New South Wales Supreme Court CITATION : Kanivah Holdings v Holdsworth Properties [2000] NSWSC 348 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50129/99 HEARING DATE(S) : 24.3.2000, 3.4.2000,11.4.2000 JUDGMENT DATE : 28 April 2000 PARTIES : Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd & Egan National Valuers (NSW) Pty Ltd & Keith Norris JUDGMENT OF : Hunter J COUNSEL : Plaintiff: M S Jacobs QC P J Bambagiotti First Defendant: I M Jackman SOLICITORS : Plaintiff: Emerys Law Firm First Defendant: Minter Ellison CATCHWORDS : Practice and Procedure - leave to amend summons - futility of allowing amendment - leave to amend to raise prima facie improbable case - application of Part 15A SCR to exercise of discretion. CASES CITED : General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 DECISION : Application for leave to amend, in part, refused on ground of futility and, in part, allowed. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST HUNTER J FRIDAY 28 APRIL 2000 50129/99 KANIVAH HOLDINGS PTY LTD -v- HOLDSWORTH PROPERTIES PTY LTD & EGAN NATIONAL VALUERS (NSW) PTY LTD & KEITH NORRIS REASONS FOR JUDGMENT 1 On 3 March 2000, by consent, leave to amend was granted against the second and third defendants in the form of the further amended summons filed in these proceedings. The plaintiff also sought leave to amend in the form of that summons, against the first defendant. Objection was taken to the granting of such leave on the ground that it would be futile to allow the amendment. 2 In the conduct of this application both parties have approached the question on the basis that I am entitled to go beyond the matter pleaded in the further amended summons and have regard to matters of fact to which the proposed amendments relate. On reflection, I was not convinced that such an approach was the correct one, save to the extent that it evidenced matters of fact which were not in dispute, or were the subject of admissions by the plaintiff. 3 It is on that limited basis that I have taken into account matters of fact extraneous to the allegations sought to be raised by the plaintiff. 4 However, the factual material so evidenced by the parties has given rise to a consideration by me of Pt 15A of the Supreme Court Rules and, in particular, rr 1 and 3 which are in the following terms: "[15A.1] Putting matters in issue unreasonably 1 (1) A party to proceedings must not in a pleading or at a trial or hearing make, or put in issue, an allegation of fact unless it is reasonable to do so. (2) A party to proceedings who has in a pleading or at a trial or hearing made, or put in issue, an allegation of fact must not maintain that allegation or its controversion unless it is reasonable to do so. … [15A.3] Scope of Part 3 Nothing in this Part shall give rise to, or affect, any right to seek that proceedings or any claim for relief or any defence be stayed or dismissed or struck out." 5 Initially, the operation of Pt 15A was not argued before me and for that reason the matter was relisted to hear further argument on the possible application of Pt 15A to the issues raised on this application. 6 As I read Pt 15A and particularly r3, it is not intended that the rules should have the effect of lowering the standard to be satisfied by an applicant in a strike out application as established in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 and in the long list of authorities that have applied General Steel. Nor do I see Pt 15A as cutting down the prima facie entitlement of a party to have an amendment as expressed by Dawson J in The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 456 as follows: "The rules of court have always provided that leave to amend pleadings may be given for the purpose of determining the real question in controversy between the parties (see now O. 36, r. 1 of the Supreme Court Rules (Vict.)) and an amendment should ordinarily be allowed if any harm arising from so doing can be compensated for by the imposition of terms upon the party asking for the amendment: see Shannon v.Lee Chun; Tildesley v. Harper; Cropper v. Smith. The usual terms which are imposed are an order for costs or an adjournment. In granting leave to amend, a court is concerned with the raising of issues and not with their merits. Of course, an amendment which is futile because it is obviously bad in law will not be allowed. But it is no ground for refusing an amendment that it raises a claim or defence which ought not to succeed. That will be an issue upon trial." However, I think it is noteworthy that Pt 15A makes no mention of its operation upon the exercise of discretion by the Court on an application for leave to amend. 7 One of the more notable limitations upon an applicant's entitlement to leave to amend lies in the disallowance of futile amendments. It is in that context that the prohibition of Pt 15A r1 may have a part to play in considering an application for leave to amend. 