- Notable Unreported Decision
SUPREME COURT OF QUEENSLAND
I & L Securities P/L v R S Melloy P/L  QSC 306
I & L SECURITIES PTY LTD ACN 061 852 355 (plaintiff)
R S MELLOY PTY LTD ACN 009 950 761 (second defendant)
S 3081 of 1997
Supreme Court Brisbane
4 October 2002
3, 4, 5, 6, 7 June 2002
I give judgment for the plaintiff against the defendant for the sum of $1,662,507.40
NEGLIGENCE – professional negligence – action for relief against defendant in negligence – where mortgage lender gave loan to developer on security – where lender relied on valuations of land for lending purposes – where developer went bankrupt – where land eventually sold at price much lower than valuations – where deficiencies in preparation of valuations – whether actions of valuer amount to professional negligence
TRADE PRACTICES – misleading and deceptive conduct action for relief against defendant pursuant to s 52 Trade Practices Act – where mortgage lender alleges reliance on representations by valuer – whether unreasonable to rely on representations – whether misleading and deceptive conduct
VALUATION OF PROPRERTY – valuers
Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co Ltd  QB 375, considered
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd,  HCA 41, 2 October 2002, considered
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2000) 179 ALR 89, considered
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd  QSC 320, No 494 of 1997, 22 October 1999, considered
Oz Finance Pty Ltd v JLW (Qld) Pty Ltd  QSC 155, No 1180 of 1995, 7 August 1998, considered
Law Reform (Tortfeasors, Contribution, Contributory Negligence, and Division of Chattels) Act 1952 (Qld), s 10(1)
Queensland Law Society Rules 1987 (Qld)
Supreme Court Act 1995 (Qld)
Trade Practices Act 1974 (Cth), s 52, s 81, s 82, s 82(1), s 87(1)
S Doyle SC with P McQuade for the plaintiff R Morton for the defendant
Deacons for the plaintiff McInnes Wilson for the defendant
- AMBROSE J: At all material times the plaintiff carried on business at the Gold Coast as a private mortgage lender controlled by a firm of solicitors Messrs. Ingwersen & Lansdown.
- The mortgage lending business was conducted in accord with the constraints of the Queensland Law Society Rules 1987. I infer that the plaintiff was that firm’s finance nominee company.
- On 15 July 1994 the plaintiff received from a finance broker an application for the loan of $995,000 to Lindbridge Pty Ltd (“the developer”) one of a group of companies involved inter alia in land development.
- The developer sought the loan on security of a parcel of land it owned at Slacks Creek about 23 kms south of Brisbane. That land had an area of 4.514 ha with a frontage to Gomana Street which was only partly constructed. The land was uncleared.
- The land was then within the Residential B zone which under the then current town plan could be used with local authority consent for the purpose of construction of townhouses. In forwarding the developer’s application for the loan of monies on 15 July 1994 the finance broker advised that an existing mortgage loan over the same land matured on 29 July 1994; it is clear from its letter that one of the partners from Ingwersen & Lansdown had already discussed the prospect of the plaintiff making such a loan. Accompanying the application were statements of the net assets of each of the two directors/shareholders of the developer. Each asserted his net assets to have a value of approximately $1.5 million.
- The application for a loan was also accompanied by a valuation from one of the first defendant’s valuers a Mr Lang. That valuation was dated 12 July 1994. In addition a letter, dated 14 July 1994 from the Managing Director of the developer was enclosed, commenting upon the content of the valuation report of the first defendant (“the defendant”) asserting that the developer was entitled to develop its site to contain 225 townhouses but that it preferred to develop it to contain only 195 townhouses.
- The developer’s application to the finance broker made on 13 April 1994, on its face, was for the loan of $950,000 over a period of 12 months at 11% per annum such interest to be prepaid and to be deducted from the loan made. That application offered the land owned by the developer, said to have an area of 4.5175 ha, as security as well as the personal guarantee of each of the directors/shareholders of the developer.
- That application made to the finance broker for a loan of $950,000 seems to have been translated into one for a loan of $995,000 which was analysed by the plaintiff in a document described as “loan application resume”. This document showed the amount of loan required to be $995,000. The term was to be 12 months at an interest rate of 11.5% per annum which was to be prepaid for 6 months in advance and if the loan was required for longer than 6 months then interest was to be payable monthly in advance after the first 6 months.
- The loan to valuation ratio was said to be 48.5% of the defendant’s valuation of the developer’s land used to support the application. It was recorded that the loan was required to pay out a loan of $800,000 secured on the land on a high interest private mortgage held by another firm of solicitors presumably through their finance nominee company.
- The security proposed for the loan sought was a first registered mortgage over the developer’s land at Gomana Street, Slacks Creek which it was said had been approved for 225 residential dwellings (2/3 bedroom duplexes); the defendant’s valuation of the site at $2,050,000 was attached as was the resume of the background and financial position of the directors/shareholders of the developer. It was intended to obtain personal guarantees from each of those directors.
- Reference was made also to another valuation of the developer’s land dated 4 May 1993 in the sum of $2,232,500.
- It was stated that the developer was obtaining final development and building approvals and had three options –
(1)To develop the property itself
(2)To develop the property in a joint venture arrangement
(3)To sell the property with all approvals in place.
