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  • Unreported Judgment

Pioneer Australia Pty Ltd v Quinn

 

[2019] QSC 72

SUPREME COURT OF QUEENSLAND

CITATION:

Pioneer Australia Pty Ltd & Anor v Quinn [2019] QSC 72

PARTIES:

PIONEER AUSTRALIA PTY LTD (ACN 073 498 905) AND SPA INVESTMENTS PTY LTD (ACN 134 314 631)

(plaintiffs/defendants by counterclaim)

v

RORY ANN QUINN

(defendant/first plaintiff by counterclaim)

YIC INDUSTRIAL PTY LTD

(ACN 139 276 627)

(second plaintiff by counterclaim)

FILE NO/S:

SC No 1550 of 2017

DIVISION:

Trial Division

PROCEEDING:

Claim

DELIVERED ON:

26 March 2019

DELIVERED AT:

Brisbane 

HEARING DATE:

5 – 7, 10 September 2018

JUDGE:

Bond J

ORDER:

The orders of the Court are:

  1. The parties are directed to bring in minutes of an order dismissing the counterclaim and giving the plaintiffs judgment against the defendant in an amount together with interest consistent with the reasons for judgment.
  2. I will hear the parties on the orders which should be made as to costs.

CATCHWORDS:

INTERPRETATION – GENERAL RULES OF CONSTRUCTION OF INSTRUMENTS – COMMERCIAL AND BUSINESS TRANSACTIONS – PARTICULAR TRANSACTIONS – where the amount payable was in dispute – where there were two alternative interest rates applicable to the deed – where the deed was varied by subsequent agreement – where the later deed was silent as to whether simple or compound interest applied – where it was disputed the proper construction of the later deed was that interest was to capitalise monthly – where a rebate scheme to incentivise payment was introduced in the later deed – whether the amount payable on the loan at the time of sale had been correctly calculated

REAL PROPERTY – VALUATION OF LAND – METHODS OF VALUATION – HYPOTHETICAL SALE CONCEPT – where the two expert valuers diverged significantly in their valuation of the subject land – where the experts disagreed on the potential development of the land – where one expert had made errors in methodology which affected the credibility of their evidence – whether the land was sold at an undervalue

Property Law Act 1974 (Qld), s 84

Commonwealth v Milledge (1953) 90 CLR 157, considered

Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87, considered

Pola v Australia and New Zealand Banking Group Limited [2015] NSWCA 146, cited

COUNSEL:

M Martin QC, with D Ferraro, for the plaintiffs and defendants by counterclaim

D Savage QC, with L Copley, for the defendant plaintiffs by counterclaim

SOLICITORS:

Gall Standfield & Smith for the plaintiffs and defendants by counterclaim

C I Legal Services for the defendant and the plaintiffs by counterclaim

Introduction

  1. [1]
    On 7 October 2009 YIC Industrial Pty Ltd (YIC) acquired certain rural land in Yeppoon (the subject property) for a contract price of $2,500,000. YIC planned to develop the subject property as industrial property.
  2. [2]
    Two weeks later, on 21 October 2009, YIC borrowed $3,000,000 from the plaintiffs on mortgage security over the subject property. The defendant (who is the sole director and secretary of YIC) and her husband guaranteed YIC’s indebtedness to the plaintiffs and indemnified the plaintiffs against any loss which they might sustain by reason of any default by YIC in repayment of monies owed.
  3. [3]
    A little under 3½ years later, and consequent upon YIC’s default in repayment, on 21 March 2014, the plaintiffs sold the subject property for $3,300,000. As at the date of the sale, the plaintiffs said that the amount of principal and interest YIC owed under the loan was $5,930,788. In this proceeding, the plaintiffs claim $6,403,072 from the defendant under the guarantee, being the principal and interest owing by YIC under the loan as at the date of trial, after deducting the proceeds of sale and some other payments which had been made over the term of the loan. If the plaintiffs succeed, the calculation would have to be updated to the date of judgment.
  4. [4]
    The defendant and YIC dispute the plaintiffs’ calculation of the amount due and owing as at the date of the sale of the subject property. They say the proper calculation was $5,074,916. But, more importantly, they say that, in breach of various duties owed to them, the plaintiffs sold the subject property at a gross undervalue. If the subject property had been sold at the true market value of $9,641,945, the net proceeds of sale would have paid out the $5,074,916 owing on the loan and left a surplus of $4,251,416.06. Accordingly, the defendant and YIC counterclaimed for a declaration that the defendant’s liability under the guarantee had been extinguished and a judgment in favour of YIC against the plaintiffs in the sum of $4,251,416.06 plus interest from the time of sale to the date of judgment.
  5. [5]
    Two principal issues were litigated at the trial.
  6. [6]
    First, what was the amount owed by YIC as at the date of the sale of the subject property?  It was common ground at trial that the resolution of this issue turned on what was the proper construction of a deed dated 5 February 2013 which varied certain aspects of the extant legal arrangements between the parties. There was no dispute between the parties as to how the correct calculation should be reached, once the construction issues concerning that deed had been resolved.
  7. [7]
    Second, was the secured property sold at a price below market value?  The defendant and YIC sought to persuade me that the sale was at a price below market value. The plaintiffs contended the contrary. However, the plaintiffs conceded that, if I found that the secured property was sold below market value, they were legally liable to YIC to the extent of the short fall.[1]  Each side adduced expert valuation opinion evidence in support of their position and presented various criticisms of their opponents’ valuation approach. 
  8. [8]
    It was common ground at trial that if the defendant and YIC could not persuade me that the sale price was below the market value, then the counterclaim would be dismissed and judgment would issue in the plaintiffs’ favour for whatever amount derived from the resolution of the first issue. Conversely, it was common ground at trial that if the sale of the subject property was below market value, then a calculation should be performed following the logic of the counterclaim. The precise form of the judgment which would follow would, however, depend upon the extent to which I was persuaded that the sale price was below the market value.
  9. [9]
    I will first identify the relevant events in the chronology of the relationship between the parties and then address the two principal issues in turn.

Relevant facts

  1. [10]
    The terms of the original contractual arrangements between the plaintiffs, YIC and the two guarantors were set out in:
    1. (a)
      a security deed dated 21 October 2009 between the plaintiffs as lenders, YIC as the borrower and the defendant and her husband as guarantors; and
    2. (b)
      a registered mortgage between YIC as mortgagor and the plaintiffs as mortgagee over the subject property.
  2. [11]
    The security deed contained the following terms:
    1. (a)
      By clause 1, various terms used in other clauses were defined.
    2. (b)
      By clauses 2 and 5, the plaintiffs agreed to advance the “Primary Advance” to YIC, namely the sum of $3,000,000 on 21 October 2009.
    3. (c)
      By clause 3 and the definition of “due date”, YIC was obliged to pay the “the moneys hereby secured” on 21 October 2010, being 12 months after the making of the Primary Advance.
    4. (d)
      By clause 4, YIC was obliged to pay to the plaintiffs interest on “the moneys hereby secured”, at the rate of 15% per annum (called “the lower rate”), monthly in arrears and capitalised as provided for in the “Interest Schedule”. Reference to the definition of “the moneys hereby secured” and to the Interest Schedule revealed that interest was to compound monthly, with the result that the amount outstanding at the end of the 12 month period contemplated by clause 3 would be $3,482,263.50.
    5. (e)
      By a proviso to clause 4, in the event that YIC failed to pay the monies owing on the due day, YIC was obliged to pay interest the rate of 20% per annum (called “the higher rate”) on “the moneys hereby secured”. Although there was no express statement in the security deed that interest calculated at the higher rate (if it ever became applicable) would compound monthly in the same way as had been agreed for interest calculated at the lower rate, having regard to -
      1. (i)
        the inclusion in the definition of “the moneys hereby secured” of moneys payable on any account (see clause 1(e)(a)) and the moneys which the plaintiffs could charge pursuant to the registered mortgage (see clause 1(e)(f)) and arrears of interest (see clause 1(e)(i));
      1. (ii)
        the wording of the first item of the schedule to the registered mortgage and of clauses 5(c) and 40 of the mortgage (as to which see [12] below); and
      1. (iii)
        the relevant provisions of the statement of particulars of loan document (as to which see [13] below),

in my view that conclusion would be reached on the proper construction of clause 4. It was, in any event, common ground at trial that the original arrangements contemplated compounding interest whether at the lower rate or the higher rate.