8 While I think it is self-evident that the reasonableness of the making of an allegation of fact, in most cases, will only emerge upon the hearing of the proceedings in which the allegation is raised, there will be cases when the unreasonableness of making the subject allegation will be demonstrable, for example, by uncontroverted evidence on an application for leave to amend. 9 In my view, if the allegations of fact upon which the proposed amendments are founded, are shown in this application by uncontroverted evidence to be unreasonably made, that should be a factor to take into account in determining whether the plaintiff should be allowed to make that allegation by way of leave to amend its summons. If it be shown that the applicant would be prohibited from pleading an allegation of fact by virtue of Pt 15A r 1, the application for leave to amend should be approached on the basis that the applicant cannot rely on such an allegation in support of the proposed amendment. 10 The plaintiff (Kanivah) and the first defendant (Holdsworth) are the successors in title to the lessee and lessor, respectively, under a lease between the State Rail Authority of New South Wales as lessor and Supenu Pty Ltd as lessee (the lease) of property at 1 Railway Parade, Burwood (the property) which, for practical purposes, may be regarded as an undeveloped site. The rent reserved under the lease was the "Current Market Rental" which was subject to review determined at the "review date" as meaning the "best annual rental that [could] reasonably be obtained … having regard to:- (i) the maximum annual rental that might [then] reasonably be obtained were the demised premises available to be leased by a willing landlord to a willing tenant with Vacant Possession; (ii) on the terms and conditions contained in this Lease; (iii) the position of the demised premises; (iv) the highest and best use to which the demised premises may be put; and (v) the usual valuation principles in the state of New South Wales to the extent to which those principles are not inconsistent with the criteria set out in sub-clause 1(d). and not having regard to:- (i) any building structure or other improvement erected on the demised premises, by or on behalf of the Lessee, after the commencement of the term of this Lease at the expense of the Lessee (ii) the value of any good will (sic) attributable to the Lessee's business and the value of tenants fixtures and fittings on the demised premises; and (iii) any deleterious condition of the demised premises, if such condition results from a breach of any provision of this lease by the Lessee but otherwise assuming that all covenants on the part of the Lessee contained in this lease have been fully performed and observed." 11 Central to the allegations made in the further amended summons is the operation of paragraphs (iv) and (v). 12 In the event of disagreement as to the current market rental the lease made provision for an appointment by the parties of a valuer whose decision was to be final and binding. It is alleged by the further amended summons that the second defendant (Egans) was so appointed to carry out a valuation of the current market rental of the premises and that Egans appointed the third defendant (Norris), one of its directors, to carry out the valuation. 13 Kanivah challenges the validity of Norris' appointment and asserts in the alternative, that the valuation made by Norris was not in accordance with the terms of the lease under which Norris was appointed. Challenges to the valuation included the following: "(e) Instead of determining for himself what the highest and best use of the Premises was, the Third Defendant incorrectly assumed it was in accordance with the Deferred Commencement Consent of Burwood Council of 6 January 1999; …. (h) In paragraph 15 of the Determination the Third Defendant adopted Parramatta sales as comparable sales whereas adjustment to the prices achieved for the Parramatta properties should have been made to accommodate for the following matters: …. (ii) In order to accommodate the car parking on site, an additional basement would be required which would involve considerable expense (iii) The alternative would be for the developer in accordance with pre-condition 1 of the Deferred Commencement Consent, to acquire a stratum from the Burwood Council for a 99 year term, at a rental in the order of $135,000 per annum equating to a premium of $1.5m in accordance with the Athur Andersen (sic) recommendation dated 28 May 1999 . …. (n) (iv) Pre-condition 1 of the Deferred Consent required satisfactory finalisation of a lease agreement with Burwood Council over the portion of the site which is in public (Council's) ownership and that the Plaintiff was required to bear all le gal and lease costs incurred by Council… ." 14 Those allegations have some bearing on the causes of action sought to be raised against Holdsworth. The proposed amendments are extensive and the allegations of fact as made in the form of the Further Amended Summons suffered from obscurity and inconsistency, in a number of cases were meaningless and contained allegations which involved a non-sequitur. 