- It was stated that the developer was in receipt of a “firm offer from a major building company” which would give it 26 unencumbered units in the first stage of development with a value of $2.6 million.
- The defendant’s valuation, prepared upon the instruction of the developer, defined “market value” as “The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”. It stated that the property had been inspected by Mr Lang the valuer and agent of the defendant on 4 July 1994.
- On page 6 of the valuation it is recorded that no formal development plans or applications had been approved by the local authority. When initially rezoned to Residential B, land of that area could have been developed to a maximum of 225 units; under later amendments to the town plan the maximum development permitted was 180 units.
- The valuation contained this statement –
“Notwithstanding the above, we have been instructed to assess the value of the property on the assumption that the Council would allow a development of 195 attached dwellings mostly of three bedrooms, to be constructed on the site together with two swimming pools and a tennis court in the total development.
We have not been provided with any plans, but the client has supplied a cost estimate including civil works, of $70,000.00 per townhouse unit, plus $75,000.00 for recreation facilities”.
- Based on 195 units this would give a total development cost of $13.725 million. The valuation then states that the current market value of the land was assessed at $2,050,000. Included in “remarks” on page 12 is this statement –
“With the major trend towards medium density living in the area, consideration can be given to developing the land. However, there are indications that at this particular area may be reaching saturation point in relation to townhouse developments. Any complex constructed on the subject land would need to be completed to a standard superior to other developments in this locality, but at a still affordable price for the investor market. Whilst we have not been provided with any plans or overall layout, from discussions with the owner it appears that this is the intention and we have relied upon this concept in assessing the value of the land.
We have also been provided with development costs and requested to base our assessment on a complex of 195 townhouses although current zoning provides a maximum 180 units. Should any of these factors vary, this report should be referred to the valuer of comment”.
These remarks seem directed towards the developer.
- On page 13 the “remarks” continue –
“The property is considered to be a reasonable security, but due to the current supply of completed or under construction projects may prove difficult to sell, as most buyers would be looking to a medium term holding strategy. We would recommend that lending percentages be in accordance with the conditions of this report”.
These remarks seem directed towards the plaintiff.
- The plaintiff seeks relief against the defendant in negligence and pursuant to s 52 of the Trade Practices Act.
- Essentially it is the plaintiff’s case that Mr Lang in preparing his valuation report was not merely in error in a number of important respects with which I will deal in more detail later, but in fact so departed from the care and skill that the plaintiff was entitled to expect of the defendant as to constitute professional negligence and to the extent that s 52 of the Trade Practices Act applies, the grounds advanced to support the valuation were so unreasonable and lacking in substance and so unsupported by the sort of proper investigation required to adequately perform this valuation it exercise that it constituted deceptive and misleading conduct entitling the plaintiff to relief under s 52 and s 82 of the Trade Practices Act.
- The defendant contends that the valuation, however insupportable it may have been because of inadequate consideration of relevant material, nevertheless on its face made quite clear the basis upon which its hypothetical development exercise was prepared – the instructions of the developer. There was no suggestion on the face of the valuation that Mr Lang had attempted to investigate those instructions to satisfy himself that they were reliable; on the other hand there was no suggestion that he had not.
- Obviously a critical fact to be determined by the valuer, either with or without the assistance of other persons expert in this field, was how many townhouse units could probably be constructed on the developer’s land.
- On my reading of his report the valuer Mr Lang made it clear that it was not his view that 195 units could be constructed on the land. He adopted that figure merely because he was instructed by the developer to do so.
- Even though Mr Lang made it clear in his report that he had adopted a figure of 195 units as the optimum development for this site only because he had been instructed to do so by the developer, in my view his examination and consideration of relevant facts in preparing his valuation based on hypothetical development fell far short of what the plaintiff was entitled to expect of him as a professional valuer.
- A very large part of the site was beneath the one in 50 year flood line (“the Q50 level”), below which the local authority would not permit the construction of townhouses. Indeed 1.43 ha of the 4.514 ha parcel of land was below this flood line. Under council policy that land could not be filled by bringing soil from higher parts of the land. It could only be filled marginally perhaps near its border line with the higher land above the flood line with soil taken from beneath the Q50 level so that theoretically at least there would be no “filling of the flood plain” which in times of flood would lead to problems upstream and downstream of the site.
- Although Mr Lang agreed that it would have been helpful had he had a plan of the developer’s land showing the Q50 level he gave no explanation really as to why he had not bothered to procure one from the local authority office. Eventually he said he estimated that the area affected below where he estimated the flood line would have been was about 0.3 ha. He estimated that area by pacing it out and thought than an area of about 50 metres x 60 metres would require filling to a depth of up to 4 metres to enable construction on the developer’s land of 195 units.
- He thought that this amount of fill would be sufficient to fill about 80% of the area affected in times of flood. He did not bother to calculate the volume of fill required although he agreed that the cost of procuring, carting and compacting the 12,000 cubic metres of fill that he estimated would be necessary would cost between $144,000 and $156,000.
- I am unpersuaded really that Mr Lang ever turned his mind to the cost of filling the land to the extent necessary to accommodate 195 units.