  1. (f)
    By clause 8, read with clause A1 of the “Charge Terms Schedule”, the whole of “the moneys hereby secured” would become payable without the need for notice, in the event that default was made at any time in the payment of any of “the moneys hereby secured”.
  2. (g)
    By clause 6, the defendant and her husband guaranteed the due and punctual payment to the plaintiffs by YIC of “the moneys hereby secured” and undertook to pay the moneys to the plaintiffs as if they were the principal debtor, principal contractor and/or principal obligee.
  3. (h)
    By clause 7, the defendant and her husband indemnified the plaintiffs from and against all loss and damage which the plaintiffs may sustain by reason of default by YIC in the payments of “the moneys hereby secured” or by reason of default in the performance of any of the covenants and obligations of YIC;
  4. (i)
    By clause 8, read with clauses 13.1 and 13.3 of the “Guarantee Terms Schedule”, the guarantees provided by the defendant and her husband -
    1. (i)
      were enforceable at any time after demand in writing by the plaintiffs seeking to enforce them; and
    1. (ii)
      were independent of, and in addition to, any other guarantee or security held by the plaintiffs in connection with any of “the moneys hereby secured”.
  1. [12]
    The mortgage contained the following terms:
    1. (a)
      By item 5 of the mortgage the debt or liability secured by the mortgage was set out in the schedule to the mortgage.
    2. (b)
      By item 6 of the mortgage YIC covenanted with the plaintiffs in terms of the schedule.
    3. (c)
      The first item of the schedule recorded the description of the debt or liability secured in these terms:

5.  Description of debt or liability secured

THE CONSIDERATION  - $3,500,000.00

RATE OF INTEREST   - 15% (HIGHER RATE OF INTEREST 20%) PER ANNUM

PERIOD OF LOAN   - 12 MONTHS

MONTHLY INSTALMENTS  - N/A

  1. (d)
    By clause 5(a) of the schedule, upon default of payment by YIC being made of the principal sum or of any other secured moneys, the plaintiffs were at liberty to exercise a power of sale of the subject property and were permitted to sell by public auction or private contract.
  2. (e)
    By clause 5(b) of the schedule, upon default of payment by YIC of the principal sum or any part thereof or of interest or if default be otherwise made by YIC under the mortgage, the whole of the principal sum and all other moneys owing would at the option of the plaintiffs immediately or at any time thereafter become due and YIC was obliged thereafter to pay the same on demand.
  3. (f)
    By clause 5(c) of the schedule, in the event that any interest payable or any interest payable on arrears of interest capitalised was unpaid on the due date, then in every such case the interest would be added to the principal moneys secured and would bear interest payable at the rate and on the interest days provided therein, and all covenants and provisions expressed or implied with respect to interest on the facility would equally apply to the interest on such arrears.
  4. (g)
    By clause 35 of the schedule, YIC acknowledged that it had received from the plaintiffs and before it executed any security document, a statement in writing of the particulars of the proposed loan.
  5. (h)
    By clauses 38 to 40 of the schedule:

38  PRINCIPAL SUM DRAW DOWN

The Mortgagor acknowledges that from the principal sum it is only entitled to draw down the amount of $3,000,000.00.

39  PRINCIPAL SUM PAYABLE

The Mortgagor will pay to the Mortgagee the principal sum or such amount thereof that has been drawn down therefrom and all other sums and obligations becoming money secured herein on the date being 12 months from the date of the advance.

  1.  INTEREST

So long as the principal sum shall be owing or unpaid by virtue of this Mortgage or any collateral security hereto or upon any judgment or order in which any covenant herein may become merged the Mortgagor will pay interest on such amount of the principal sum that has been drawn down in the manner from time to time and/or to the person or persons, firm or firms, corporation or corporations as the Mortgagee may direct at the rate of 15% per annum as follows, namely:-

Interest shall be calculated monthly in arrears and capitalised in accordance with Schedule 1 hereto.

Interest due is payable upon repayment of the principal sum or such amount thereof that has been drawn down therefrom.

In the event that the principal sum or such amount thereof that has been drawn down therefrom and interest due is not paid by the date provided for in clause 39 hereof, then interest shall be calculated at the rate of 20% per annum monthly in arrears in lieu of 15% per annum on the outstanding principal sum or such amount thereof that has been drawn down therefrom and interest unpaid.

  1. [13]
    The “Statement of Particulars of Proposed Loan” referred to in clause 35 of the schedule to the mortgage was in evidence. It was a document executed by YIC and the two guarantors on the same date as the security deed and the registered mortgage. Relevantly it recorded that:

Term of Loan:   12 months from the draw down date.

Lower Rate of Interest:  15% per annum.

Higher Rate of Interest: 20% per annum.

Capitalisation of Interest:  Interest is calculated monthly in arrears and capitalised at the end of each month.

  1. [14]
    The plaintiffs advanced $3,000,000 to YIC on 21 October 2009 in accordance with their obligations.
  2. [15]
    However YIC did not repay the loan and interest by the due date of 21 October 2010. Instead, by deed dated 21 October 2010, the plaintiffs, YIC, the defendant and her husband agreed to vary the arrangements between them in this way:
    1. (a)
      YIC would make an immediate payment to the plaintiffs in the sum of $235,000 in partial reduction of the total amount owing by YIC to the plaintiffs;
    2. (b)
      the due date under the security deed would be extended by 6 months to 21 April 2011; and
    3. (c)
      if the moneys due under the security deed were paid prior to the extended due date then then the amount to be paid would be $3,498,547.10 (which, it may be observed, was an amount which reflected interest having been capitalised monthly at the lower 15% per annum rate, account being taken of the $235,000 payment).[2]
  3. [16]
    YIC caused $235,000 to be paid to the plaintiffs as it was obliged to do, but failed to repay the loan by 21 April 2011. It may be observed that, in consequence of the default, interest became payable at the higher 20% per annum rate, that interest being capitalised monthly.
  4. [17]
    On 3 May 2011 the plaintiffs served upon YIC a default notice and notice of exercise of power of sale pursuant to the mortgage and in accordance with s 84 of the Property Law Act 1974 (Qld). YIC failed to remedy the default.
  5. [18]
    By deed dated 5 February 2013 the plaintiffs, YIC, the defendant and her husband agreed to a further alteration to the obligations which applied as between them which gave YIC an extension of time to pay the full amount owing, on certain terms, which involved: (1) YIC paying $250,000 immediately, (2) YIC agreeing to procure the completion of certain works as part of the proposed development of the subject property, and (3) the plaintiffs agreeing to forbear to take further action on the existing default until 31 January 2014. It is the proper construction of this deed which dictates the answer to the first principal issue litigated at the trial. I will come back to its precise terms.
  6. [19]
    On 31 January 2013 YIC paid $250,000 to the plaintiffs as it had agreed to do. However YIC did not procure the completion of the specified works to upgrade the intersection. Nor did it make repayment of the loan by 31 January 2014.
  7. [20]
    On 11 March 2014 the plaintiffs entered into a contract for the sale of the secured property as mortgagees in possession to the Livingstone Shire Council (the Council) for $3,300,000. On 21 March 2014 the sale to the Council completed and the net proceeds of $3,290,249 were credited against the amounts owed to the plaintiffs.  As I have already indicated, the defendant and YIC contended that the manner by which that sale was brought about involved breach by the plaintiffs of various enforceable duties owed to YIC. In light of the plaintiffs’ concession concerning breach of duty and causation,[3]it is not necessary to record that contention in any more detail.
  8. [21]
    On 16 April 2014 the plaintiffs caused a letter to be sent to the defendant (in her capacity as sole director and secretary of YIC and in her personal capacity as guarantor) whereby the plaintiffs, amongst other things, made a demand upon YIC and the defendant for the balance of monies owing to the plaintiffs being $2,640,538.71 as at 22 March 2014. Neither YIC nor the defendant have paid any further moneys in reduction of the amount said to be owed to the plaintiffs.
  9. [22]
    Against that background I turn to consider the first principal issue.

What was the amount owed by YIC at the time of sale?

