District Court New South Wales Medium Neutral Citation: Kennelling Investments Pty Ltd v Brent Anthony Tilse [2011] NSWDC 196 Hearing dates: 11 August 2011 Decision date: 09 December 2011 Jurisdiction: Civil Before: Judge M Sidis Decision: 1 Verdict for the plaintiff 2 The proceedings are adjourned to 9.30am on 14 December 2011 to deal with issues of interest and costs. 3 My reasons are published. Catchwords: CONTRACT: assessment of damages for breach of contract to purchase commercial property; competing valuation evidence Category: Principal judgment Parties: Kennelling Investments Pty Ltd (Plaintiff) Brent Anthony Tilse (Defendant) Representation: Mr Armfield for the Plaintiff Mr Davies for the Defendant Turnbull Hill Lawyers (Plaintiff) McDonald Johnson Lawyers (Defendant) File Number(s): 2010/243887 Judgment 1These proceedings were initially heard on 10 February 2011 when issues of liability were determined in favour of the plaintiff. The claim returned to the Court in August, September and November 2011 to deal with the plaintiff's claim for damages. 2The claim arose out of the failure of the defendant to complete a contract dated 14 March 2008 for the sale of the plaintiff's property at 90 Park Avenue, Kotara. The purchase price for the property was $1,155,000. The defendant paid a deposit of $50,000 on exchange of contracts. Nothing further was paid prior to the termination of the contract on 3 November 2008. 3The plaintiff claimed damages as provided for in clause 9.2 of the contract as follows: If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can - ... 9.3 Sue the purchaser ... 9.3.2 to recover damages for breach of contract. 4The property has not been resold. The plaintiff claimed that its market value declined and sought as damages the difference between the purchase price and its market value at 3 November 2008, the date of termination of the contract. 5The purchaser relied on valuation opinion that the market value of the property at 3 November 2008 was $620,000. It therefore claimed as damages $485,000, being the difference between $1,155,000 and $620,000 after deduction of the deposit of $50,000. The plaintiff also claimed interest. 6The defendant relied on valuation opinion that the market value of the property at 3 November 2008 was $1,150,000. 7The property was listed for auction in April 2009 with a reserve price of $1,000,000. It was passed in on the vendor's bid of $650,000. The property remained on the market for $950,000. Offers were made of $900,000 and $950,000 but on terms that involved conditional and delayed settlement. The property was withdrawn from sale at the end of 2009. 8The defendant did not press his pleading that the plaintiff failed to mitigate its loss by failing to resell the property. 9Assessment of the plaintiff's damages therefore involved consideration of the competing opinions of the valuers, Mr Rich and Mr Vasilou. 10The valuers agreed on the following details concerning the property: Title: Site description : Triangular in shape, having an overall area of 746.1 square metres and high exposure to Park Avenue. The building area totalled 281 square metres of which 131 square metres were on the ground floor and 150 square metres on the first floor. Mr Rich described the improvements as a 1970's Bessa block constructed commercial building, previously leased to a veterinarian but vacant for many years. The first floor comprised a 4 bedroomed residence with an internal connection to the ground floor and external access so that it could be occupied separately from the ground floor. 11They also agreed that the site was in a favourable position on the northern side of Park Avenue in a busy location directly opposite the Westfield regional shopping centre at Kotara. The property was situated 12 kilometres from the Newcastle CBD and 5 kilometres from the Charlestown CBD. The Westfield centre was a popular shopping centre in the Newcastle and Lake Macquarie districts with major tenants and many speciality shops. The property was outside the Westfield shopping centre but was in the immediate vicinity of other commercial, fast food and retail premises and was close to a bulky goods development. 12The valuers agreed that the building on the property was dated, economically obsolete and that it was ready for redevelopment. They agreed that the highest and best use of the site was that of a redevelopment site. 13The valuers adopted different approaches to the valuation of the property. 14Mr Rich relied upon the traditional method of researching sales prices achieved for sites that he considered to be comparable to the property at 90 Park Avenue. He valued the property at 3 November 2008 at $620,000. This figure was arrived at by assessing its land value only at $800 per square metre or $596,000 and adding to that sum an estimated $40,000 for rent, less agent's fees, likely to be received during the 12 months period from the date of sale to the date after which it might be expected that all necessary approvals for redevelopment could be secured. 