ATI CHWORDS Trade Practices - consumer protection - misleading or deceptive conduct - misrepresentations as to compliance with terms of lease and standing of tenant at sale of commercial building - assessment of damages. Trade Practices Act 1974 ss.52 and 82 Parkdale Custom Built Furniture Pty Ltd v. Puxu Pty Ltd (1978) 140 C.L.R. 216 Global Sportsman Pty Ltd v. Mirror Newspapers Ltd (1984) A.T.P.R. 45-339 Brown v. The Jam Factory Pty Ltd (1981) 53 F.L.R. 340 Mr Figgins Pty Ltd v. Centrepoint Freehoids Pty Ltd (1981) 36 A.L.R. 23 Toteff v. Antonas (1952) 87 C.L.R. 647 Holmes v. Jones (1907) 4 C.L.R. 1692 Gould v. Vaqgelas (1984) 56 A.L.R. 31 GEORGE FRASER SCOTT and MARGARET ANNE SCOTT v. WINDSOR HOLDINGS PTY LTD & CLIVE RAYMOND HARTZ No. G21 of 1985 FORSTER J. PERTH 29 OCTOBER 1986 IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY No. G21 of 1985 ) ) ) ) ) ) GENERAL _DIVISTON ) BETWEEN: GEORGE FRASER SCOTT and MARGARET ANNE SCOTT Applicants - and - WINDSOR HOLDINGS PTY LTD First Respondent - and - CLIVE RAYMOND HARTZ Second Respondent MINUTE OF ORDER JUDGE MAKING ORDER FORSTER J. WHERE MADE PERTH DATE OF ORDER THE COURT ORDERS THAT: 1. There be judgment for the applicants against the 29 OCTOBER 1986 respondents in the sum of $42,800. 2. The respondents pay to the applicants the costs of the application to be taxed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY No. G21 of 1985 GENERAL DIVISION BETWEEN: GEORGE FRASER SCOTT and MARGARET ANNE SCOTT Applicants - and - WINDSOR HOLDINGS PTY LTD First Respondent - and - CLIVE RAYMOND HARTZ Second Respondent REASONS FOR JUDGMENT CORAM: FORSTER J. : The applicants, husband and wife, (Scott and Mrs Scott) purchased from the first respondent (Windsor) the upper floor of a commercial building at the corner of Fitzgerald and Roe Streets, Perth for a price of $130,000. The building consisted of two floors and each was held under a separate strata title. Prior to the sale the first respondent was a mortgagee in possession of the land on which the building 1s erected but nothing turns on this fact. The second respondent (Hartz) 1s and was at relevant times managing director of a group of companies including Windsor. Computer Country Pty Ltd (Computer 2. Country) was at relevant times the tenant of the upper floor pursuant to a lease in writing. The applicants allege that during negotiations preceding the signing by Scott on their behalf and by Hartz on behalf of Windsor of a form of offer and acceptance as to the sale and purchase of the whole building comprising both floors Hartz on behalf of Windsor made certain representations. The representations alleged to have been made are as follows - " (a) Computer Country Pty. Ltd. had made all payments of rent and other moneys then due by it under the lease; (b) Computer Country Pty. Ltd. was of good financial standing; (c) there was then no reason to consider that Computer Country Pty. Ltd. would be unable to make payment of rent and other moneys payable by 1t under the lease as and when they fell due." It is claimed that these representations were false and that they constituted misleading and deceptive conduct and induced Scott to enter into a contract on behalf of himself and his wife to purchase the upper floor of the building. The applicants claim damages from the first respondent on a number of different bases. First, on the basis of a contravention of s.52(1) of the Trade Practices Act (the Act), second, on the 3. basis of a contravention of s.53A(1)(b) of the Act which claim was later not pressed although not abandoned, third in fraud, fourth in negligence and fifth in breach of contract which claim was later abandoned. Also, claims for damages were made against the second respondent on the basis that he was directly and knowingly concerned in, and/or a party to the contraventions of §.52(1) and 53A(1)(b) of the Act. It 15 necessary to set out a brief history of the matter tan order that important incidents and conversations may be understood in their proper context. Scott, born 1n Western Australia and having lived for the last twenty years or so in Los Angeles, returned to Perth in March 1984 with a view to investing 1n real property which was or could be leased. He made contact with an estate agent, Manning, who was then carrying on business under the name of F. Deshon & Co. to look for suitable properties for him. On 9 March 1984 Scott and Manning looked at the property on the corner of Fitzgerald and Roe Streets. This property had a ground floor and a first floor. The ground floor was vacant and the first floor was tenanted. Scott liked the property and he and Manning called to see the owner which was the first respondent and spoke to Hartz. It was at this