15 I do not understand Senior Counsel for Kanivah to dispute that general criticism. Certainly, the proposed amendments against Holdsworth could not have been granted in the form presented in the Further Amended Summons. 16 I drew a number of these deficiencies to the attention of Senior Counsel when the matter was relisted on 3 April 2000 and granted an adjournment to enable Kanivah to reconsider further its proposed amendments. 17 The form of the proposed amendments next presented on behalf of Kanivah suffered from similar deficiencies which were brought to its attention prior to 11 April 2000, the final hearing date of this application. The form of the proposed amendments now pressed on behalf of Kanivah are those which accompanied the further written submissions of 10 April 2000 of Senior Counsel for Kanivah. I have initialled and dated those proposed amendments 11 April 2000 (the proposed amendments). 18 The positions taken on behalf of Kanivah have changed from time to time, on the several occasions this matter was before me and have not been consistent. The transcript will speak to those matters and I do not propose to address them in the course of these reasons. 19 Pars 16-19 of the proposed amendments are in the following terms: " 16.1 There was no provision for any exchange of submissions, under the terms of the Lease or the agreement appointing the Third Defendant to undertake the Determination . 16.2 The First Defendant made its submissions to the Third Defendant in secret and in confidence. 17.1 In making its submissions to the Third Defendant, the First Defendant both acted personally and in regard to some submissions, was represented by Knight Frank and by Gerton Pty Limited. 17.2 The First Defendant knew: (a) that the Third Defendant would or might rely on any evidence provided by or on behalf of the First Defendant in arriving on his determination of the market rental for the Premises ; (b) that if the evidence were not correct, the Third Defendant would or might determine an amount substantially in excess of the market rental; (c) the Third Defendant's decision would be final and binding . 17.3 The submissions made by or on behalf of the First Defendant were made in the course of trade and commerce . 18.1 Over the period 19 April 1999 - 26 August 1999, the First Defendant's agents, M J Higgins and Associates, were in communication with the Burwood Council to negotiate, on behalf of the First Defendant, a purchase or lease from Council of the area under Railway Parade being that area referred to in one of the preconditions for the grant of a Development Approval under the Deferred Commencement Consent No. 520/98 ("the substratum car park area"). 18.2 The Burwood Council, in a letter of 9 August 1999, informed M J Higgins that the Council would not negotiate as to price and or tenure until building plans, for the proposed buildings under the Deferred Consent, have been approved and were ready for release . 18.3 The aforesaid Higgins, by a fax of 9 August 1999, drew the facts set out in paragraph 18.2 above to the First Defendant's attention. 18.4 At all relevant times, there were no building plans submitted to the Burwood Council under the Deferred Commencement Consent . 19. The First Defendant failed to advise the Third Defendant of the facts stated in paragraph 18.2 above. " 20 The matters referred to in paras 18 and 19 are not in dispute. I have used the expression "the Council deferment of negotiations" as a short description of the matter alleged in paragraph 18.2. 21 The methodology which was said to govern Norris' valuation was alleged in par 20 of the proposed amendments as follows: " 20. In order to determine the current market rental of the Premises under subclauses 1(d)(iv) and (v) of the Lease, the Third Defendant was required to take the following steps (a feasibility study or otherwise known as a residual land value analysis):- (a) He first had to determine the highest and best use to which the Premises could be put; (b) Having determined the highest and best use to which the Premises could have been put, he would then have had to determine the market value of that highest and best use as if complete; (c) He would then have had to deduct from the market value as if complete, all the costs of construction and development in order to ascertain a residual value at an acceptable level of profit; (d) The accepted level of profit is that which reflects all the risks inherent in that highest and best use, and which is reflected in a profit and risk factor, expressed as a percentage, and which reflects the return on the total development cost ; (e) After taking into account all these factors, there remains a residual land value which reflects the value of the site (that is the amount that the hypothetical purchaser would pay) assuming the highest and best use proposed could be realised; (f) After making some further adjustments to the land value ascertained so achieved, the net sum would represent the market value of the Premises; ie the amount which a hypothetical purchaser would have paid for the premises on the relevant date ; (g) An appropriate multiplier would then be applied to the said amount to determine the current market rental at the relevant date ." 