  1. [23]
    As at the time of completion of the sale of the subject property, the plaintiffs calculated the balance amount owing by YIC to be $5,930,788. That calculation reflected the plaintiffs:
    1. (a)
      taking account of the payment of $235,000 referred to at [16] above;
    2. (b)
      applying the lower 15% per annum rate, that interest being capitalised monthly, up until the failure to repay on 21 April 2011 referred to at [16] above;
    3. (c)
      applying the higher 20% per annum rate, that interest being capitalised monthly, at all times after 21 April 2011; and
    4. (d)
      taking account of the payment of $250,000 referred to at [19] above.
  2. [24]
    The defendant contended that calculation was in error because on the proper construction of the deed dated 5 February 2013, and immediately upon entry into the deed the parties had agreed that:
    1. (a)
      the principal debt due and owing by YIC and the defendant to the plaintiffs was fixed in the sum of $4,000,000; and
    2. (b)
      if the facility was not repaid by 31 January 2014, YIC was obliged to pay to the plaintiffs interest calculated on the sum of $4,738,460 from 31 January 2013 or on so much of the principal and interest as remained outstanding until repayment at the rate of 20% per annum (being simple interest only).
  3. [25]
    At the time the deed was entered into, the relevant context which was known to the parties was as follows:
    1. (a)
      the fact and terms of the existing legal arrangements and the alterations which had already been made to them;
    2. (b)
      the quantum of debt which flowed from them and which would continue to flow from them unless altered;
    3. (c)
      YIC was in default in relation to the terms of its borrowing from the plaintiffs; and
    4. (d)
      YIC proposed to develop the subject property in the manner referred to in the recitals.
  4. [26]
    It is necessary to quote from the deed at length:

Recitals

  1. YIC is registered as Proprietor of Lot 5000 on SP 230276 Parish of Yeppoon County of Livingstone Title Reference 50784248 ("the Land").
  2. YIC proposes to develop the Land generally in accordance with the Negotiated Decision Notice dated 2 July 2009 issued by the Rockhampton Regional Council under Application number L/2008-331 ("the ROL Approval").
  3. In addition to undertaking the works required pursuant to the ROL Approval (which YIC proposes to undertake in stages) YIC also proposes to cause the construction of the upgrade to the intersection of Jordy Drive and Rockhampton-Yeppoon Road as required by condition 2.3 of the ROL Approval ("the Intersection Works").
  4. YIC and the Guarantors and Pioneer and Spa are parties to a loan agreement dated 21 October 2009 ("the Security Deed").
  5. Pioneer and Spa are registered as First Mortgagees of the Land pursuant to Mortgage No. 712810004 ("the First Mortgage").
  6. The First Mortgage and the Guarantors are in default of the Security Deed with a Default Notice and Notice of Exercise of Power of Sale having been issued on 3 May 2011 ("The Default Notice") and at 31 January 2013 has principal and interest outstanding in the sum of $4,988.490 plus costs due to Pioneer and Spa pursuant to the Security Deed and the First Mortgage ("the 31 January 2013 Debt").
  7. Pursuant to the First Mortgage interest will continue to accrue on the 31 January 2013 Debt at the rate of 20% per annum calculated at monthly rests until all monies due and owing under the First Mortgage and Security Deed have been paid.
  8. YIC and the Guarantors have requested Pioneer and Spa to compromise their position in relation to the First Mortgage and Security Deed upon YIC procuring a contribution to the 31 January 2013 Debt and procuring the completion of the Intersection Works ("the Contributions").
  9. YIC has procured external assistance to enable it to make the Contributions.
  10. In consideration of YIC making the Contributions Pioneer and Spa have agreed to forbear recovery action under the First Mortgage and Security Deed to 31 January 2014 and to pay to the direction of  YIC upon final repayment of the monies due and owing under the First Mortgage and Security Deed all monies to which Pioneer and Spa are entitled and recovered under the First Mortgage and Security Deed In excess of the sum of $4,000.000.00 plus interest from 31 January 2013 at the rate of 15% per annum calculated at monthly rests until all monies due and owing under the First Mortgage and Security Deed have been paid.

Whereby it is agreed as follows:

  1. The parties agree the Recitals to this Deed are true and correct and form part of this deed.
  2. YIC agrees to pay to Pioneer and Spa the sum of $250,000 forthwith upon execution of this Deed by Pioneer and Spa.
  3. Subject to payment of the sum referred to in clause 2 hereof Pioneer and Spa hereby agree to forbear any further action under the Default Notice until 31 January 2014.
  4. Pioneer and Spa agree that all monies paid by or on behalf on YIC towards the Intersection Works shall constitute further advances made pursuant to clause 1 of the First Mortgage and form part of the principal sum secured thereunder.
  5. Pioneer and Spa acknowledge and agree that on repayment of the monies due under the First Mortgage they shall firstly calculate the principal sum and interest due under the First Mortgage and Security Deed having regard to any advances made pursuant to clause 4 hereof and interest at the higher rate plus costs to the date of the repayment ("the debt due on repayment") and apply the debt due on repayment in the following manner:
  1. (i)
    Firstly, in paying the sum of $4M plus interest at the rate of 15% per annum until 31 January 2014 (or such earlier date as the monies outstanding are paid) and in the event the First Mortgage has not been repaid by 31 January 2014 plus interest beyond 31 January 2013 at the rate of 20% per annum on the sum of $4,738,460.00 until the date of repayment; and
  2. (ii)
    Secondly, the difference between the amount paid to Pioneer and Spa pursuant to clause 5(i) above and the debt due on repayment to YIC or as it directs.
  1. For the avoidance of doubt in the event that the First Mortgage has not been fully repaid by 31 January 2014 and Pioneer and Spa pursue the Default Notice or any replacement or substitution of it in order to redeem the debt due under the First Mortgage then the amount due and payable to YIC pursuant to clause 5(ii) hereof shall not exceed the net amount (after all default and sales costs) recovered on a sale of the Land less the amount payable pursuant to clause 5(i) hereof.
  2. YIC and the Guarantors acknowledge and accept the 31 January 2013 Debt and in consideration of this Deed waive any rights which they may have against Pioneer and Spa in disputing their indebtedness under the First Mortgage and Security Deed.

[…]

  1. [27]
    The deed was not the product of competent legal drafting. Nevertheless I think a reasonable commercial person in the position of the parties, having regard to the surrounding circumstances known to the parties, and the purpose and object of the transaction, would reach the following conclusions.
  2. [28]
    First, Recital F confirmed the quantum of the debt due and owing as at 31 January 2013. Notably the quantum there recited demonstrably reflected interest having been capitalised monthly at the lower 15% per annum rate until the time of the default in payment on 21 April 2011 and thereafter capitalised monthly at the higher 20% per annum rate. This is consistent with what I think was the proper construction of the existing legal arrangements between them. It reflected the application of compound interest, not simple interest.
  3. [29]
    Second, Recital G acknowledged that interest would “continue to accrue on the 31 January 2013 Debt until all monies … due and owing under the First Mortgage and Security Deed have been paid”. In light of the context of the existing legal arrangements, the operation of which had been specifically confirmed by the preceding recital, in my view it is obvious that the concept of “continued” accrual meant continued accrual in the same way as interest had been accruing, namely compounding by being capitalised monthly. The recital did not reveal any intention to alter the status quo in that respect. The defendants contend the failure to make explicit reference to compounding or capitalising monthly suggests that in this recital and in clause 5 the references to interest should be taken as references to simple interest. I disagree. In my view a reasonable commercial person standing in the shoes of the parties would have thought they were using a short hand reference consistent with the well-understood operation of their existing legal arrangements.
  4. [30]
    Third, there were relevantly two ways in which the plaintiffs had compromised their rights, each of which was contingent in certain respects. The first way was the plaintiffs agreed to forbear from taking any further action on the default notice for a further 12 months, until 31 January 2014, and the second was that upon final repayment of the monies due owing under the First Mortgage and Security Deed, the plaintiffs agreed to rebate certain moneys back to YIC or at its direction.
  5. [31]
    Fourth, as to the plaintiffs’ agreement to forbear from taking further action –
    1. (a)
      Upon entry into the deed, YIC became the subject of an unconditional obligation to pay $250,000 to the plaintiffs: clause 2.
    2. (b)
      Upon entry into the deed, the plaintiffs became the subject of an obligation to forbear further action, but that obligation was conditioned on YIC paying the $250,000: clause 3.
    3. (c)
      The agreement to forbear further action did not extend beyond 31 January 2014.
  6. [32]
    Fifth, as to the plaintiffs’ agreement to rebate moneys –
    1. (a)
      Recitals H and J suggested that agreement was in consideration of YIC both paying the $250,000 and actually procuring the completion of the Intersection Works, and the plaintiffs compromising their position in return for that having occurred. Yet, curiously, the deed did not expressly impose an obligation on YIC to procure the completion of the Intersection Works. In light of clause 1 and the form of clause 4, in my view such an obligation should be implied and, in any event, the plaintiffs’ agreement to rebate should be regarded as contingent upon YIC actually procuring the completion of the Intersection Works.
    2. (b)
      Recital J recorded the plaintiffs’ agreement to pay certain moneys to YIC “upon final repayment of the monies due and owing under the First Mortgage and Security Deed”. This suggested that the obligation to make such a payment was intended to be contingent upon such final repayment having occurred. That suggestion was confirmed by the wording of clause 5 which made explicit that the obligation to make any such payment only accrued “on repayment of the monies due under the First Mortgage” and stated the obligations in terms which require the plaintiffs to make payments out of those monies.
    3. (c)
      The argument of the defendant and YIC suggests that immediately upon entering into the deed, the plaintiffs gave away any rights against YIC or the guarantors except those referred to in clause 5(i). That argument cannot be accepted for two reasons. First, it ignores the express rebate structure inherent in the wording of Recital J and clause 5. The deal was expressly set up as a cash back or rebate arrangement and that structure obviously represented a deliberate choice. It is not legitimate simply to ignore that choice. Second, it is commercial nonsense to conclude that the parties intended that the plaintiffs would immediately exchange their extant right to recover $4,988,490 plus interest compounding monthly at the higher 20% rate in return only for promises: (1) to pay $250,000, (2) impliedly to procure the completion of the Intersection Works, and (3) to pay $4,000,000 plus interest calculated in a way which would vary depending on the circumstances. Even if one assumed the promise to pay $250,000 was good, why would the plaintiffs immediately give away the right to recover $738,490?  On the other hand, one would well understand the plaintiffs holding out the prospect of becoming bound to pay a rebate which would have that effect, with a view to motivating YIC and the guarantors to ensure that the contingency was met.
    4. (d)
      To my mind, a reasonable commercial person in the position of the parties, having regard to the surrounding circumstances known to the parties, and the purpose and object of the transaction, would conclude that the intended operation of the rebate mechanism was to provide motivation for the defendants to bring about one or other of the following options, but to leave unamended the impact of the payment provisions in the First Mortgage and Security Deed if neither option was brought about:
      1. (i)
        the plaintiffs might be paid the full amount owing under the First Mortgage and Security Deed on or before 31 January 2014 in which case: (1) the plaintiffs would keep $4,000,000 plus interest capitalised monthly at the lower 15% rate on the $4,000,000 from 31 January 2013 until payment, and (2) the plaintiffs would rebate the balance back to YIC or as it directed; or
      2. (ii)
        the plaintiffs might be paid the full amount owing under the First Mortgage and Security Deed after 31 January 2014 in which case: (1) the plaintiffs would keep $4,000,000 plus interest capitalised monthly at the higher 20% rate on $4,738,460.00[4] from 31 January 2013 until payment, and (2) the plaintiffs would rebate the balance back to YIC or as it directed.
  7. [33]
    Finally, I should observe that I would reject the argument that the interest mechanism in clause 5 was intended to introduce a simple interest mechanism for similar reasons to those mentioned at [29]. In my view the reasonable commercial person standing in the shoes of the parties would have concluded that the reference to interest was a shorthand reference to what were the then current arrangements. No intention is revealed to change a status quo which involved a liability to pay compound interest into a liability only to pay simple interest.
  8. [34]
    If my construction of the clause is right, because the contingency was never met, the obligation to make the rebate never accrued and YIC’s obligation to pay pursuant to the Security Deed and the First Mortgage continued unaltered.
  9. [35]
    The result is that as at the time of completion of the sale of the secured property, the balance amount owing by YIC to the plaintiffs was $5,930,788, as contended by the plaintiffs.
  10. [36]
    I turn to consider the second principal issue.

