointment, and (4) act as an expert not as an arbitrator, (e) The decision of the accountant is final and binding on the parties (subject to obvious error).
Counsel for Zoobury submitted, based on the structure of the subclauses, that subclause (c) implicitly provided that, to the extent that actual rents had not been determined (subclause (b)), the estimate in subclause (a) was to be used. Alternatively, the parties tacitly agreed for the purpose of subclause (c) to use the estimates in subclause (a).
The construction advanced by counsel for Cariste was different. It focused on the phrase "nett annual income" in the definition, which I have already set out at [75] above. According to the submission, this was to be calculated by taking all of the actual revenue derived from ownership of the Galston property and subtracting all of the actual expenses. This was said to be the natural meaning of the language used.
This meaning was also said to make more sense in the context of a valuation based on capitalisation of income. Such a valuation is based on the idea that purchasers of commercial property will pay a multiple of the earnings which can be derived from that property. For this purpose it may be assumed, so the submission ran, that the earnings must be the earnings net of expenses.
Counsel for Cariste in their argument also relied on a more general commercial consideration. Counsel pointed out that under the PSC (cl 4) Zoobury was to manage the property. Counsel submitted that it could not have been intended that what counsel characterised as Zoobury's failure to let out the vacant properties would leave its Property Share entitlement unaffected. This was said to support the conclusion, inherent in Cariste's construction, that only actual rental income from occupied tenancies was to be taken into account.
It is convenient to deal with counsel's last argument first. I do not accept it. It is clear, and counsel did not dispute, that the scheme of the PSC was to fix Zoobury's income share once and for all as at the end of the development. The appointment of Zoobury as manager going forward was commercially quite distinct. Any poor performance of the property from an investment point of view (or indeed improved performance) would affect the level of Zoobury's distribution but not its share of the income.
I also think that counsel's point about valuation being based on capitalised income is too simple. Valuation of an enterprise on this basis is commonplace, but it does not mean that all the expenses associated with that enterprise must invariably be deducted for valuation purposes. Valuations on the basis of earnings before interest and tax are well known and reflect the fact that the debt burden on, and tax payable on the earnings generated by, the enterprise may be quite different in the purchaser's hands from the vendor's. Similarly, depreciation and amortisation may also be excluded in calculating the earnings.
It is one thing to say that, in general terms, a purchaser would expect to pay a multiple based on net rental income rather than a multiple of gross receipts which include contributions to outgoings. But it is another thing entirely to say (as Cariste's argument requires) that a valuation of the Galston property for the purposes of the PSC would necessarily have to deduct the non-recoverable outgoings and other overhead expenses recorded in the 2011 accounts.
If I am wrong in thinking that the 2008 and 2010 valuations are inadmissible as part of the matrix of fact, that would not help Cariste on this argument. Rather the reverse. In calculating the income for the purpose of his valuation, Mr Duguid made a deduction to reflect the portion of the management fee which was not recoverable under the Franklins lease. But KF did not. Neither valuer made any deduction for non-recoverable outgoings.
All of this underlines that, for the purpose of valuing a property on the basis of capitalised income, how the income is to be calculated is a matter for individual decision in each particular case. In the present case, the calculation has been specified by the parties in their own language. No relevant assistance can be derived from a priori assumptions by others about how the task should be done.
Cariste's argument also involves a radical change of the basis of calculation between the interim basis (which was expressly based on estimated rental income for the unlet Shops) and a putative final calculation based on actual income (and expenses) only. This is theoretically possible, but it seems to be unlikely to have been intended.
The calculation proceeded on the basis that Zoobury's Property Share was being determined on the basis of the value of the property as at 1 May 2010. It was not necessary for this purpose to calculate the income, whether on an actual or estimated basis, at all. Equally the valuation could have been obtained by using a different method entirely, such as reference to comparable sales. The fact that a capitalised rental method of valuation was adopted should not subvert the business objective behind the PSC. It was not a revenue sharing agreement based on ongoing management. It was an ownership agreement based on previous gains from the development.
Counsel argued that a Property Share of 16.5% (based on an EV of $16.6 million) was improbably high having regard to Mr Duguid's April 2010 valuation of $12.3 million. But I am not sure whether this comparison is a fair one. The main explanation for the relatively low valuation reached by Mr Duguid was that he used a capitalisation rate of 8.75%. As Peter Roach recorded in his email of 5 May (and as was reflected in the PSC) he had agreed to a rate of 7%. Had Mr Duguid adopted that figure his valuation would have been 20% higher for that reason alone.
Even if it were legitimate to have regard to the valuation as part of the matrix of fact, I do not think that it would assist Cariste. Tim Roach had in his July 2008 email put forward a possible figure for Zoobury's Property Share of 11.5% (see [83] above). But that was before the construction was carried out, Shops 2 and 5 were let, and estimates were made for the letting value of the other Shops. Tim Roach's email of 25 June 2010, which post-dated the valuation, and reflected the terms of the PSC as ultimately executed, explicitly gave Zoobury an interim Property Share of 16.5%.
If this was completely outside Peter Roach's expectations, it is most unlikely that he would have agreed to it, even on an interim basis. The parties' communications show that Peter Roach understood quite clearly that Zoobury's share of the development profit would be $2 million or more, which implied an EV of much more than $12.3 million.
Coming back to the text of the PSC, the term "nett income" does usually connote some deduction from gross receipts. But in the present case that need not have meant the deduction of all expenses. It could have referred to the actual rent, ignoring or netting off the tenants' contributions to outgoings. Such a reading is readily available in the context of factors which were indisputably part of the matrix of fact: a supermarket property where the existing tenants were paying, and the future tenants would have been expected to pay, such contributions.
There is some textual support for this in the definition. All of the items mentioned as being included in the parenthesis which follows "nett annual income" were receipts from tenants. The same was so for the additional items mentioned at the end of the definition. The definition does not mention expenses at all (unless the reference to the inclusion of "outgoings" means "allowing for outgoings and tenants' contributions to outgoings", but that would not affect the present point).