- It is abundantly clear that the addition of an extra 0.3 ha of land upon which units might be constructed to that part of the developer’s land which was above the Q50 level would have had no significant effect at all on the capacity of the land to contain 195 units. Had any proper investigation been conducted at the time it would have been apparent to him that the filling of land at an approximate cost of $150,000 to produce an additional area above the Q50 level sufficient to accommodate only twelve to fifteen units would almost certainly not have been a viable economic undertaking. With respect of each of those twelve to fifteen units there would be an additional cost of between $10,000 and $12,500. I find it improbable that such a cost would be disguised within a “contingency” figure of $126,950 for the whole development expressed as $650 per unit in the valuation.
- On the evidence however, in my view, it is probable that Mr Lang did not even consider the filling of any part of the site. There is no mention made of that cost in his valuation. He said that he had “assumed” that it was by filling the land to the extent that he described in evidence that 195 unit sites could be obtained above the Q50 level. I have real reservations as to whether he knew anything about the Q50 level or even adverted to the necessity of taking it into account in valuing the land; the topography of which meant that 1.43 ha of the total area of the site was in fact below the flood line – and not merely the 0.3 ha which he said in evidence he took into account after pacing it out on site.
- In my judgment the approach that he adopted in preparing his valuation rendered it unreliable. He said that he had simply omitted to mention any question of filling the flood plain and the cost of so doing in his valuation. He said that he had assumed that the land could be filled because of its zoning, he admitted that the ability to fill the land was critical to his assumption that 195 townhouses could be constructed on it. I am satisfied that the local authority would not at any relevant time ever have permitted filling below the Q50 level of the developer’s land, except perhaps within the constraints referred to in para 25, and that this fact was ascertainable when the valuation was being prepared.
- He agreed that persons reading his valuation might be misled into thinking that no fill was required for the land to permit 195 units to be constructed on it. It is clear that the defendant’s office had material in its possession, prior to Mr Lang making his valuation, indicating that a road was to be constructed on the developer’s land but he did not take this in to account and indeed was not aware of it when he prepared either of his valuations. It is clear that the information was available or should have been available to Mr Lang from a document of 26 May 1994 which is Ex 30.
- He agreed that it was open to him to search for any rezoning conditions affecting the developer’s land but he took no steps to ascertain whether there were any conditions much less the cost of compliance with them in considering the value of that land. Not merely did he not attempt to peruse the rezoning conditions affecting the developer’s land at the Local Authority office he did not even ask the developer for those conditions.
- The defendant received instructions for the preparation of the first valuation of 12 July 1994 on 26 May 1994. It therefore had a period of approximately seven weeks in which to make inquiries independent of and to confirm the reliability of instructions given by the developer to prepare the valuation. Mr Lang agreed that he had ample time in which to make the necessary inquiries concerning rezoning conditions and the Q50 level. Ultimately he agreed that the performance of his obligations as valuer “was deficient in some respects”.
- Mr Lang agreed that the developer’s land had been rezoned as part of a larger parcel of land in 1989. In 1992 the site density of the land disregarding its topography was reduced from 1 unit to 200 square metres (225) to 1 unit to 250 square metres (180); this was the situation to his knowledge when he prepared his valuation in July 1994.
- Upon the evidence I am satisfied that as well as the floodplain problem there were a number of easements within the site upon which townhouses could not be erected. As a consequence of rezoning conditions imposed when the land together with other lands had been rezoned prior to the date of valuation, a developer was required to construct upon one easement what to my mind was in effect a five metre wide road with four metre wide verges either side from one end of the site to the other. Moreover the five metre roadway had to be constructed with a bitumen surface. It is clear that one function of this road was to provide public access to a park adjacent to the land near its boundary opposite its Gomana Street boundary. There were various other easements which it is unnecessary to consider.
- I have not attempted in the absence of expert evidence to analyse the Town Planning Certificate relating to development of land opposite the developer’s land (the Brookfield Lodge Land) which is Ex 12 with any precision. I assume that the group title plans shown in the Town Planning Certificate as having been prepared in the course of a number of development stages were prepared for the purpose of obtaining finance for the development. What does seem to be clear however is that the various blocks of units shown on annexure S7 to Mr Slater’s supplementary report occupy only a fraction of the area of the lots shown on the group title plan to which I have referred and indeed the eight lots demonstrated on plans 1 and 2A on the Town Planning certificate (lots K and S on annexure S7) occupy only a fraction of the 1098sqm of the group title subdivision shown on plans 1 and 2A.
- Stated shortly it appears that the area of land developed for the Brookfield Lodge townhouse development was 1.789 ha and that the whole of that area was available for the construction of townhouses. It was developed with a site density of 1 townhouse per 220sqm to produce 81 townhouse units.
- On my analysis of the site layout plan of the Brookfield Lodge development, which is annexure S7 to Mr Slater’s report, that land was fairly intensively developed.
- If 195 similar townhouse units were constructed on 2.686 ha of the developer’s land available for townhouse construction and having roughly the same characteristics as the 1.789 ha Brookfield Lodge land then it is helpful to compare the site density of one townhouse per 137sqm on the developer’s available land with the density of townhouse development on the Brookfield Lodge land of one townhouse per 220 square metres. If one considers the density of development of 195 units on available land on the developer’s land (195 units on 2.686 ha) with the number of comparable units constructed on available land on the Brookfield Lodge development (81 units on 1.789 ha) and compares those densities it is clear that the unit density assumed by Messrs Lang and Ehlers for the developer’s available land would be nearly double that of the Brookfield Lodge development.