conversation that the relevant representations were alleged to have been made by Hartz. In December 1983 the top floor of the building had been 4. let by the first respondent to a small computer company, Computer Country. The lease commenced on 1 January 1984 and was for a term of five years. By letter dated 22 December 1983 the farst respondent undertook to grant to the lessee the first five months of the term free of rent and also, incidentally, to pay the costs of preparation of the lease. There was no mention of this "rent holiday" in the formal lease document. On going into the premises the lessee paid the first respondent one month's" rent which, because of the rent holiday, became in due course the rent for the month of June so that the first further payment of rent was due on 1 July 1984. The oral evidence as to conversation on 9 March 1984 was that of Scott, Hartz and Manning. Scott said that having looked at the property with Manning he thought 1t was the sort of property he had been looking for. He told Hartz that he had another property in Perth and that the rent income from that and from the property to be purchased from Windsor had to be sufficient to cover the mortgage payments with respect to the money he would need to borrow to purchase the property in question. Scott says and I accept that three propositions were offered by Hartz with respect to the corner building, first that he could purchase the top floor for $§140,000, second that he could purchase the bottom floor for $165,000 and finally that he could purchase the whole building for $295,000. At one stage Scott offered $260,000 for 5. the whole but this was rejected. The price for the whole was said by Hartz to be $300,000 or more but he agreed to let Scott have 1t for $295,000. Scott was attracted by this proposition but needed to be satisfied that income from the property and his other Perth property would be sufficient to pay interest on the sum of roughly $270,000 he would need to borrow to complete the purchase. All three men did calculations based on the rent provided for in the lease of the top floor, the rent coming in from the other property, and rent of $18,000 per annum from the bottom floor. As to the bottom floor Hartz agreed to guarantee payment of rent at the rate of $18,000 per annum for three years. The result of these calculations was that Scott could afford to purchase the property for $295,000 provided of course that he could borrow the amount of money he needed. It 1s at this stage that there took place the important conversations and actions upon which these proceedings depend. I should say at the outset that I found Scott a more impressive Witness than Hartz and generally I prefer his evidence to that of Hartz where the two conflict. Scott appeared to me to be an aggressive businessman keen to make a profit and avoid a loss but substantially frank and truthful. Hartz onthe other hand impressed me as being smart and rather devious, particularly when answering questions about matters inconvenient to hin. His own evidence of Scott's question, "are the tenants of good standing?" and his answer "they are a computer company which has the franchise for the State for Computerland. They have signed a 6. lease for three years and I have the director's guarantees including their parents", was revealing. Hartz stoutly maintained that this was a perfectly adequate answer to Scott's question whereas of course 1t was really hardly any answer at all to the question of their standing. Manning was not a very helpful witness. His memory of what happened at the meeting was somewhat dim and I gained the impression that for whatever reason he was anxious to assist Hartz. Against this background of my view of the credibility of the three witnesses to the meeting I find as follows - Scott asked Hartz whether the tenant was laving up to the terms and conditions of the lease and also whether 1t was fully paid up or whether it owed any money. Hartz answered that 1t was living up to the terms of the lease and owed no money. Scott then said "are they tenants of good standing?" and Hartz answered "yes". Hartz was aware of the importance to Scott of the payment of rent with respect to the lease in order that he might meet repayments due on his mortgage. Ater this discussion Hartz handed to Scott a copy of the current lease of the top floor and he perused it and took it away and kept it for a few days. Manning prepared a form of offer and acceptance providing for the purchase by Scott of the building for §295,000 expressed to be subject to Scott being able to obtain a loan of $275,000 at 13.75% on mortgage of the property and Scott's other property. Manning confirmed that Hartz said that the tenant was