There is also a problem with fitting Cariste's interpretation in with the language of cl 3.2. On Cariste's approach the Property Income had to be calculated by reference to income and expenditure over a particular annual period. The problem is that there is no indication in the wording of cl 3.2 that this is what the parties had in mind. Nor, if it was, is there any specification of the particular twelve-month period.
Cariste's argument in these proceedings assumes that the twelve-month period ending 30 June 2011 was the relevant one. But this seems arbitrary. It would be equally if not more plausible to choose the twelve-month period ending 30 April 2011 (that is, the first twelve months of operation) or the twelve-month period ending 30 July 2011 (the end of the period referred to in cl 3.2(c)).
In my view, the greatest difficulty for Cariste's construction arises out of the terms of cl 3.5: Distribution of Property Income From the commencement date of the Franklins Lease the Property Income must be applied: (a) firstly, in payment of the Running Costs; (b) secondly, to Cariste and Zoobury in accordance with each of their respective Property Shares.
Clause 3.5 refers to "Running Costs". The definition of that term is: Running Costs means (a) rates, taxes, land tax and other similar fees and charges; (b) insurance of the Property including (1) a damage policy on repair and reinstatement basis; (2) public liability insurance; (3) loss of rent insurance; (4) machinery breakdown and necessary construction risk insurance; (c) repair and maintenance costs, but not the cost of work undertaken to fit out or prepare premises for use by an intending lessee or licensee; (d) cleaning, landscaping and security; (e) management fees; (f) the excess payable on any claim under an insurance policy; (g) any other cost properly and reasonably incurred in connection with the operation of the Property
Cariste's interpretation would require the Running Costs to be deducted from the gross receipts so as to get the Property Income. In cl 3.5 that would result in the Running Costs being double-counted as deductions. That cannot have been intended. It would be nonsense commercially. Of itself I think this is sufficient to defeat Cariste's interpretation.
It must be accepted that in using the same definition of Property Income for cll 3.2 and 3.5, the drafting has created a problem. This is illustrated by the treatment of outgoings. Clearly tenants' contributions to outgoings must be included in Property Income for the purpose of cl 3.5, because the outgoings themselves are included in Running Costs and otherwise the calculation would be unbalanced. But at the same time, tenants' contributions to outgoings were left out of the interim calculation of Property Income for the purpose of cl 3.2(a), which was based on "nett" rent only. It seems as though, in the drafting of the definition, some elements were inserted when the operation of cl 3.5 was being considered and other elements were inserted when considering the operation of cl 3.2. The result is somewhat incoherent.
Counsel for Zoobury suggested, based on cl 3.2(a), that the final Property Income for the purposes of cl 3.2 had to be read as excluding outgoings. Counsel's argument came close to suggesting that the term "Property Income" should be given a different meaning in cl 3.2 from the meaning given to it in the definition and cl 3.5.
Counsel for Cariste criticised this aspect of the argument for Zoobury. But the criticism does not advance Cariste's construction. If consistency were required, Zoobury would be entitled to insist on the tenants' contributions being included in the final determination of Property Income under cl 3.2, in accordance with the way the definition must work in cl 3.5. That would have the effect of further increasing the Property Income, and thus the End Value, to the ultimate disadvantage of Cariste.
For these reasons I do not accept Cariste's main contention on construction. I turn now to the alternative contention, namely, that final determination of the Property Income could not occur until the letting of the final vacant tenancy. In passing, I should note that this argument gives rise to the same problem as arises on Cariste's principal argument, namely the identification of the particular twelve-month period over which "nett annual income" was to be calculated. As the alternative argument was only formulated at the end of the hearing, this problem did not have to be confronted by counsel for Cariste.
Cariste's alternative contention is consistent with the language of cl 3.2(b) considered on its own. But the argument also needs to accommodate cl 3.2(c).
Expressly cl 3.2(c) is permissive. It allows the parties to agree. But the parties can always agree. Effect must be given, if possible, to the whole of the clause including the reference to the twelve-month period. Counsel for Zoobury submitted that this implicitly required that the issue had to be dealt with in that period. If the parties agreed, so be it. If they disagreed, the expert determination provision took effect. If there was no express agreement, then implicitly the estimate in the interim figure was carried forward.
Counsel argued that this construction was supported by indications in the PSC that it was intended for Zoobury's final Profit Share to be calculated reasonably quickly. The expert determination was required to be "prompt" and the timetable for submissions was brief, measured in days.
The same conclusion was also arguably supported by more general commercial considerations. Clause 3.3(b) required that Zoobury's Property Share be finally determined before the option could be exercised. The grant of the option was an important part of the contract and it should not be presumed that it could be delayed, potentially for years, by a failure to let just one of the vacant Shops. It would also be commercially inconvenient if the period of distributions could be open for recalculation for a decade or more, as would be the case if Cariste's argument was accepted in the present case.
More broadly, it is clear that the parties' general intent was to determine the value of the property as at 1 May 2010 for the purpose of giving Zoobury what was effectively an equitable interest in the property from that date. It could hardly have been intended that the calculation would depend upon the rent achieved under a lease negotiated in 2020. Counsel for Cariste themselves submitted in the course of their argument that the parties' contemplation was that Zoobury's final Property Share would be calculated "about one year" after 30 July 2010.
Counsel for Cariste submitted that their main construction argument avoided a failure in the contractual machinery which would otherwise have resulted (because the remaining Shops had not been let as contemplated by cl 3.2(b)). But equally, the argument by counsel for Zoobury would avoid any mechanical failure happening at all. This, it seems to me, would be a reason to accept Zoobury's construction rather than to reject it.
For these reasons, I think the interpretation of cl 3.2(c) advanced by counsel for Zoobury, involving an implication, is the preferable one. But even if it is not, I think that there was a tacit agreement by the parties arising from a failure to raise the issue as at 30 July 2010. Finality was thus reached by the application of the express terms of cl 3.2(c).