- It suffices to say that I am persuaded upon all the evidence, which I will not attempt to analyse in further detail, that it is quite unlikely that the local authority would have permitted construction of anything like 195 units on the land and that the most perfunctory consideration of readily available information by Mr Lang would have made this quite clear. If anything like that number of units had been constructed I am satisfied that it would have been almost impossible to market them, or most of them, and I rather take the view that valuer Slater’s description of such a development as a “slum” is appropriate. Whatever the council’s attitude may have been to permitting such a number to be erected, in my view it would have been next to impossible to sell units in such a dense development in competition with units for sale in Brookfield Lodge for anything like the sum which the valuer applied to them.
- In my view on the evidence if development were to have commenced within 6 months or so of the date of valuation it is likely that the maximum development permitted would have been about 122 units – particularly if, as Mr Lang asserted, they had to be of a better standard than other units in the area with which they would have to compete on the open market.
- Mr Lang, really made no attempt to get the assistance of surveyors or planners or architects or quantity surveyors or anybody else for that matter to determine the type and extent and cost of townhouse development on the site which would accommodate its development problems to which I have referred which was really critical to the valuation exercise. Not merely did he fail to obtain any independent professional advice to determine the number of units that could be produced on this 4.514 ha block of undeveloped land but he seems to have made no independent inquiry whatever as to the cost of “civil works” which in some fashion the developer had worked out at $70,000 per townhouse unit – presumably on the assumption that 195 units could be constructed.
- Mr Lang said that in performing his hypothetical development exercise the only alteration he made to the development costs he had been instructed to adopt by the developer was his inclusion of a “contingency figure” in the sum of $650.00 per unit − i.e. $126,750 for the whole development – to accommodate the cost of any necessary fill. However reference to his hypothetical development on page 10 of his valuation shows that this is merely one category of development costs amounting to $70,000 per unit which he accepted from the developer. If the developer did provide merely an estimate of developments costs of $70,000 per unit without categorising them, then Mr Lang must have merely inserted the categories himself. Alternatively, if the developer did purport to categorise them without including an allowance for “contingencies”, Mr Lang must have varied one or more of the other estimates given.
- It seems probable on the evidence that only 122 units could be constructed and marketed on the site at a time material to the preparation of the valuation of July 1994. On this assumption the cost of development work per unit (as distinct from unit construction cost) required to put them in a saleable condition on the market would obviously increase significantly beyond the unit cost if 195 units were to be constructed. If, as seems probable, the maximum number of townhouses that could have been constructed was only 122, it would mean that the land had only 62.56% of the site density potential for townhouse development which the valuer had been instructed to adopt and did adopt in the preparation of his valuation.
- Even if only 62.56% of the townhouses which the defendant asserted might be erected could in fact be erected with a consequent saving in total unit building costs one would think that most if not all of the costs of other civil work such as road construction etc would remain the same.
- I find it possible only to speculate upon the evidence adduced by the defendant as to within what range a proper valuation of the land on a proper hypothetical development exercise may have fallen had Mr Lang, instead of merely accepting instructions from the developer as to the number of units that would be permitted and indeed marketed and as to the cost of such development involving civil works, head works charges for sewerage, water etc, building construction etc, made proper independent inquiries from the appropriate experts. At the end of the day the valuation figure to be arrived at depended inter alia upon the net profit a purchaser buying that land at valuation date might expect to make from developing and selling it in the foreseeable future. The defendant’s hypothetical development exercise seems to assume that the full development and sale would take 3 years to complete. It is unclear to me what the “opportunity holding costs on land” for 3 years could otherwise convey. Perhaps it was intended to convey that a purchaser might assume that the land would have to be held for 3 years from date of purchase before it had been completely sold in its fully developed state. This was the explanation that Mr Lang gave. One can only say that even accepting that the average value of each townhouse would be $115,000, if there were only 122 developed on the site the gross proceeds of sale would be $14,030,000 – more than $8m less than the gross realisation adopted by the valuer on the assumption that 195 units were developed and sold. Even if, because of the lower site density the average sale price were $130,000, and none of his sales on page 8 of his report would support such a price, the gross proceeds of sale would still be more than $6.56m less than the gross return adopted by the valuer on his assumptions.
- In my view it is unnecessary to further analyse in depth the details canvassed for many days in Court as to other inadequacies of the hypothetical development valuation.
- One question for determination is whether on its face the valuation report is quite inadequate. With respect to the hypothetical development exercise it does not even pretend to record the investigation of relevant facts by Mr Lang to support his valuation. His evidence demonstrates that in effect he made no proper investigation of matters that should have been ascertained and analysed. He seems to have merely accepted what the developer told him without even checking that information and then to have done a hypothetical development exercise to produce a valuation report in the usual acceptable form.
- Under the town plan in operation in 1992 the maximum density had been one unit per 200 square metres of land, the maximum number of units permissible upon 4.514 ha of land would have been 225. If one were simply to divide the area of the site by that site density requirements of the plan, one would end up with a potential to develop 225 units and such a calculation could be made without even walking onto the land to inspect it. However, in determining the number of units that could physically be placed upon the land at date of valuation when the site density requirement was one unit per 250 square metres, one would have to take into account inter alia, the topography of the land including inclines, the nature of access to each unit etc and in this case in particular what area of land was subject to flooding. It is clear that no developer could obtain planning permission to erect any part of a unit below the Q50 level.