22 Paragraphs 21 and 22 of the proposed amendments summarised Norris' valuations as follows: " 21 . The Third Defendant, in the determination, found that the highest and best use of the Premises was for the construction of the buildings referred to in the Deferred Commencement Consent . 22.1 In his feasibility study, the Third Defendant made provision inter alia for a profit and risk factor of 15%. 22.2 After making the other provisions, the Third Defendant arrived at a value of the Premises in an amount of $4,150,000 and the current market rental value in an amount of $348,000 per annum . 22.3 Had the Third Defendant applied a higher profit and risk factor, he would have found that the value of the premises was in an amount substantially less than the sum of $4,150.000 (sic), and would have determined the current market rental in an amount substantially less than $348,000 per annum. 22.4 In his determination of the appropriate profit and risk percentage, the Third Defendant would have to have regard to all the matters that would have impacted on the mind of the hypothetical purchaser." 23 Of the Council deferment of negotiations, par 22.5.1 of the proposed amendments alleged that it "increased the risk which the hypothetical purchaser would need to take into account." Kanivah 'amplified' that allegation in par 22.5.2 of the proposed amendments in the following terms: "22.5.2 In amplification of the allegation in paragraph 22.5.1, the Plaintiff states:- (a) To achieve building approval:- (ii) Building plans must be prepared in detail. These plans would inter alia consist of Architectural and Engineering drawings ; (ii) Reports would have had to be obtained from many consultants ; (iii) The plans would have had to be submitted to the Burwood Council; (iv) The Burwood Council would have charged a submission fee based on the estimated cost of the project; (b) The cost to a developer of taking the steps in sub paragraph (a) above would be to the order of $2,560,000.00; (c) After having spent the aforesaid sum of money on the preparation and the submission of the said plans, a developer would then have to negotiate a price for the substratum or the tenure thereof; (d) If no agreement was reached with the Burwood Council, the developer would have lost an amount to the order of $2,560,000 and interest thereon; (e) The developer would then have to consider proceeding with a development which did not depend on the use of the substratum for off street parking; ( f) That development would be smaller in size and less profitable." 24 It is on those allegations that Kanivah seeks to found causes of action against Holdsworth in terms of par 24 of the proposed amendments as follows: " 24.1 The Plaintiff states that in all the circumstances set out in paragraphs 23 and 24 (sic) above, the Plaintiff had a reasonable expectation that the First Defendant would have informed the Third Defendant of the facts set out in para.18.2 above." 24.2 The Plaintiff states, in the alternative and in any event, that in the circumstances set out above, the First Defendant had a duty to bring the facts set out in paragraph 18.2 above to the attention of the Third Defendant. 24.3 The Plaintiff says that, in the circumstances, the First Plaintiff's failure, as alleged, to bring the facts stated in paragraph 18.2 to the attention of the Third Defendant constituted conduct that was misleading, deceptive or likely to mislead or to deceive contrary to the provisions of s.52 of the Trade Practices Act ." 25 I have treated the allegations in pars 24.1 and 24.2 as formulating a duty imposed upon Holdsworth to act reasonably or in good faith. Although counsel on behalf of Holdsworth has submitted that no such duty is known to the law in the circumstances of this case, I have preferred to proceed on the assumption that such a duty existed. 