15Mr Rich also valued the property at 18 June 2010, the date of his inspection, at $700 per square metre or $522,270. 16Mr Vasilou provided valuations at 3 November 2008 of $1,150,000 and at the date of his inspection, 15 April 2011, of $1,260,000. He arrived at these figures by considering four methods of valuation and checking each against the other. The methods were: (1)comparison or market data method; (2)capitalisation method of income provided and nominated income; (3)feasibility study with capitalisation of nominated income; (4)summation method 17Both valuers were challenged concerning the matters taken into account in arriving at their valuations. 18In Mr Rich's case, the challenge was to the extent to which it could be said that the properties he identified were truly comparable. In response, Mr Rich described the method he undertook in arriving at his valuation of the property. He said he researched sales of high profile development sites, vacant or suitable for redevelopment with obsolete buildings on them. 19Mr Rich listed the properties he considered. He noted that they varied widely in price and that these fluctuations related to size, location and other attributes. He said he took into account matters such as high exposure, irregular shape and access difficulties for vehicles at busy, congested locations. Prices varied between $740 per square metre and $931 per square metre for sales prior to November 2008. Prices for sales that took place in 2009 and 2010 varied between $445 per square metre and $1,006 per square metre. 20Mr Rich agreed that the property was well located in proximity to the Westfield shopping centre although there was no pedestrian connection to that centre. He agreed that the area was very busy and that there was more activity there than in Hunter Street, the main street of the Newcastle CBD. He pointed out that the property was affected by the restrictions caused by congestion in the area and that it did not have the advantages of a corner site. He said the biggest impairment to the property was its irregular shape. 21Sites to which Mr Rich referred were located in commercial areas in central and suburban regional commercial centres other than Kotara. They were in Hunter Street, in the Newcastle CBD, and in Cardiff, Wickham and Mayfield. He argued that there were no absolutely comparable sites but there were characteristics of each of the properties he nominated that gave them sufficient similarity to 90 Park Avenue to render them comparable. 22Mr Vasilou's four methods of valuation were challenged on a number of bases. 23In his comparison or market data method , Mr Vasilou limited his selection of the properties that he considered to be comparable to those within a radius of 750 metres of 90 Park Avenue. Mr Rich considered that many of them were not comparable. He considered the containment of sales analyses to a radius of 750 m to be unconventional and unduly restricted. It did not conform to accepted valuation methodology. Mr Rich noted that Mr Vasilou said he refrained from using sites he looked at in nearby areas because they would provide inaccurate evidence but did not explain why this should be so. 24While I appreciate that it is rarely possible to identify a precisely comparable property, in limiting the area for selection in this manner, Mr Vasilou faced the problem of finding sites that were even remotely comparable. 25The result was that he compared the subject site with its area of 746.1 square metres with sites that bore little or no comparison. One site was 72 times larger or 53,390 square metres in area and developed as a retail homemaker centre that was fully occupied and that sold for $61,500,000. 26The most significant flaw in the way in which Mr Vasilou approached this valuation method was his refusal to take into account the value of buildings on the sites he nominated. His explanation for failing to do so was that the highest and best use of the subject property was as a redevelopment site. Since the buildings would be demolished, they were of no value. He therefore approached every site on the basis that the buildings were of no value. 27Mr Rich did not accept that this accorded with accepted valuation principles. He said the conventional method was to assess the unimproved value of the property. In situations where there were commercially viable improvements, the practice was to value them by reference to an accepted construction handbook or to the valuer's own estimate, deduct that value and divide the unimproved value by its square meterage. 28I agreed and concluded that I could place no reliance on this part of Mr Vasilou's valuation. 29Mr Vasilou's capitalisation method also suffered from a number of flaws. 