- When land on the other side of Gomana Street opposite the subject block was developed the council permitted a development density greater than one unit per 250 square metres on condition that there was a corresponding reduction in the density of development on the balance of the site including the subject land.
- The council at all material times held or was entitled to have registered an easement upon which ultimately was to be constructed a road 5 metres in width with verges of 4 metres on either side. This is shown as easement L on annexure E1 to Mr Slater’s report which is Ex 4.
- The area actually available for the construction of units on the subject land is shown on annexure E2 to Mr Slater’s report. That demonstrates that the area actually available for construction of units upon it, at whatever site density, was 2.6861ha.
- If 195 units were to be constructed on the land available for unit construction (ignoring access roads etc to those units) there would be a site density development of one unit per 137sqm of available land.
- In my view such a development even if permitted would not be and never would have been marketable at unit price levels within the range adopted and applied by Mr Lang. I find persuasive the opinion expressed by Mr Slater that the maximum potential development of the 4.514ha site for townhouses would be for 122 attached dwellings – i.e. one unit per 370sqm of the total area of the developer’s land or one unit per 220sqm of available land. Even if a maximum site density of 200sqm per unit were applied to the available area, only 134 units could be constructed – and to do this would be to disregard the likely constraint on site density by the proportionate reduction resulting from the previous relaxation of site density on land over the road from the developer’s land.
- The defined flood maps available in the council office, which Mr Lang did not bother to inspect, demonstrated that about 31% of the 4.514ha site (i.e. 1.399ha) was unavailable for the construction on it of attached dwellings.
- Interestingly, and perhaps unsurprisingly, Mr Lang although adopting two quite different valuation approaches:–
- direct comparison with comparable englobo sales and
- a hypothetical englobo development exercise
arrived at almost precisely the same valuation on each exercise.
- In his analysis of and direct comparison with seven englobo sales said to be comparable with the subject site, he concluded that such exercise “equates to $45.41 per square metre of site area” which he said was “generally in line with” the englobo sales to which he referred. Interestingly all those sales were of much smaller englobo parcels than the developer’s site and none of them appears to have had its topographical problems. He referred to seven such sales of Residential B land sold in 1992, 1993 and 1994. The largest two of those seven sales comprised an area 1.012ha and 1.1323ha respectively. The smallest of the allegedly comparable sales was 0.202ha, three varied between 0.36ha and 0.44ha while the last one had an area of 0.78ha. One of the sales which he said he inspected at Kingston (sale 5) he mistakenly concluded was a sale of 1 hectare when in fact it was a sale of 2 hectares. The rate per metre which he mistakenly deduced from this sale was about $41 per square metre which he compared with his sales numbered 2 and 4 which were of 0.3642ha and 0.2023ha respectively.
- Quite apart from the much smaller areas comprised in these sales, the error with respect to sale 5 alone one would think would cast grave doubt on his observation towards the end of his direct englobo comparison exercise that the figure of $2.050m equating to $45.41 per square metre “was generally in line with” the three sales 2, 4 and 5 to which I have referred.
- In my view for negligence to be established against the defendant it must be demonstrated that Mr Lang’s application to the developer’s land of a per metre rate based on his direct comparison with his seven “comparable” englobo sales went beyond an arguable error of judgment and amounted to a failure properly to inspect, analyse and investigate his sales and to adopt and apply with reasonable care well recognised and generally applied principles and practices of valuation.
- To the extent that his valuation is based upon his hypothetical development exercise I take the view that on its face it suggests if indeed it does not make clear that he has performed a valuation exercise based in essential respects only upon information he was given by the developer who it might be inferred, was interested in obtaining a high valuation for mortgage security purposes. It is clear on his evidence although not on the face of his valuation that he made no real effort to confirm that information either personally through his inquiries and investigations from persons aware of flood lines and development costs etc and no effort to research any of the constraints upon the density of development upon that land by reason of the earlier imposition of density constraints when the development of the land over the road from it was approved.
- On my analysis of the hypothetical development exercise – designed to demonstrate what another developer or joint venture partner might be prepared to pay for the land for townhouse development purposes – such valuation would be unlikely to be relied upon by any person in the business of successfully developing such estates. Quite apart from adopting a risk and profit allowance of only 25%, the valuation report expressly highlighted the drop in demand for such developments. In my view upon the evidence of Mr Lang it was not a properly researched valuation exercise. It was merely a valuation exercise performed on instructions given to Mr Lang by the developer which he did not check out himself by any inquiry made of independent persons knowledgeable in matters relating to comparable developments in the Slacks Creek area.
- Even when the defendant in effect assigned its valuation to the plaintiff it was made very clear that Mr Lang had made no independent contribution by investigation of matters critical to the worth of his hypothetical development valuation exercise but had merely accepted the instructions given to him by the developer.