Conclusions and orders

I have concluded that Zoobury's construction of the PSC and interpretation of the contractual effect of subsequent events is correct. Zoobury is entitled under the PSC to a Property Share of 16.51%, and to continue to receive distributions for the financial year ending 30 June 2020 onwards calculated on that basis. Cariste's cross-claim for restitution fails and it is not necessary to consider the estoppel defences (or limitation defence) to that claim.
Prima facie, Zoobury's claim in the proceedings succeeds. But that is subject to the cross-claim based on misleading and deceptive conduct. The parties agree that a damages claim cannot now be pursued given the unconditional validation order which I will make. But there is still debate between them about whether the proposed amendment to the prayers for relief in the cross-claim should be permitted and whether some sort of application for rescission of the PSC based on misleading and deceptive conduct is viable. I will fix the proceedings for directions early in the new term so as to consider how these issues are to be resolved and any further hearing on the misleading and deceptive conduct claim is to be conducted.
The final orders made by the Court (as a result of the validation application) are: 1. Order that the purported execution by the first plaintiff of the instrument styled "Deed of Option to acquire Property Share" dated 30 July 2010 be validated. 2. Order that acts purportedly done by the first plaintiff pursuant to that instrument before 8 October 2020 be validated.
The Court also makes the following interlocutory orders: 1. Order that, nunc pro tunc, there be a separate and preliminary hearing on the following questions: 1. Whether, on the true construction of the Deed of Option to acquire Property Share dated 30 July 2010 between the defendant and the first plaintiff, and in the events which have happened: 1. The final value of the Property Share is 16.51%. 2. The final value of the Property Share is 5.37%. 3. The final value of the Property Share could only be determined once all of the Shops had been let. 1. Order that the questions be answered: 1. Yes. 2. No. 3. No. 1. Adjourn the proceedings for further directions at 10:00 am on 7 February 2022 or such other date as may be fixed by arrangement with my Associate.

Amendments 29 July 2022 - amend dates at [33] and [37] 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: 29 July 2022

Trade Practices Act 1974(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (17 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (10)

Cited By (3)