26 It is not in dispute that Kanivah's expert, Landsburys Property Advisory Services (Landsburys), on behalf of Kanivah, provided a report dated 13 July 1999 to Norris for the purpose of his determination and which contained the following material: " 3.2 APPROVALS The property is subject to two Development Approvals. The first granted in 1996 known as DA 146/95 was lodged for the development of ground level office and retail (including a restaurant), 3 levels of car parking for 154 cars and an 8 storey residential tower containing 6 x 3 bedroom units and 44 x 2 bedroom units. This development is proposed to include a Plaza area at the eastern end of the site towards Burwood Road and a bus bay in a similar location to the existing bus stop and shelter. In addition, a swimming pool, common room and garden area is provided to the podium level of the rooftop car park which will serve the residential tower. This approval is considered upon inter alia:- * Section 94 Contributions of $228,800 payable for improvement in Parkland * Section 94 Contribution of $37,768 paid toward cost of traffic management facilities. The second approval is a deferred commencement consent granted in 1999 and known as Development Approval 520/98. This approval is for a retail/ commercial office building having a Gross Floor Area of 15,785m² and underground parking for 367 cars. Approval to this development was granted, subject to various terms and conditions which included a Section 94 Contribution for a deficiency of 84 car spaces of $1,705,455 plus a further Section 94 Contribution of $664,123. These contributions were reduced on appeal to the Land and Environment Court to $300,000 for parking and $250,000 for community services and traffic facilities. A fundamental condition of this consent and one of the matters to be resolved prior to granting of an approval is "finalisation of a lease agreement with Burwood Council over the portion of the site which is in public ownership. " This issue has not been resolved and the cost/rent and term of this lease is unknown . We also note that of the car parking to be provided, 78 spaces are to be reserved for public parking." (emphasis added) 27 What is clear from Kanivah's own case is that Norris was supplied with the terms of the conditional consent of Burwood Council to the development of the property and, in relation to Council's car parking requirements, that it was a "fundamental condition" and that the car parking issue was unresolved. In the language of Landsburys, "the issue [had] not been resolved and the cost/rent and term of this lease is unknown." 28 The 'thrust' of this aspect of Kanivah's proposed amendments lies in the significance to be attached to Council's stance that it was "not prepared to enter into negotiations as to price and/or tenure [of the car park area] until an applicant is ready to have building plans released by Council." 29 It was conceded by Senior Counsel on behalf of Kanivah that it was not part of Kanivah's case that: (i) the Council would use its bargaining position to extract a commercially unrealistic price for Kanivah's acquisition or tenure of a car parking area from the Council; and (ii) that the Council deferment of negotiations would have deterred the developer from proceeding to building plan stage. 30 Kanivah's case is that Norris failed to take into account any risk factor attaching to the absence of agreement with Council or the "fundamental condition" relating to the acquisition on terms of a car parking area for the development. That is implicit in pars 10,14 and 21 of the proposed amendments, and on the case based upon "comparables" referred to later in these reasons. It is not Kanivah's case that Norris applied a risk factor represented by the absence of agreement with Council on acquisition or tenure of a car parking area which was insufficient by reason of the Council deferment of negotiations. 31 Kanivah's complaint that Norris failed to apply a risk factor represented by the absence of agreement with council on a "fundamental condition" of development consent of which he was fully appraised, may only be redressed by a case based upon that failure. The council deferment of negotiations on that case would represent an increment to the consequence of Norris' failure to take into account the absence of agreement with council on acquisition or tenure of a car parking area. That is how par 22.5.2 of the proposed amendments should be viewed. 32 The fundamental flaw in Kanivah's proposed case against Holdsworth, based upon Council's deferment of negotiations, in my view, lies in its failure to address the consequence of the alleged underlying failure of Norris to apply a risk factor to the absence of agreement with council on the acquisition or tenure of a car parking area for the development. 33 For those reasons the causes of action sought to be raised in par 24 of the proposed amendments should be disallowed. 34 In pars 26-42 of the proposed amendments, Kanivah seeks to raise causes of action against Holdsworth sounding in an alleged breach of duty to act reasonably or in good faith or in misleading conduct based upon market valuations of commercial buildings in the general vicinity of the property proffered to Norris by Holdsworth's agents as comparable developments to that the subject of development approval in relation to the property. 