- In the circumstances, in so far as his valuation was based on his hypothetical development exercise, the plaintiff was invited to rely upon it as a professional valuation by a valuer who was satisfied by his inquiries and investigations of its reliability. Although it was suggested on the face of the valuation report that the hypothetical development valuation exercise was based substantially if not almost entirely upon essential facts the developer had instructed Mr Lang to accept and it was not asserted that he had taken few steps to satisfy himself by independent inquiry or investigation that that information was reliable, it was provided to the plaintiff couched in terms designed to invite reliance upon it in determining the value of the developer’s land for security purposes and in my view the valuer is liable in negligence and for breach of the obligations he owed under s 52 and s 82 of the Trade Practices Act.
- With respect to the valuation exercise performed by direct comparison with englobo sales of land in my view a careful examination of the conclusions that he drew from the seven sales to which he referred should have raised some doubt as to its reliability.
- One might suspect that contrary to the usual valuation approach where a hypothetical development exercise is often used as a check valuation against a careful analysis of available and relevant englobo land sales, quite the opposite approach was adopted in this case. The hypothetical development exercise which I have already analysed really seems to have been based almost solely on the information he was given by and the instructions he received from the developer for the purpose of that exercise. The developer was obviously anxious to have its land valued at a sum sufficiently high to secure the loan of approximately $1m from the plaintiff and one can only infer that it was for this reason that the information and instructions to which I have referred were given to the defendant.
- On the other hand the seven sales of Residential B englobo sites upon which Mr Lang also based his valuation seem to have been applied directly to the subject site in spite of significant differences in topography between those sale sites and the developer’s land and in spite of the fact that the largest of them had an area of little more than one quarter of that of the developer’s land and the smallest about one twenty-secondth of that of the developer’s land.
- Sale one in April 1992 had an area of about one eleventh of that of the developer’s land. It was analysed at $58.60 per m² and $12,000 per potential unit.
- Sale two in May 1992 had an area of about one twelfth of that of the developer’s land. It was analysed at $43.10 per m² and $8,722 per potential unit.
- Sale three in June 1993 had an area of about one tenth of that of the developer’s land. It was analysed at $60.73 per m² and $12,272 per potential unit.
- Sale four in June 1993 had an area of about one twenty-secondth of that developer’s land. It was analysed at $42.95 per m² and $12,125 per potential unit.
- Sale five in January 1994 was analysed to have an area of about one quarter of that of the developer’s land. It was analysed at $41.00 per m² and $10,375 per potential unit.
- Sale six in April 1993 had an area of between one fifth and one sixth of that of the developer’s land. It was analysed at $63.73 per m² and $16,129 per potential unit.
- Sale seven in November 1993 had an area a little over one third of that of the developer’s land. It was analysed at $85 per m² and $22,959 per potential unit.
- Mr Lang’s observation on page nine of his valuation that the per metre figure of $45.41 obtained by dividing his valuation figure of $2,050,000 by the gross area of the land being 4.514 ha “was generally in line with” his seven englobo sales at first sight seems at best questionable. Four of those seven sales demonstrated a per metre price of roughly between $60 and $80 and they had areas which were only a fraction of the area of the developer’s land. The only three sales which demonstrated per metre figures ranging between $41 and $47 were also of areas not remotely comparable with that of the developer’s land. He advanced a site valuation of $10,500 per unit without offering any comment or explanation as to obvious doubts raised concerning the comparability of his sales three, four, six and seven. The only comparable sale would have been sale five in respect of which he mistakenly took only half its actual sale area into consideration – although this did not appear in his valuation.
- The probable explanation for the making of this observation was the desire of Mr Lang to draw some support for the figure at which he had arrived in his hypothetical development exercise based upon the facts he was instructed to accept by the developer, by doing a comparable sales analysis which of course is the preferred approach in valuing land of this kind when comparable sales are available. Mr Lang gave evidence that his seven “comparable” sales were all the sales of land with a potential for townhouse development which he was able to discover within the general area and within the relevant time frame.
- One has only to consider the analysis of the so called comparable sales on pages six-seven of the valuation report to see that a per metre value of $45.41 for the developer’s land on one view is not at all “generally in line” with his analysis of his seven sales. It seems clearly “out of line with” four of his sales and only “generally in line with” the other three if their disparity in area with that of the developer’s land is ignored.
- However the observation on page nine may have been construed to convey only that in Mr Lang’s professional judgment, his impartial analysis of his seven englobo sales led him to form the opinion that the developer’s land had the value he stated; if so it is necessary to examine carefully the evidence he gave to determine whether he simply erred in his judgment which would not constitute either negligence or a breach of s 52 of the Trade Practices Act, or whether his expressed opinion was so insupportable that one may infer both professional negligence and a breach of s 52 of the Trade Practices Act.
- He agreed that the bigger the englobo parcel of land for hypothetical development the bigger the required “discounting” in the analysed per metre valuation of smaller sales of otherwise comparable land. The same approach of course would be reflected in both the englobo comparable sale exercise and the hypothetical development exercise.
- With respect to his comparable englobo sale exercise Mr Lang agreed that he had wrongly described sale five as containing approximately 1 ha when in fact it contained nearly 2 ha.
- It emerged that the defendant had another valuation on file which correctly described the area of sale five. Mr Lang explained that he had searched the site “electronically” and that he would have preferred to rely upon the erroneous area of 1 ha that he obtained on that search even if he had become aware of the 2 ha area disclosed in the other valuation on the defendant’s file. He could not remember whether he had even looked at the other valuation to check for comparable sales. He said that had he known the correct area, in effect it would not have made any difference to his valuation because he would then have considered his sale number 5 “out of line with most of the other sales and what we knew of the market ourselves”. Ultimately he agreed that ordinarily he would have looked at the other valuation to check for comparable sales that his own researches may not have unearthed. I am persuaded that Mr Lang’s evidence on this aspect of the case was unreliable.