Was the subject property sold below market value?

Introduction

  1. [37]
    The plaintiffs adduced expert opinion evidence from Mr Sheehan. He conducted a retrospective assessment of market value as at 20 March 2014 (i.e. the day before the settlement of the $3,300,000[5]sale to the Council) which arrived at a market value of $3,050,000.[6]  His evidence supported the plaintiffs’ case that they sold at a figure above market value.
  2. [38]
    The defendant and YIC adduced expert opinion evidence from Mr Murphy. He conducted a retrospective assessment of market value as at 21 March 2014 (i.e. the day of the settlement of the $3,300,000 sale to the Council) which arrived at a market value of $9,641,945.[7]  His evidence supported the case of the defendant and YIC that the market value was greater than $3,300,000.
  3. [39]
    The defendant and YIC carried the burden of persuading me that the subject property sold at a price below market value. In order to discharge their burden they:
    1. (a)
      sought to persuade me of the validity of various criticisms which they made of the expert valuation opinion evidence of Mr Sheehan, upon whom the plaintiffs relied; and
    2. (b)
      argued that I should prefer the expert valuation evidence of Mr Murphy over that of Mr Sheehan.
  4. [40]
    For the reasons which follow, I was not persuaded of the merits of the criticisms of Mr Sheehan’s evidence and did not find Mr Murphy’s analysis to be a reliable one. Accordingly, I was not persuaded by the defendant and YIC to make the finding they sought. 