35 Kanivah's proposed case is as follows: a) At the request of Norris to be supplied with evidence of comparable commercial site valuations, Holdsworth's agents provided details of property valuations in relation to commercial properties which valuations were adjusted for location and land size differences and "market increases" to arrive at a comparable value for the property. (b) It was implied by Holdsworth's agents that no further adjustments were necessary, notwithstanding that further adjustments, reducing the valuations, were necessary by reason of the unsatisfied conditions of Council development consent and the cost of off-site car parking relating to the proposed development of the property. (c) Holdsworth had a duty to be accurate in providing such comparable values and to draw Norris' "attention to the necessity to adjust" the valuations by reason of the matters referred to in (b). (d) The failure of Holdsworth's agents to do so was both a breach of that duty and misleading conduct. 36 It is not in dispute that Norris allowed for the cost of $9,175,000 for a car parking area to accommodate 367 cars. Neither is it in dispute that Norris was aware of the "pre-conditions" of the development consent, particularly pre-condition 1, relating to off-site car parking and of the fact that agreement with the Council on the cost of acquisition or tenure of the car-parking area was not concluded at the time of his determination. 37 It is not alleged that the valuation opinions of Holdsworth's agents were not genuinely held by them or that Holdsworth did not regard these agents as qualified to express those opinions. 38 Norris was appointed as an expert valuer to determine the valuation of the property, although Kanivah presently disputes his qualifications. 39 It is common ground that Kanivah was also invited to provide comparable values to Norris and that Landburys provided a valuation of the property to Norris. It was in Kanivah's interest to emphasise to Norris the alleged diminished value of the property by reason of the matters referred to in sub-par 35 (b) above. 40 In those circumstances it is difficult to see how the failure of Holdsworth's agents to advert to those aspects of the development consent relating to the property could have an effect on Norris' determination. If Norris failed to take those aspects of the development consent into consideration that may reflect on the quality of his valuation but would not be expected to reflect on any alleged misleading aspect or inaccuracy in the comparables proffered by Holdsworth's agents. 41 It is not Kanivah's case that it overlooked these valuation factors in its submissions to Norris. Nor does it suggest that it was not incumbent on it to provide Norris with valuation considerations favourable to its case. 42 Notwithstanding those views, I am disposed to allow the proposed amendments relating to the provision of comparables by Holdsworth. It is conceivable that the adjusted valuations, as provided by Holdsworth's agents, could be so inaccurate as to be misleading to an expert valuer: particularly where Kanivah has not been afforded the opportunity of alerting Norris to the alleged inaccuracies. 43 However improbable is a case that the conduct of Holdsworth's agents could amount to proscribed conduct on the part of Holdsworth, I think the improbability does not justify a conclusion that Kanivah could not conceivably mount an arguable case of misleading conduct: particularly when regard is had to the allegation that the comparable values as supplied by Holdsworth's agents were not made available to Kanivah for comment. 44 That being so, I think the amendment should be allowed so far as it relies on a case based on the alleged inaccuracies of the comparable valuations. It does not follow that, in allowing the amendment, there is no room left for the operation of Pt 15A. In fact I think there is considerable scope for the operation of those rules when the facts relating to the amendment are exposed on the hearing of these proceedings. 45 I have not addressed Holdsworth's challenge to the existence of a cause of action based on breach of duty. The course I have chosen is to allow the case as pleaded in the proposed amendments relating to the alleged inaccurate comparables, leaving the determination of that issue to the hearing. 46 As to costs, during the course of final submissions I made it clear that, whatever the outcome of this application, the first defendant's costs of the application should be paid by the plaintiff on an indemnity basis and I so order. 47 The form of the amendments sought from time to time on behalf of Kanivah attracted strong criticism from the first defendant, in my view, with considerable justification. The time and resources of the first defendant, and, for that matter those of the Court, have been wasted, largely as a result of the unacceptable form which the amendments took in the several versions presented. 48 I direct the plaintiff to file and serve an amended summons in accordance with these reasons by 5 May 2000. The plaintiff is to pay the first defendant's costs occasioned by or incidental to the amendment. ************** Last Modified: 09/25/2000 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.