up 7. to date, owed no money or words to that effect, but said that he did not think Hartz said that the tenant was of good standing. When on a football trip to the United States of America in December 1984 Manning signed a statement prepared by Scott which included a sentence "Clive Hartz assured George Scott they were tenants of good standing". Manning's evidence was that he told Scott he did not agree with that sentence but nevertheless he Signed the statement. His evidence went on that the statement was accurate except for that sentence. I do not believe Manning on this topic. Had the position been as he says 1t would have been simple enough to cross out or otherwise delete the sentence Said to be inaccurate before signing the statement. He had possession of the statement for a day or two before signing it and did not sign 1t in Scott's presence. I think that Manning accepted the statement as accurate when he first read it and when he signed it but for some reason decided to resile from this position later. Hartz admitted that he never mentioned the rent holiday but said that he handed his whole file on the tenancy to Scott who appeared to skim through it. Included in the file was a copy of a letter setting out the rent holiday and also an agreement to take industrial premises which mentioned it. Scott denies that the file was handed to him and says that only one copy of the lease was handed to him which contained no record of the rent holiday. On this issue I believe Scott and not Hartz. Manning does not have a clear recollection of what took place but 8. what he does remember appears to favour Hartz. Scott said that had he been aware of the rent holiday he would not have agreed to purchase the property without a guarantee from Hartz that the rent would be paid. Failure to mention the rent holiday 1s not Pleaded as being misleading or deceptive conduct but the fact of the rent holiday is pleaded as a particular of the falsity of the representations that the lessee had made all payments of rent and other moneys due under the lease. There was evidence which I accept that rent holidays are quite often offered as an inducement to lessees to take commercial premises, but I also find that sometimes they are asked for because of the impecuniosity of prospective tenants as incidentally was the case here. I will return to this matter later. Scott was unable to borrow more than $240,000 from his bank so another arrangement was entered into between Scott and Windsor whereby Windsor was to lend Scott $37,500 on second mortgage. Shortly afterwards Scott's brother-in-law Boland became interested in the property and, through Manning, Scott and Boland offered to buy the property, Scott and his wife to buy the top floor for $130,000 and Boland the ground floor for $165,000. The sale from Windsor to Scott and Mrs Scott of the top floor was finally settled on 28 June 1984. A payment of rent was due to Scott on 1 July and this was paid some time in August. The rent for the months of August and September was paid in each case in arrears and no further payments were made. Computer Country eventually left the premises in response to a notice to quit and the property was relet. Windsor's agent in the matter of the letting of the property to Computer Country was Peet & Co. Ltd. Bertogna, the governing director of Computer Country gave evidence that in March or April 1984, that 1s, well before settlement, he informed McKnight, an employee of Peet & Co. Ltd, that Computer Country would have serious difficulty in paying rent under the lease once the rent holiday was over and he asked McKnight if a lower rent could be negotiated. Bertogna said that McKnight said that he would have to speak to Windsor about that. Bertogna said that no rent reduction was ever decided upon. McKnight's evidence was that Bertogna spoke to him about the middle of 1984 asking him 1f he could find a substitute tenant because Computer Country was in financial difficulties. McKnight said that he was uncertain as to when this conversation with Bertogna took place. He knew it was some time after a valuation of the property had been done in connection with the sale and rather thought it was towards the middle of the year. I am inclinced to accept Bertogna as an accurate witness. This matter of the failure of Computer Country was no doubt central to his life but the matter of a reletting toa busy estate agent would not be nearly so important. I think that Bertogna told McKnight that in March or April that Computer Country was in financial difficulties and asked for a reduction in rent and McKnight has forgotten about 1t or confused it with a later conversation concerning obtaining a substitute tenant. 