Applicable constraints affecting development

  1. [41]
    Both Mr Sheehan and Mr Murphy agreed in principle that because there was a lack of evidence of en globo sales directly comparable to the subject property, it was appropriate to value the property on a “hypothetical development basis”.
  2. [42]
    Proceeding in that way required each of them, in effect, to consider what, as at 21 March 2014, a hypothetical willing developer would have had to offer a willing vendor to induce the willing vendor to sell, having regard to what the willing developer acting knowledgeably and prudently would have known or assumed about:
    1. (a)
      how the subject property could be developed consistently with applicable constraints affecting development;
    2. (b)
      what development period and development costs would be involved in so doing;
    3. (c)
      what gross realization proceeds could be obtained by selling such lots as would have been available for sale after the block had been developed consistently with the constraints affecting development;
    4. (d)
      what the sales period and sales/marketing costs would be;
    5. (e)
      what allowances should be made for profit and risk; and
    6. (f)
      what would be the applicable interest rates.
  3. [43]
    Before examining the differences between the two valuations, it is appropriate explicitly to consider what the hypothetical willing developer acting knowledgeably and prudently would have known or assumed about the applicable constraints affecting development as at about the time of sale of the subject property. The way in which each valuer dealt with this issue was a significant point of differentiation between them.
  4. [44]
    The subject property was approximately 56.59 hectares located five kilometres to the south-west of the township of Yeppoon. At all material times during the period of the loan and up until the time of sale, the subject property was zoned “Rural” according to the Council town planning scheme. Industrial development was inconsistent with rural zoning.
  5. [45]
    However YIC’s intention to develop at least part of the land for industrial development was soundly based because there was good reason to be confident that the zoning could be changed, at least in part.
  6. [46]
    On 11 March 2008, and pursuant to an application made by YIC, the Council had issued a “Decision Notice Approval”. The approval was for a “Development Permit for a Preliminary Approval Overriding the Planning Scheme for a Material Change of Use for an Industrial Estate comprising Industrial, Multi-Modal and Open Spaces Uses.” 
  7. [47]
    The conditions of the 11 March 2008 approval included:
    1. (a)
      Pursuant to condition 3.1, the approval was subject to the Department of Main Roads conditions as outlined in an attachment 2, which included:
      1. (i)
        the nearby intersection at Rockhampton-Yeppoon Rd had be upgraded in accordance with certain plans (Department of Main Roads, condition 1.1.1); and
      1. (ii)
        the Department would contribute up to a maximum of $200,000.00 towards the intersection upgrade costs in the 2008/2009 financial year (Department of Main Roads, condition 1.1.1).
    2. (b)
      Pursuant to condition 3.2, the approval was subject to the Department of Natural Resources and Water’s conditions as outlined in an attachment 3 dated 22 October 2007, which included the requirement that the application would not involve clearing of any assessable vegetation in a nominated area, it having been noted that the applicant had stated that the proposed plan did not require clearing of any remnant vegetation (clause 1 of attachment 2).
    3. (c)
      Pursuant to condition 4.1, a Master Plan Development Document had to be provided to the Council.
    4. (d)
      Pursuant to condition 7.1, the approval was valid for a period of 10 years from the day the approval took effect.
  8. [48]
    Having regard to an attached land use plan, the 11 March 2008 approval -
    1. (a)
      approved a total developable area of 23.8 hectares for use as:
      1. (i)
        general Industry – 23.4 hectares;
      1. (ii)
        multimodal – 1.4 hectares;
    2. (b)
      identified that the remaining area not approved as developable area comprised:
      1. (i)
        road – 4.5 hectares;
      1. (ii)
        balance lot – 28.7 hectares;
      1. (iii)
        open space and water treatment – 2.8 hectares.
  9. [49]
    The Department of Natural Resources and Water condition referred to at [47](b) above was a condition affecting the 28.7 hectare balance lot, which had not been approved as part of the total developable area.
  10. [50]
    On 8 July 2008, the preliminary approval expressed in the 11 March 2008 approval was re-issued so as to remain valid for 10 years.
  11. [51]
    On 15 January 2009, and pursuant to an application made by YIC, the Council issued a further “Decision Notice Approval”. Such approval was for aDevelopment Permit for a Reconfiguration of a Lot – (one lot into twenty-one lots)”. The approved plans attached to the January 2009 approval showed reconfiguration of the 23.4 hectares (permitted for general industry use by the March 2008 approval) into 21 lots (over three stages).
  12. [52]
    The conditions of the 15 January 2009 approval included the following:
    1. (a)
      Pursuant to condition 1.7, the approval was valid for a period of 4 years from the day it took effect and would lapse if the Final Survey Plan had not been sealed in accordance with the approved conditions within 4 years.
    2. (b)
      Pursuant to condition 2.3, the intersection improvement works at Rockhampton-Yeppoon Rd had to be designed and constructed in accordance with the requirements of the Department of Main Roads. The requirements were specified by reference to identified plans in Department of Main Roads condition 1.1.1.
  13. [53]
    On 2 July 2009, and pursuant to an application made by YIC, the Council had issued a
    “Negotiated Decision Notice”. The negotiated decision related, inter alia, to contributions to be paid in accordance with the then Council policy rates. The conditions of the 15 January 2009 approval included the same two conditions mentioned in the previous paragraph.
  14. [54]
    As at 21 March 2014:
    1. (a)
      the 11 March 2008 approval was current and, accordingly, the areas approved (and not approved) for development had not changed;
    2. (b)
      the 15 January 2009 and 2 July 2009 approvals had each expired;
    3. (c)
      no Master Plan Development Document had been submitted to Council; and
    4. (d)
      the Rockhampton – Yepoon Road intersection had not been upgraded.
  15. [55]
    In my view it would be an appropriate assumption for any valuer to make that the hypothetical willing developer acting knowledgeably and prudently would have found out the foregoing details.
  16. [56]
    Against that background it is appropriate to make some observations about how the two valuers addressed these considerations.
  17. [57]
    That the 15 January 2009 and 2 July 2009 approvals had each expired was not lost on Mr Sheehan. The way he dealt with the issue was factually based. I make the following observations:
    1. (a)
      Later in 2014, after the Council’s purchase of the property had settled, the Council obtained approval to reconfigure part of the property already approved for development pursuant to the 11 March 2008 approval into:
      1. (i)
        10 lots – 6.9239 hectares (excluding roads) (stage no. 1); and
      1. (ii)
        13 lots – 3.8875 hectares (excluding roads) (stage no. 2).
    2. (b)
      That reconfiguration was not precisely the same either in area or in number of lots as the reconfiguration which had been the subject of the expired 15 January 2009 and 2 July 2009 approvals. Moreover, that reconfiguration did not exhaust the area which had already been approved for development pursuant to the 11 March 2008. In this regard, Mr Sheehan thought the area of the subject property which remained after that reconfiguration (after taking account of some road widening) was 42.25 hectares. 15.841 hectares of that area was the subject of the 11 March 2008 existing approval for general industrial use and 26.409 hectares fell within the area which was not approved for development.
    3. (c)
      In his valuation opinion, Mr Sheehan adopted a hypothetical development configuration based upon the 2014 approval obtained by Council after it acquired the property. He assumed that the hypothetical willing developer would have considered the value of the land by reference to 3 component parts, namely the reconfigured area (divided into 23 industrial lots); the balance of the area which had been approved for industrial development in the 11 March 2008 approval; and the remaining balance area which was not approved for development.
    4. (d)
      The defendant criticized this choice and contended that it was contrary to appropriate valuation methodology. But Mr Sheehan justified not using the configuration contained in the 15 January 2009 and 2 July 2009 approvals because they had lapsed. And he justified using the configuration based on what the Council did in fact approve later in 2014 as preferable, because he thought that you would not use the lapsed configuration if a better one was available and given that Council did in fact approve a different configuration (albeit for itself as developer) and subsequently implemented that configuration, it was appropriate to use that configuration.
    5. (e)
      I reject the criticism of his approach. In effect he has treated what happened in 2014 within a few months after the valuation date as a basis for inferring what a hypothetical willing developer could have established in 2014 as being a configuration which would likely have been approved by Council in 2014, notwithstanding the lapsing of approvals made over 4 years earlier. This seems to me to a sensible and fact-based approach to the valuation.
  18. [58]
    Mr Murphy on the other hand, proceeded on an assumption that the hypothetical development would be the same as that which had been approved in the 15 January 2009 and 2 July 2009 approvals. He did this because he had overlooked that the 15 January 2009 and 2 July 2009 approvals had expired as at the date of valuation. During cross-examination, Mr Murphy conceded his error. Although, mathematically, the issue was not of great significance,[8]Mr Murphy’s error was one of a number of reasons why I concluded that his opinion was not one on which I could rely.
  19. [59]
    Mr Murphy made what were to my mind two other significant flawed assumptions in his treatment of the significance of the existing constraints. The first influenced his assessment of the costs of the development in accordance with any assumed reconfiguration. The second influenced his valuation of that part of the subject property which was not contained within the reconfiguration referred to above. I found his reasoning on both assumptions to be unpersuasive. I do not accept that either assumption was appropriate. This also formed part of the reasons why I concluded that his opinion was not one on which I could rely.
  20. [60]
    As to the first assumption:
    1. (a)
      Given the terms of the 11 March 2008 approval and the fact that the intersection improvement works at Rockhampton-Yeppoon Road had still not been completed, the only valid assumption would be that the terms of any approval of reconfiguration would be conditional on the intersection improvement works at Rockhampton-Yeppoon Road being completed and that would inevitably come at a cost.
    2. (b)
      Yet that was not the assumption which Mr Murphy made. Rather he assumed that the hypothetical willing developer: (1) would have known that, as was the fact, there was another developer carrying out nearby works, development approval for which was also conditional upon having the intersection improvement works done; and (2) would have assumed that that other developer would bear 100% of the costs of those works without seeking contribution.
    3. (c)
      Whilst I would accept the first proposition, I would reject the second. It was a completely uncommercial notion. It is far more likely that both developers would recognize that the prudent course would be to come to an arrangement whereby the costs burden would be shared. Indeed an internal Council report dated 7 March 2014 (which had been prepared for the purposes of the Council’s decision as to whether to acquire the subject property from the plaintiffs on a mortgagee sale) recognised as much, when it observed:

The development of the industrial estate will precipitate the need to undertake upgrade works on the intersection of Jordy Drive and Yeppoon Road. This intersection provides access to large scale residential and industrial estates. Similar demands also apply to the residential development occurring on the northern side of Jordy Drive (Homecorp). This could result in a standoff, with each party waiting for the other to undertake the works. Alternatively, there is the potential for both parties to work together, to share the burden.

  1. (d)
    I think any hypothetical willing developer would have recognized the potential benefits of working with the other developer as the Council in fact did. Such a hypothetical willing developer would have assumed that it would be at risk of bearing the whole cost of the intersection work, but would be likely to be able to strike a deal which would permit it to share the cost with the other developer. That is the assumption which a competent valuer should have made. The appropriateness of that assumption was confirmed by the fact that (as Mr Sheehan noted and took into account) when the Council did in fact carry out the development work on the subject property it entered into an arrangement with the other developer which resulted in the Council bearing half of the cost of the intersection work at a total cost of $1,221,282).
  2. (e)
    It seemed that Mr Murphy must have been influenced in making the uncommercial assumption that he made by the fact that the defendant’s husband (from whom Mr Murphy apparently thought it was appropriate to take instructions directly) gave him material which suggested that the principal of the other developer had emailed a statement saying “This is to confirm that YIC Industrial Pty Ltd was never obliged to and in fact did not contribute to the costs of the intersection.”[9]  Of course literally that statement was true, because YIC had not been the subject of any obligation to that developer (because the requirement to complete the intersection works was expressed in conditions of approval which YIC had obtained) and in fact it was the Council which contributed to the costs of the intersection borne by that developer, not YIC. Nevertheless, Mr Murphy’s preparedness to value the property on this assumption sounded adversely to my assessment of the reliability of his opinion evidence. 
  1. [61]
    As to the second assumption:
    1. (a)
      Mr Murphy assumed the whole balance area could be sold as approved for development. This assumption treats as irrelevant two constraints expressed in the 11 March 2008 approval, namely: (1) over 26 hectares was not approved for industrial development and therefore was still zoned rural with no extant approval to override the planning scheme, and (2) the approval was the subject of an apparent constraint in terms of vegetation removal imposed by the Department of Natural Resources and Minerals.
    2. (b)
      Mr Murphy justified his approach by reference to the following material:
      1. (i)
        1a MacroPlan Report prepared at the request of the Council in December 2007, which revealed that the author recommended the area as suitable for future industrial needs of Yeppoon;
      1. (ii)
        a GHD Report prepared in 2010 which, similarly, recommended the area as suitable for future industrial needs of Yeppoon;
      1. (iii)
        an email dated 5 March 2012 provided to him by the defendant’s husband (from whom Mr Murphy again apparently thought it was appropriate to take instructions directly) which suggested the existence of a draft strategic council plan which would include the area in a proposed industrial zone;
      1. (iv)
        a newspaper report dated 20 February 2013 (also directly provided to him by the defendant’s husband) which referred to the fact that the Council’s planning scheme was moving into a public consultation phase;
      1. (v)
        Council material from September 2015 which revealed that Council staff had recommended and the Council had approved a Draft Planning Scheme in September 2015 for submission to the State government for approval, the terms of which confirmed that no new industrial land had been zoned, but that planning would continue in “two investigation areas near Yeppoon Road to determine suitability for future industrial development”; and
      1. (vi)
        a copy of the Draft Strategic Plan for Yeppoon dated 4 November 2015 which identified the Balance Land within the subject property as “Future Industrial”.
    3. (c)
      But this material did not justify Mr Murphy’s assumption for at least the following reasons:
      1. (i)
        The MacroPlan report pre-dated the March 2008 approval and the March 2008 approval did not approve the whole Balance Area for industrial development.
      1. (ii)
        Under cross-examination Mr Murphy conceded that the GHD report was based on the assumption of population increases which had not in fact materialized, and, in any event the terms of the report suggested that it would not be until the year 2031 that there might be a demand for an area of vacant industrial land in the Livingstone Planning Area (38 hectares) similar to the area the subject of Mr Murphy’s assumption.
      1. (iii)
        Mr Murphy conceded that a property developer could not have discovered the 2015 material at or about the valuation date.
      1. (iv)
        Even in the Draft Strategic Plan produced 18 months after the valuation date, it was not proposed that the zoning of the relevant area be changed to permit industrial development. Rather it seemed that that was a future contemplation.
      1. (v)
        The Draft Strategic Plan had not been approved by the State Government at that time.
    4. (d)
      Mr Murphy paid insufficient regard to the vegetation removal constraints contained in the March 2008 approval. Mr Sheehan elaborated on those difficulties by identifying email documentary evidence that the Council who had in fact purchased the land, had recognized that the difficulties existed. Whilst it might be doubtful that the particular email concerned would have been identified by the hypothetical willing developer, I think it is reasonable to assume that enquiries with Council would have identified at least the issue of vegetation clearance as a real obstacle to regarding the whole balance area as available for development.