30He estimated that a sum of $130,000 would be required to upgrade the buildings at 90 Park Avenue to generate the income he used as the basis for his calculations. He estimated that upgrading the improvements in this manner would increase income of $46,800 per annum by $735 per week or $38,220 per annum and generate a total of $85,020 per annum. 31Mr Vasilou applied a capitalisation rate of 8%, arriving at a value of $1,062,500. He then deducted an amount for profit and risk at 20% of $130,000 in the sum of $26,000 arriving at a value of $1,036,500. 32There were three problems with this method of valuation. 33As Mr Rich pointed out, Mr Vasilou's estimate of building cost of $130,000 was speculative in that it was unsupported by any quotation from the unnamed builder. No drawings or details were provided to explain the nature of the improvements proposed or how they would generate the estimated additional income. Mr Rich agreed that the property needed money spent on it to realise its rental potential. He said some refurbishment has been done on first floor for about $15,000 and maintained that little could be done to improve the ground floor. 34Mr Vasilou denied that his rental figures were unrealistic, although Mr Rich noted that they exceeded the actual rents current for comparable but newer commercial buildings in the area. 35Mr Vasilou obtained rental information from data services without sighting leases. He relied in particular on the rents that were sought for the adjoining site at 88 Park Avenue that was under construction at the time the valuers prepared their reports. 36Mr Rich accepted that it was appropriate to rely on asking rents if they were achieved but said they were likely to be negotiated in return for benefits such as rent free periods or the lessor bearing the cost of fit out. Mr Michael Dodds, the leasing agent for 88 Park Avenue, provided affidavit evidence (Exhibit B) in which he stated that there was limited interest since the property was listed in August/September 2010 and that it was difficult to secure tenants for an incomplete building. Mr Rich accepted that 50 square metres in this building had been leased since the date of his report. The terms of the lease were not in evidence. 37The third problem was that Mr Vasilou applied a 20% discount for profit and risk to the sum of $130,000 for improvement works only rather than to his estimate of the capitalised value. The result (after taking account of his incorrect figures) was a value of $1,036,000 rather than $850,000. Mr Vasilou's explanation for this approach was: This is for existing ONLY and no risk analysis is factored into land as it does not exist. (Exhibit 1, p.29) 38Finally, I noted that, on the basis of rent actually received for 90 Park Avenue, capitalised at the rate of 8.35%, Mr Vasilou arrived at an indicated value of $560,479 in November 2008, a value that was not dissimilar to that arrived at by Mr Rich. 39In the absence of reliable figures for construction costs, details of proposed construction work, reliable figures for rental income and a comprehensible explanation of the application of profit and risk to a part only of the capitalised value of the development, I was not prepared to rely on this method of assessment of value. 40The feasibility study method was also beset with problems. 41I agreed with Mr Rich in finding Mr Vasilou's figures difficult to understand. 42Mr Rich raised many valid points concerning the way in which this study was undertaken. They included the absence of architectural drawings to support calculations and the failure to take into account substantial realisation costs. I have dealt in more detail with the points that I considered were of most significance to the valuation exercise. 43Mr Vasilou's assumptions concerning likely rental receipts faced the same difficulties as with the capitalisation method. They resulted in the adoption of rents at the upper limit of the current market. 44He disagreed strongly with Mr Rich concerning the point at which the profit and risk allowance was to be applied. He agreed that this made a significant difference to the outcome of the valuation exercise. He claimed that his method was used by mainstream developers. He claimed that the standard discount was 15%, although he took a conservative approach in applying a discount of 20%. He agreed that banks applied a rate of 25% and applied profit and risk in the manner contended for by Mr Rich. He said that developers did not rely on bank finance but obtained funding from special purpose lenders. This left open the question of whether his assumptions concerning interest expenses were accurate. 45Mr Rich referred to accepted Australian text on principles of valuation to support his position concerning the point at which profit and risk was to be applied. I was persuaded by these texts to accept Mr Rich's approach to this aspect of the feasibility study. 46Another point of disagreement between the valuers was the potential floor space ratio of any redevelopment of the property. 