10. There is little evidence as to whether or not Windsor and Hartz were informed of this conversation. Bertogna of course cannot say although he did say that McKnight said the matter of a rent reduction would have to be referred to Hartz. McKnight has no apparent recollection of the conversation taking Place and Hartz denies that he knew anything of Computer Country's financial problems until much later. I believe Bertogna on the topic of the conversation with McKnight and I think 1t more probable than not that McKnight would have informed Hartz. So far as concerns the claim under s.52 of the Trade Practices Act I find that the first respondent by its agent the second respondent represented that Computer Country had made all Payments of rent and other moneys due by it under the lease and that Computer Country was of good standing. I am unable to find that a separate representation was made that there was no reason to consider that Computer Country would be unable to make payment of rent and other moneys payable by it under the lease as and when they fell due. In all the circumstances the first representation made was untrue. All that Scott knew about the lease was what was contained in the lease document. He was not told of the rent holiday nor did he have an opportunity of finding out about it by perusing Windsor's file. Notwithstanding that because of the collateral agreement providing for a rent holiday it may have ll. been true that Computer Country owed Windsor no money. The answer that the lessee had made all payments of rent under the lease was misleading to and deceptive of Scott when Hartz had not anformed him of the rent holiday and there was no way in which Scott could have found out about it. Representation that Computer Country was of good standing was also misleading and deceptive because at the time based on the evidence of Bertogna it plainly was not. Not only was Computer Country in financial difficulties but Mr and Mrs Bertogna senior, the parents of the governing director of Computer Country and the guarantors for the performance of the lessee's covenants under the lease had come to an arrangement with their creditors under Part X of the Bankruptcy Act some months before they guaranteed the lease. I cannot be satisfied that Windsor through Hartz was aware of Computer Country's financial difficulties although I think it likely that it was. Still less can I be satisfied that it knew that the guarantors had entered into a deed of arrangement under Part X of the Bankruptcy Act. However the conduct of Windsor was misleading and deceptive on this aspect and it matters not that it may not have known of the falsity of what was said (see Parkdale Custom Built Furniture Pty Ltd v. Puxu Pty Ltd (1978) 140 C.L.R. 216 and Global Sportsman Pty Ltd v. Mirror Newspapers Ltd (1984) A.T.P.R. 45-339). Scott gave evidence that but for the representations as to compliance with the terms of the lease and the standing of the lessee he would not have entered into the transaction to purchase 12. the top floor of the building. He and Mrs Scott have suffered loss as a consequence of the transaction and are thus entitled to recover the amount of that loss pursuant to s.82 of the Act. So far as a claim in fraud is concerned I think that the applicants face certain problems of proof and I would have some difficulty in being satisfied that the misrepresentations were made with knowledge of their falsity and with fraudulent intent. There are also difficulties associated with finding the existence of a duty of care in the vendor s0 as to base a claim in negligence. However these things may be, having found that the applicants are entitled to succeed in their claim pursuant to s.52 of the Act, it is strictly unnecessary to deal with the other bases of claim. There remains to assess damages. It seems clear that the appropriate way to approach this assessment 15 to apply the principles of assessment applicable to tort (see Brown v. The Jam Factory Pty Ltd (1981) 53 F.L.R. 340 and Mr Figgins Pty Ltd v. Centrepoint Freeholtds Pty Ltd (1981) 36 A.L.R. 23). The first and most substantial item of damages may be assessed by finding the difference between what the applicants paid for the second storey of the building and what it was worth at the time they purchased it (see Toteff v. Antonas (1952) 4&7 C.L.R. 647). They paid, as I have said, $130,000. Two formal valuations as at the relevant time have heen tendered in 13. evidence, one of Robert J. Lunt at §100,000 and the other of Peter Goodchild at $90,000. One Jelley, also an experienced valuer, gave it as his opinion that the upper floor was worth $100,000 at the date of purchase. Accepting as I do that Hartz offered the top storey to Scott for $140,000 and taking into account that the two valuers called by the applicants valued at $100,000 and §90,000 respectively, and taking into account my impression that Goodchild was somewhat conservative and doing the best I can I assess the value at the time of purchase at $95,000. It 1s argued by the respondent that $130,000 was not a true price arrived at after bargaining negotiations between the vendor and the purchaser but was a price put on the upper floor by Scott and his brother-in-law Boland. This is no doubt so since the evidence 15 that Hartz did not care how much was paid for each of the top and bottom floors provided the total paid was $295,000. However $140,000 was the price put on the top floor by Hartz at the meeting of 9 March when a price of $165,000 was put on the bottom floor. It seems to me that in the circumstances $130,000 was a conservative proportion of the total price. In addition it must be said that however the price was fixed, Windsor received the amount of $130,000 for the top floor after accepting the Scott's offer for this amount. In any event 1t seems to me that the position is governed by the principle in Holmes v. Jones (1907) 4 C.L.R. 1692. Damages under this head are assessed at $35,000. Damages are also claimed under a number of other heads. 14. In Gould v. Vaggelas (1984) 56 A.L.R. 31 Gibbs C.J. says at page 35 - "Tf the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. of course the court must be satisfied that the loss dad result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation 15 given for losses when those losses, or the probability of their occurrence, has already been taken into account in determining the value of the business." A claim is made for lost rent for the period between when Computer Country ceased to pay rent and the premises were relet. The amount claimed is $7,666-64 being from 1 October 1985 to 1 July 1986. This claim was however abandoned during the course of argument. Next there is claimed the interest on the money unnecessarily borrowed on the basis that $40,000 more was borrowed than would have been necessary if the price had been $90,000 which is said to be the true value instead of $130,000. The calculation was done by a Mr Rajah, a chartered accountant employed in the Swan Building Society. He said that $120,000 was borrowed by the Scotts on 26 June 1984 and the loan was repaid in full on 30 May 1986. The interest paid on §120,000 during this period was $15,564-00. Had the advance been 680,000 the interest paid would have been $7,046-00. $8,518-00 is claimed on the basis that because the Scotts paid $40,000 more than they should have done, $40,000 more was borrowed than was necessary. 15. I think that something should be allowed under this head. Unfortunately I have found that the difference between the value and the price paid was $35,000 and no calculation has been done with respect to this. I will have to do the best I can erring if anything on the side of conservatism. I allow §6,500 under this head. A claim for $932-97 being rates and taxes payable by Computer Country and not paid by it and subsequently paid by the Scotts is admitted. I allow $250 being a letting fee paid by the Scotts to Con Tsokos and Associates, real estate agents, who arranged the letting of the property after Computer Country vacated it. A claim is also made for costs amounting to $971 payable by the applicants to their solicitors in connection generally with the lease to Computer Country. In so far as these costs are with respect to regaining possession of the premises from Computer Country the unsatisfactory tenant, I consider that the award of damages should include these costs, but 1t is apparent from the detailed bills that despite the evidence of Scott, many of the items in the bills have reference to the present action and to matters other than recovery of possession of the premises from Computer Country. Doing the best I can and taking a conservative view I allow $200 under this head. 16. There are also claims for §107-95 for advertising fees paid to Tsokos and $76-95 for cleaning the premises after Computer Country left. With respect to both of these claims no evidence was tendered and I therefore disallow both. Damages are assessed on the following basis - (i) Difference in value $35,000-00 (ii) Interest on money unnecessarily borrowed 6,500-00 (ii1) Rates and taxes 932-97 (iv) Letting fee 250-00 (v) Legal costs 200-00 $42,882-97 Rounding this off there will be judgment for the applicants against the respondents for §42,800 together with their costs of action to be taxed. I certify that this and the preceding pages are a true copy of the Reasons for Judgment of Mr Justice Forster. Associate Dated: eh cts