Evaluation of the competing opinions

  1. [62]
    The plaintiffs suggested that I should form the positive view that Mr Murphy was not an independent witness because Mr Murphy saw fit to obtain instructions directly from the defendant’s husband and indeed to use him as a sounding board on various matters arising in the course of preparation of his opinions. I did not form the view that Mr Murphy was consciously seeking to do anything other than his sworn duty. Nevertheless, I thought it was imprudent of Mr Murphy to take the course he did, as it carried the risk of the introduction of unconscious cognitive bias.
  2. [63]
    Whether that is the explanation for the matters which sound adversely to my view of Mr Murphy’s opinion evidence which I have identified above and will identify below is not clear. It suffices to say that in combination, those matters were such that I have concluded that I would not regard Mr Murphy’s opinion evidence as a reliable basis from which to reach a conclusion as to the whether the subject property was sold below market value.
  3. [64]
    Given those conclusions, it is then appropriate to assess the criticisms which were made of Mr Sheehan to form a view whether, having regard to those criticisms and to his opinion evidence, I should form a view that the subject property was sold below market value.
  4. [65]
    The principal areas of differences between the two valuers are illustrated in the table below, a footnoted version of which forms Annexure A to this judgment. The column relating to Mr Sheehan identifies how he arrived at his valuation based on the data in his first report, which was the valuation which he continued to support in his oral evidence at trial. The column relating to Mr Murphy presents the figures contained in his revised opinion as expressed in the comparison table in the joint expert report, so as to enable a more meaningful comparison to be made with Mr Sheehan’s analysis.

 Item

Mr Sheehan’s valuation

Mr Murphy’s valuation

23  Industrial lots

$12,522,780

$15,983,200

Plus Balance Area

15.841 hectares balance area available for industrial development

$1,394,008

                $4,755,828

 

 

 

26.409 hectares balance area not available for industrial development

$440,000

Gross Realization (GST incl)

$14,356,788

$20,739,028

Gross Realization (GST excl)

$13,051 ,625

$18,877,634

Less Selling Expenses

$463,920

$694,976

Net Realization

$12,587,706

$18,182,658

Less Profit and Risk Allowance

$2,517,541

$2,767,383

Less developments costs including interest on development costs

$5,575,120

$5,141,658

Land value including interest on purchase price

$4,495,045

$10,273,617

Land value excluding interest on purchase price

$3,210,746

$10,273,617

Less stamp duty and legal costs on purchase

$179,065

$631,671

Land value

$3,031,681

Rounded up to       $3,050,000

$9,641,945

  1. [66]
    I will continue my evaluation by reference to the component parts of the table.

Gross realisation - 23 lots

  1. [67]
    Mr Sheehan’s gross realization calculation proceeded on the basis of sales of the 23 lots available after a hypothetical subdivision of part of the subject property into 23 industrial lots.
  2. [68]
    In determining the gross realisation of the 23 lots based upon the 2014 approval Mr Sheehan had regard to vacant industrial sales in four particular areas within Yeppoon, two particular areas in Rockhampton and one in Gracemere, and used that sales evidence form a view as to the valuation of each of the lots the subject of the industrial reconfiguration which he assumed. Mr Murphy took the same methodological approach, although his assumed reconfiguration was a little different.
  3. [69]
    Mr Sheehan’s use of the sales evidence took this course:
    1. (a)
      He identified what were potentially comparable sales of potentially comparable lots within each of those areas.
    2. (b)
      He identified per potentially comparable lot so identified:
      1. (i)
        the street address;
      1. (ii)
        the real property description;
      1. (iii)
        the area in square metres;
      1. (iv)
        the date of sale;
      1. (v)
        the sale price; and
      1. (vi)
        the rate per square metre which derived from the sale price.
    3. (c)
      He made observations as to the degree to which each potentially comparable lot was comparable, superior, or inferior to the subject property.
    4. (d)
      Based on that information he identified in Annexure D to his report:
      1. (i)
        a GST exclusive rate per metre squared which in his opinion was suitable for each of the 23 lots;
      1. (ii)
        (by multiplying that rate by the area of the lot) a projected GST exclusive sales price for each of the 23 lots;
      1. (iii)
        (by making a GST allowance of 10% on the projected sale price) both GST inclusive rates per metre squared and GST inclusive sales prices for each of the 23 lots.
    5. (e)
      He then used the projected GST inclusive sales prices to derive the gross realization of $12,522,780 (GST inclusive) which was dealt with in the way recorded in the table at [65] above.
  4. [70]
    In dealing with the sales evidence, Mr Sheehan made these observations:
    1. (a)
      On the available industrial sales evidence within the Yeppoon area there had only been nineteen vacant land sales (excluding “in house transfers”) since 2008 which equated to about one sale every 6.3 months. Since 2012, there had only been six sales which equated to one sale every 10 months. Where there had been resales of the same land a reduction in value had been illustrated.
    2. (b)
      That data could reflect that:
      1. (i)
        there had been little or no demand for vacant industrial sites since 2008;
      1. (ii)
        the current asking prices were above market level; or
      1. (iii)
        better quality industrial land was available within Rockhampton or Gracemere.
    3. (c)
      He noted that values adopted by the State Government for rating and land tax purposes reflected a reduction had been applied to 2011 values. He thought there was no resales evidence that could substantiate that there had been an increase in value or that values in the Yeppoon area had remained constant over the period 2007 to 2014.
    4. (d)
      He thought that as at March 2014 the industrial market in Yeppoon was contracting both in the value of vacant land and in rental levels existing industrial sheds could command.
    5. (e)
      His assumption was that the project would take of the order of a 2 year construction phase and a 10 year selling phase.
  5. [71]
    Some support for his view about the industrial market in Yeppoon was borne out by the sales evidence after the date of valuation and, in particular, by the sales evidence after the date of valuation of the lots which were in fact developed from the subject property by the Council. I make the following observations:
    1. (a)
      That evidence was identified in Mr Sheehan’s original report and also in his supplementary report. The supplementary report in particular identified the sales evidence concerning seven of the vacant industrial lots by the Council. On average, the actual sales by Council were 18.85% lower than the value assessed by Mr Sheehan as at the valuation date.[10] 
    2. (b)
      The defendant and YIC made the point in re-examination of Mr Murphy that between the valuation date and 2016, Yeppoon was subject to the devastating impact of Cyclone Marcia. However, I accept the plaintiffs’ submission that no evidence was adduced by the defendant or YIC regarding actual values of industrial land in Yeppoon between March 2014 and 2016 and the impact of Cyclone Marcia on land values in Yeppoon was not put to Mr Sheehan.
    3. (c)
      Notwithstanding the post-valuation date impact of Cyclone Marcia I think one qualitative point can be made. Mr Sheehan’s view of the industrial market in Yeppoon on the valuation date was more pessimistic than that of Mr Murphy and this evidence tended to support his view. 
  6. [72]
    In terms of how the market might impact the timing of the project, Mr Sheehan’s evidence found support in the internal Council report prepared for the purposes of the Council’s decision as to whether to acquire the subject property, to which I have already referred. Council conducted its decision making in the recognition that –
    1. (a)
      the acquisition of the subjection property for development would involve it bearing a real risk of potential lack of demand and increased holding costs;
    2. (b)
      “the reality is that a tract of land of this size will represent a ten to twenty year project as a minimum (unless an industrial growth explosion occurs)”; and
    3. (c)
      “it would be fair to suggest that the breakeven point for the project [on an assumed acquisition price of 3,330,000] would be several years away”.
  7. [73]
    Mr Murphy justified his more buoyant view of the market in this way. He thought that the very low level of sales volumes throughout the Council’s area was “not to the lack of vendors unwilling to sell, but the lack of supply of new industrial land stocks available to be purchased.”  He thought that March 2014 was an opportune time to supply additional industrial land. He thought that his interpretation of the market was also supported by: (1) the GHD Report and MacroPlan Report to which I have earlier referred, and (2) the development of the $500 million "The Pines" housing estate right next door to the subject property and the numerous positive press releases from the Mayors of Rockhampton and the Council in the period leading up to March 2014. He did not dispute Mr Sheehan’s observation concerning the values applied by Government for rating and land tax purposes. Nor did he disagree that the price of industrial land in Yeppoon declined from 2011, but did not consider this relevant to assessing the value of industrial land as at March 2014, or that it provided any evidence to illustrate the economic circumstances that existed in Yeppoon as at that date.
  8. [74]
    I do not accept Mr Murphy’s approach to the market. I have already commented on the significance of the GHD Report and the MacroPlan report. Otherwise Mr Murphy’s approach was subjective and not supported by data. I found the proposition advanced in the last sentence recorded in the previous paragraph to be illogical. But that was not the only problem with his view of the impact of the market on the attractiveness of the subject property to a hypothetical willing developer. Mr Murphy’s assumption was that construction could commence within 2 months of acquisition, with a 6 month construction period and a 5 year selling phase. The first part of that assumption was unrealistic given his error that there was no extant approval for any configuration and selling the balance area as entirely suitable for development would have required a new approval for a material change of use. But the contrast between his conception of a 5 year selling phase and the Council’s own view of a 10 to 20 year phase “at a minimum” with a breakeven point several years away was telling. Indeed, one point never grappled with satisfactorily by Mr Murphy was how it could possibly be that the land purchased by YIC in October 2009 for $2,500,000 could have increased in value by over 380% in 4 years without evidence of massive general increase in prices of industrial land in the area.
  9. [75]
    I accept the reasoning of Mr Sheehan in relation to the state of the relevant market for industrial land at about the valuation date. As a general proposition, I found Mr Sheehan’s evidence to be persuasive. I found it to be a reliable basis from which to reach a conclusion on whether the subject property was sold below market value.
  10. [76]
    The defendant and YIC suggested Mr Sheehan made an error in the way that he dealt with GST. They demonstrated by reference to transfers obtained from the titles office that for seven of the properties used by Mr Sheehan in the comparable sales part of this report, Mr Sheehan “unilaterally deducted GST from the sale price for reasons not set out in his report or the joint report”. As to this criticism:
    1. (a)
      It is true that Mr Sheehan deducted GST to get to the sale price which he recorded in the relevant parts of the report.
    2. (b)
      But when one appreciates the structure of his report, the purpose of so doing was to get to a GST exclusive rate per metre squared. That rate was then dealt with in the way I have explained. I accept Mr Sheehan’s evidence that as a matter of course he sought to present GST exclusive figures in the comparative sales tables in his report.
    3. (c)
      If he was to derive GST exclusive rates, then logically he had to make the posited adjustment (unless the rates recorded in the transfers were GST exclusive already, and that was not demonstrated to me).
    4. (d)
      I was not persuaded by the evidence placed before me by the defendant and YIC (or by the content of the cross-examination on this topic) that Mr Sheehan had made the solecism of which he was accused.
    5. (e)
      I reject this criticism of Mr Sheehan’s analysis.
  11. [77]
    There were differences between Mr Sheehan and Mr Murphy as to the particular lots which each of them regarded as relevantly comparable, but there is no utility to any exploration of those differences. I did not find there to be any particular reason to reject the judgments which Mr Sheehan made. I accept his judgment as to the appropriate realisation to be obtained from the industrial development of the subject property.