- In dealing with his comparable sales numbered five, six and seven he said that he did not turn his mind to consider whether the intensity of the development on each was the same as what he assumed was the potential for the developer’s land.
- He admitted that he was unaware that his comparable sale 6 was one between related entities. He analysed that sale in fact to show a very high price per unit in an area in Browns Plains well away from the location of the developer’s land. Ultimately he said that he did not rely on that sale because it seemed out of line. He said in effect ultimately that neither sale six nor sale seven could be described as “comparable”. I find it difficult to understand how any reasonably careful valuer could justify his observation that a per metre valuation of land was “in line with” seven sales when he gives evidence that three of them were not even “comparable” and indeed that one (sale five) should be rejected as being “out of line”.
- He was cross examined at some length upon a “two tiered marketing” system used to sell units constructed at Woodridge and Browns Plains. This type of marketing was designed to encourage mainly interstate and overseas investors to purchase units in hope of capital gain. Essential to this type of investment philosophy was the adoption of a negative gearing strategy. Part of the sales technique was for the vendor of such units to guarantee a minimum rental for a year or two. Many of the units to which Mr Lang referred as establishing a comparable sale price achieved for units in his hypothetical development exercise were related to sales effected within the two tier marketing system. That system he agreed involved the marketeers charging high fees and high commission and involved of course the assumption of the risk inherent in guaranteeing minimum rental for a period of a year or two. Naturally the guaranteeing of such a rental might influence some interstate or overseas purchaser whose prime interest was to make a capital gain to pay a higher price for a unit than any local investor or indeed local home buyer would be prepared to pay.
- It would be unhelpful to analyse in greater detail the extent to which prices interstate or overseas investors might be prepared to pay for units marketed under a two tiered system might exceed prices that might readily be achieved under the normal system of marketing such units through local real estate agents etc.
- Mr Lang agreed that he made no reference in his valuation to the fact that most if not all of the comparable sales of units upon which he relied were units sold under a two tiered marketing system. None of his hypothetical selling costs reflects the costs normally incurred in a sale effected in a two-tier marketing scheme.
- I am unpersuaded that any reasonably careful and competent valuer with Mr Lang’s experience could honestly and reasonably hold the opinion expressed on page nine of the valuation report that the per metre valuation he gave for the developer’s land was “generally in line with” a proper analysis of his seven englobo comparable sales.
- Mr Lang agreed ultimately in cross examination that his use of the words “reasonable security” in his valuation should be read to mean that the property was then worth $2m and it was reasonable to take it as security on that assumption. He said that he intended to convey that when he prepared his valuation of July 1994 and also when he prepared his later valuation about 10 months subsequently in May 1995.
- On 19 May 1995 the developer’s finance broker sought from the plaintiff an “increase in the loan facility from $995,000 to $1,200,000”. On 31 May 1995 the defendant provided an “updated valuation” of the developer’s land on the assumption that it had a potential for construction on it of “approximately two hundred town houses”, and taking into consideration “current sales of new townhouses in the surrounding district”. Mr Lang referred to the developer’s proposal to subdivide the land into three allotments to facilitate a three stage development to result in the construction of approximately 200 townhouses. It was observed that the land was “a reasonable security for mortgage purposes” but “due to current market conditions may prove difficult to sell in one parcel”.
- The May valuation “update” was to the effect that on 23 May 1995 the land had a value of $2,050,000; he said that when he prepared this valuation he had knowledge of the sale of land described as the “Brookfield Lodge sale” just over the road from the developer’s land. This sale of 1.789ha occurred on 11 August 1994 about 10 months before the defendant’s May 1995 valuation update. That land had a townhouse development capacity of 1 townhouse per 220 square metres (81). It was in Gomana Street immediately opposite the developer’s land; it had no flood or easement problem and the development had none of the problems to overcome which the developer’s land had. Analysed, that sale showed a unit value of $11,728 and a usable square metre value of $53. A direct application of that sale to the 2.6861ha of usable land for dwelling construction on the developer’s land showed that it had a capacity to develop 122 units which if given a unit value of $11,728 showed a land value of $1,430,816 in August 1994 and certainly no more than that sum in May 1995. To the extent that the probable value of the developer’s land in July 1994 is relevant to the issue of the defendant’s breach of obligation, I take the view that this sale is the most useful sale to apply – discounted of course, because of the disparity in area and additional cost for civil works on easements etc on the developer’s land and consequent increased risk in development. He said that he had discovered no further sales he thought of relevance and when he made his May 1995 valuation he had no more information than he had when he had made his July 1994 valuation. He did not attempt to analyse or apply the Brookfield Lodge sale. If he had, in my view a proper analysis would have led to the conclusion that the value of the developer’s land at that time was significantly less than $1.4m.