47The evidence was that the draft local environmental plan covering the site set the floor space ratio at 2:1 and that there was with no currently applicable limit. Mr Rich said that currently the prevailing ratio was about .9:1 and that Newcastle City Council assessed this on the basis of surrounding properties and merit. The floor space ratio at the recently redeveloped site at 88 Park Avenue was 0.7:1. 48Mr Vasilou said that a floor space ratio of 2:1 would allow for development having floor space of 1,492.30 square metres. He claimed there was potential to increase floor space ratio by 6 - 7% and that therefore hypothetically the site could be redeveloped with floor space of 1,598.19 square metres. 49Mr Rich thought this was an improbable outcome. He said that to achieve a floor space ratio of 2:1 on the site at 90 Park Avenue it would be necessary to construct at least a two storey building and difficult to find space at grade to provide the required number of car spaces. He considered the provision of underground parking to be economically non-feasible and said it would therefore not be acceptable to financiers. 50For the purposes of his feasibility study Mr Vasilou assumed a floor space ratio of 1.74:1. He rejected the proposition that this was overly optimistic in the face of the floor space ratio of 0.7:1 on the adjoining site at 88 Park Avenue. 51I concluded that the whole of the feasibility study was unduly optimistic in that it understated expenses, overstated the floor space ratio of a probable development and overstated rents likely to be achieved. Taking these factors into account, together with my finding that the point at which Mr Vasilou applied profit and risk was contrary to accepted valuation practice in Australia, I rejected the valuation resulting from the feasibility study. 52The summation method involved assessing the land value and adding the depreciated value of any improvements. Mr Vasilou said that this value was referred to as reproduction cost new less depreciation or replacement cost new less depreciation or RCNLD. He provided figures for reconstruction based on Rawlinson's construction handbook for 2008. He then selected land values both for 2008 and 2011 that were considerably lower than his ultimate valuation of the site. These values were unexplained and distinctly inconsistent with the proposition, agreed to by both valuers, that the highest and best use of the site was that of redevelopment and that the buildings added no value. 53Further, as pointed out by Mr Rich, no allowance was made for depreciation. 54I noted that Mr Vasilou himself considered this method to be unreliable as the sole means of appraisal. 55I found it to be of no assistance. Conclusions 56It will be apparent from this analysis of Mr Vasilou's opinions that I found them to be of no assistance in determining the value of the property at 90 Park Avenue in November 2008. 57I was left therefore with the valuation opinion of Mr Rich and the problem that it presented in that a number of the comparable sites referred to by him were located at sites in other commercial centres of the Newcastle region. 58I considered the question of whether one of the properties referred to by Mr Vasilou, 55 Northcott Drive, Kotara, should be relied upon to adjust the value proposed by Mr Rich. 59This property was sold 7 February 2007. It was used as a commercial/retail showroom with obsolete buildings. The land was irregular in shape with an area of 1182 square metres. Mr Vasilou considered its position to be slightly inferior location and exposure 60Mr Vasilou said it was sold for $1,210,000 or $1,023.70 per square metre. Mr Rich maintained that the price for the sale was $1,000,000, exclusive of goods and services tax, or $846 per square metre. He accepted that this was a high price for virtual land value and suggested the reasons for this were: 1 the stronger period of sales prior to the global financial crisis; 2 the regular shape of this site eliminating wastage of land; 3 the site's wide frontage; 4 the comparative ease of redevelopment; 5 the purchase of the site by an existing tenant. 61Having regard to the uncertainty surrounding the true sale price of this property and taking into account the matters raised by Mr Rich, I decided that no adjustment should be made. 62I considered overall that Mr Rich's explanation for his ultimate conclusions was rationally and logically expounded to the point where, in the absence of alternative coherent valuation opinion, it was appropriate to adopt his valuation. 63I find that at the date of the defendant's breach of contract, 3 November 2008, the value of the property at 90 Park Avenue Kotara was $620,000. 64I find that the plaintiff is entitled to damages in the sum of $485,000 plus interest. ORDERS 65Verdict for the plaintiff. 66The proceedings are adjourned to 9.30 on 14 December 2011 to deal with issues of interest and costs. 67My reasons are published. ********** 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: 09 December 2011