Gross realisation - balance land

  1. [78]
    I have explained that Mr Murphy valued the balance area land on the basis that it was completely available for development. I have explained why I thought that approach was founded on erroneous assumptions.
  2. [79]
    As is apparent from the table at [65] above, Mr Sheehan calculated the balance land to be 42.25 hectares, comprising two parts, each of which he valued on a different basis, because of the different knowledge and assumptions which he would attribute to the hypothetical willing developer interested in buying the subject property.
  3. [80]
    As to the first part of the balance land:
    1. (a)
      The first part was 15.841 hectares.
    2. (b)
      This was the balance area available for industrial development (pursuant to the March 2008 approval).
    3. (c)
      He valued the area based upon a rate of $80,000.00 per hectare. The value was based primarily upon the price paid for a comparable sale being lot 1 on RP 618129, Parish of Gracemere (245 Somerset Road, Gracemere). I thought this approach was reasonable.
  4. [81]
    The second part was 26.409 hectares. This was the area of land for which no development approval has been granted and which Mr Sheehan regarded as unavailable for industrial development. His opinion was:
    1. (a)
      any rezoning of the balance industrial land would require approval by the Queensland Government (Department of Natural Resources and Mines);
    2. (b)
      he has been informed by the Department of Natural Resources and Mines that they were reluctant to agree to rezone the area to industrial;
    3. (c)
      under the proposed revised town planning scheme for the Council the balance industrial land would possibly be zoned “Emerging Communities”;
    4. (d)
      to value the balance industrial land as approved for industrial use (as Mr Murphy had done) was incorrect; and
    5. (e)
      the “highest and best” use of the balance industrial land as at the valuation date was as a rural home site.
  5. [82]
    He was criticized by the defendant and YIC as to that last conclusion, given the various indicia that Council thought the area might be appropriate for future industrial development. The essence of his reasoning was that the land was presently zoned rural and any approval for industrial use could be anywhere between 10 and 20 years in the future. Given holding and financial costs and the risk involved in that time frame, he thought his approach was justifiable. In re-examination, Mr Sheehan was asked if he were to value the balance rural land as land available for industrial use in the distant future, would he give it a value of any higher than $400,000.00?  Mr Sheehan responded as follows:

I don’t think I would because for the simple reason is that if you look at the advices from the – in the minutes, the Livingstone Shire Council and the rate of development of that land, it could be 20 years’ time. As far as I’m concerned, any prudent purchaser buying that land for future industrial land would have to weigh it up the holding costs, you would have to weigh up why any possible future development conditions likely to be imposed. And they would say, ‘Right, will I hold on to it for a certain time or should I go and have a look at other blocks of land that are going to give me a better return in the immediate future?

  1. [83]
    I was persuaded by the sense of Mr Sheehan’s approach. I reject the suggested criticism of his approach.
  2. [84]
    He was also criticized on the basis that his assessment of the balance land was out by 2.5 hectares because the true total of the balance area was 45 hectares not 42.5 hectares and that somewhere in his valuation he ought to have allowed value for about 2.5 hectares of industrial land. It was said that the value would have been of the order of $201,608, if it should have been valued as part of the industrial part of the balance area. It was not demonstrated to me that the area concerned would necessarily have been valued as part of the industrial part as opposed to the rural part. Mr Sheehan thought the latter was probably the better view and that, if so, it would not have altered his opinion. I accept his evidence.

Selling expenses

  1. [85]
    This item encompassed real estate agent commission, legal expenses for the sales of the allotments and advertising expenses. Mr Murphy’s figure was higher for two reasons. First the commissions were higher due to higher gross realisation prices, and second he budgeted for a more comprehensive marketing campaign. Although that explains the difference between the two, I was not persuaded that the approach taken by Mr Sheehan was inadequate.

Profit and risk allowance

  1. [86]
    Both valuers adopt the same profit and risk percentage of 25%. The higher land value applied by Mr Murphy resulted in the additional profit and risk amount shown in the table.  Mr Sheehan’s approach was satisfactory.

Development costs

  1. [87]
    In calculating the development costs for the hypothetical development Mr Sheehan relied upon the actual development costs incurred by the Council when it developed the land whilst Mr Murphy used the costs which were found for a tender which YIC had obtained in 2011 for the reconfiguration based on the July 2009 approvals, adjusted for CPI. The principal point of departure between the two valuers was a point on which I have already recorded my dissatisfaction with Mr Murphy’s approach, namely the failure to account for the intersection costs. I think Mr Sheehan’s decision to recognize cost in the way he did was the correct decision.

Interest on purchase price

  1. [88]
    The logic of each valuer’s methodology required the deduction of the cost of financing the acquisition of the land over some part of the assumed period of realization of the proceeds of sale. Mr Sheehan did so, but Mr Murphy did not. He conceded that was an error. I accept the plaintiffs’ submission that this was another significant methodological failure by Mr Murphy.

Conclusion on the second principal issue.

  1. [89]
    In Commonwealth v Milledge (1953) 90 CLR 157 (at 162), Dixon CJ and Kitto J said that the judicial task in arriving at a valuation was a “jury question” in the sense that it would be decided:

… not by a strict adherence to precise arithmetical calculations, but by a commonsense endeavour, after consideration of all the material before the Court, to fix a sum satisfactory to the mind of the Court as representing the value contained in the land [on the date for valuation]. … The problem was not to eliminate the idiosyncrasies of the individual [valuers’] opinions; it was to form an estimate which really satisfied his Honour’s mind as being the value of the property to the plaintiff on the material date.

  1. [90]
    I have sought to bring that approach to the question at issue before me, namely whether the sale of the subject property to the Council was a sale below market value. Mr Sheehan’s opinion supported the plaintiffs’ case that they sold at a figure above market value. I was not persuaded of the merits of the criticisms of Mr Sheehan’s evidence. I accept his opinion. I did not find Mr Murphy’s opinion to be a reliable one.
  2. [91]
    In order for the counterclaim to succeed the defendants and YIC have to persuade me that as at the time of sale of the subject property to Council its sale price was less than the true market value. I have not been persuaded to make that finding.

What orders should be made?

  1. [92]
    Because I have not been persuaded to conclude that the subject property was sold at a price below market value, the counterclaim must be dismissed.
  2. [93]
    As at the first day of the trial, 5 September 2018, the plaintiffs calculated the balance amount owing by the defendant to the plaintiffs pursuant to the guarantee at $6,403,072. The plaintiff is entitled to judgment against the defendant for an amount which also reflects the accrual of interest on that amount at the rate of 20% per annum compounding monthly from the first day of trial until the date of judgment. The plaintiffs are entitled to interest on the amount of the judgment at the rate of 20% per annum compounding monthly until the date of payment.
  3. [94]
    I direct the parties to bring in minutes of an order reflecting those conclusions.
  4. [95]
    The prima facie position is that the defendant should pay the plaintiffs their costs of the claim and the defendant and YIC should pay the plaintiffs their costs of the counterclaim. However there was a pleaded claim by the plaintiffs that costs should be awarded on the indemnity basis, because of the terms of the security deed between the parties. As to the relevance of such terms on the costs discretion, see Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 at [12]–[13]; Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 3) [2010] NSWSC 1139 at [22], [39]; Lee v Australia and New Zealand Banking Group Ltd [2013] QCA 284 at [9]; and HBU Properties Pty Ltd & Ors v Australia and New Zealand Banking Group Limited [2015] QCA 95 at [26].
  5. [96]
    I will hear the parties on the orders which should be made as to costs.

Annexure A

Item

Mr Sheehan’s valuation

Mr Murphy’s valuation

23  Industrial lots

$12,522,780[11]

$15,983,200[12]

Plus Balance Area

  1. [97]
     

15.841 hectares balance area available for industrial development

$1,394,008[13]

                $4,755,828[14]

 

 

 

26.409 hectares balance area not available for industrial development

$440,000[15]

Gross Realization (GST incl)

$14,356,788[16]

$20,739,028

Gross Realization (GST excl)

$13,051 ,625[17]

$18,877,634[18]

Less Selling Expenses

$463,920[19]

$694,976[20]

Net Realization

$12,587,706

$18,182,658

Less Profit and Risk Allowance

$2,517,541[21]

$2,767,383[22]

Less developments costs including interest on development costs

$5,575,120[23]

$5,141,658[24]

Land value including interest on purchase price

$4,495,045[25]

$10,273,617

Land value excluding interest on purchase price

$3,210,746[26]

$10,273,617

Less stamp duty and legal costs on purchase

$179,065[27]

$631,671[28]

Land value

$3,031,681[29]

Rounded up to       $3,050,000[30]

$9,641,945[31]

Footnotes

[1] Senior counsel for the plaintiffs conceded that if I found the proper value of the subject property was a figure higher than the actual sale price, then on the balance of probabilities, if the plaintiffs had performed their duty as to the manner of sale, they would have sold it for the higher figure for settlement on the same day as they in fact sold it: see T4-68 lines 20 – 43. This concession as to breach and causation rendered it unnecessary to attempt to reconcile the various authorities (discussed in Pola v Australia and New Zealand Banking Group Limited [2015] NSWCA 146 at [81] to [98]) which address the approach to be taken in cases (like the present) where there is scant direct evidence that the subject property would have been sold for any figure other than that for which it was sold.

[2] Tab 15 of exhibit 14 “Schedule of calculation of amount owing to the Plaintiffs” dated 5 September 2018.

[3] See footnote 1 above.

[4] Apart from an irrelevant discrepancy of $30, this figure is the full amount owed under the Security Deed and the First Mortgage less the $250,000 which, it would be assumed, would have been paid by YIC on entry into the deed. So on this hypothesis, in return for having actually paid the plaintiffs, YIC would get the benefit of not having had to pay $738,460 of the principal which it otherwise owed.

[5] exclusive of GST.

[6] exclusive of GST.

[7] exclusive of GST. The figure quoted is the one that Mr Murphy sought to support after a joint expert conference had occurred.

[8] The 2009 configuration proposed a net land area of the developed lots of 9.8100 hectares and the 2014 actual configuration was only slightly less in 9.4004 hectares. Other things being equal, the error increased Mr Murphy’s valuation a little.

[9] At the trial, although the defendant and YIC had made arrangements to call the representative of the other developer, they chose not to do so. No explanation was provided. I would infer that his evidence would not have supported the counterfactual proposition on which Mr Murphy was prepared to proceed.

[10] Supplementary Report of Sheehan, page 2 of 11. The tender of exhibit 2 did not include the material to be found after the conclusion of the table on the page 2 to the end of page 11 of 11 of the report: see T 1-48 lines 12 to 31.

[11] Sheehan report p. 57. The figure reflects the total of the GST inclusive values which Mr Sheehan attributes to each of the 23 lots available for sale after the subdivision of the property.

[12] MM revised figure from comparison table at p. 47 of the joint expert report. Figure is GST inclusive.

[13] Sheehan report p. 57. The 15.841 hectares is the area depicted on exhibit 4.

[14] The figure is the $4,083,763 GST excl figure mentioned in MM revised column from comparison table at p. 47 of the joint expert report. I have added GST of $408,376 and then the $263,689 stamp duty figure from the same column.

[15] Sheehan report p. 57. The 26.409 hectares is the area depicted on exhibit 4.

[16] Sheehan report pp. 30 and 57.

[17] Sheehan report pp. 30 and 57. This reflects the arithmetical fact of excluding GST.

[18] This represents deducting the total of the GST on the 23 lots as mentioned in MM revised column from comparison table at p. 47 of the joint expert report and the GST on the Balance Area figure as referred to in footnote 53.

[19] Sheehan report pp. 30 and 87. The component parts are set out at p. 87.

[20] MM revised column from comparison table at p. 47 of the joint expert report.

[21] Sheehan report p. 30. The figure is based on a 25% profit and risk allowance.

[22] MM revised column from comparison table at p. 47 of the joint expert report.

[23] Sheehan report pp 30 and 87. Page 87 in turn relies on the costs set out at p. 65 et seq.

[24] MM revised column from comparison table at p. 47 of the joint expert report.

[25] The figure is the Net Realization figure less (1) profit and risk allowance and (2) development costs including interest.

[26] Sheehan report p. 30. The interest included on the purchase price which was deducted is identified in Sheehan report p. 88.

[27] Sheehan report p. 88.

[28] MM revised column from comparison table at p. 47 of the joint expert report.

[29] Sheehan report p. 30.

[30] Sheehan report p 30. The figure reflects the rounding upwards of the $3,031,681 figure.

[31] MM revised column from comparison table at p. 47 of the joint expert report.

Close

Editorial Notes

  • Published Case Name:

    Pioneer Australia Pty Ltd & Anor v Quinn

  • Shortened Case Name:

    Pioneer Australia Pty Ltd v Quinn

  • MNC:

    [2019] QSC 72

  • Court:

    QSC

  • Judge(s):

    Bond J

  • Date:

    26 Mar 2019

Litigation History

Event Citation or File Date Notes
Primary Judgment [2019] QSC 72 26 Mar 2019 Judgment for the plaintiff against the defendant pursuant to a guarantee and indemnity; counterclaim dismissed: Bond J.

Appeal Status

No Status