- He said that when he made his May 1995 valuation, he could not recall being aware that interest rates had been increasing or that there had been any resulting contraction in the market for townhouses as a consequence. I am satisfied on the evidence of valuer Slater of both these facts and that both were readily ascertainable by a valuer who made appropriate inquiries. He agreed that there was a drop off in sales in the period July 1994 to September 1994. He did not demur to the suggestion that there had been a 60% drop in sales in that period from the period that preceded it. He said that all he could say was that the drop in sales had been “fairly substantial”. He agreed that this drop off in sales resulted from a lessening in demand. He agreed that that was a matter that was relevant to his valuation in May 1995 and that in preparing that valuation it was very important to take into account the drop in sales of townhouses that had occurred between his first valuation in July 1994 shortly before of the Brookfield Lodge sale in August 1994 and the time of his second valuation in May 1995. However he failed to advert to this in his May 1995 valuation.
- In the course of explaining how and why he assessed the interest cost for the whole hypothetical development for a period of only six months, he said that when he prepared his hypothetical valuation he had in mind that the development would be a three stage development extending over three years. He assumed that each year 65 units would be sold at the price which he based largely on prices received for units sold under a two tier marketing scheme. The costs of each stage of the development would be wholly recovered within that twelve month period.
- The valuer said that he was aware when asked to “update” his valuation that the developer was seeking the loan of additional monies.
- Ultimately Mr Lang conceded that taking all things into account including the drop in demand for units it was possible that the value of the developer’s land had dropped from $2.05m in July 1994 down to $1.6 or $1.7m by May 1995. He said that he did not mention this in his May 1995 valuation report. He gave evidence that “rather than cause a lot of disruption and reduce the total I tended to at that time, confirm the valuation I had already made”.
- The 1994 valuation of its land was prepared for and used by the developer to persuade the plaintiff to lend approximately $1m upon security of that land. The defendant was made aware of the purpose for which its valuation was to be used. A valuation of the land which was about twice the amount of the loan sought was obviously more likely to so persuade the plaintiff to advance it than one which approximated or was even less than that amount. The 1995 valuation was prepared to persuade the plaintiff to advance further monies upon security of that land.
- Eventually upon the developer’s default under its mortgage the plaintiff exercised its power of sale of the land in three lots. After Australia wide advertising and three unsuccessful auctions it was sold in September 2000 and realised only $385,000; by this time the town plan had been amended to increase the density development constraints in force in 1994/95 by about 50%; the defendant does not challenge that this was the best price that could then be obtained; the net proceeds of sale amounted to $348,798.42.
- The guarantors of the developer’s performance of its obligations under the loan agreement were made bankrupt and no monies were recovered from them under their guarantees or under the administration of their bankrupt estates.
- The defendant called Mr Ehlers to give evidence of the value of the developer’s land in July 1994 and May 1995 and also to give opinion evidence as to what a “competent valuer would normally be expected to complete”.
- On the critical question of what the relative site density of the developer’s land was at the date of the valuations, he referred only to inquiries he had made of a planning officer at the Logan City Council. Unsurprisingly, because this went to one of the principal issues in the whole case, it was objected to. No effort was made by the defendant to call that planning officer. As I have already indicated if one simply took the prescribed planning density of one unit per 250sqm of land or one unit per 200sqm of land, one could certainly work out the maximum site density on a plan without even walking on the land. The whole point however is that the prescription of site densities are prescriptions of maximum site densities. There is nothing in the town planning material which supports the proposition that because land within the residential B zone had a maximum site density prescribed the local authority would in fact approve development of any parcel of land for home units irrespective of its topographical features so that that site would yield the maximum unit density permitted for land within that particular zone.
- It is interesting to note that the surveyors retained by the developers – Messrs Somerville & Partners Pty Ltd – advised on 14 February 1997 that they had been advised by Logan City Council that the total number of units permissible for development on the developer’s land was approximately 120. That was before the site density constraints existing in 1994/95 had been altered. This advice was given after the developer had proposed to subdivide its land into three lots – to permit the more ready sale of the whole of the land perhaps to three potential purchasers rather than simply to one. Before that subdivision could be effected a bond would probably have to be given by the developer to cover the cost of road construction which was a subject of the earlier rezoning exercise of this land together with the land over the road sold off in August 1994 for development. I reject the observation made by Mr Ehlers that the developer’s property had “quite sufficient available land for development of the site after allowing for maximum site coverages, landscaping arrangements, open space requirements, etc”.
- Inherent in this assertion is the fact that assuming units could not be constructed below the Q50 flood level or upon the road easement that is taken from one boundary of the land to the other with which I have already dealt in some detail, either 195 or 180 or 167 units may have been developed adopting various approaches.
- I prefer the opinion expressed by Mr Slater for the convincing reasons he gave at length that this contention is insupportable.
- I pay no regard to Mr Ehlers’ recollection of what he had been informed by a planning officer over the counter at the Logan City Council office concerning potential development of the site. In fact he did not inspect the property for the purpose of making his valuation until November 1999 nearly five and a half years after the defendant’s July 1994 valuation and more than four and a half years after its May 1995 valuation. I am unpersuaded that any prior approval was ever given to develop any specific number of units on the developer’s land at any time prior to the valuations. Mr Slater dealt in detail with the effect of the relaxation of the then current site density constraints on other parts on the agglomeration of land owned by the developer at that time. Indeed Mr Lang observed that no approval had been given for the development of the subject land at the time he made his 1994 valuation.
- According to Mr Ehlers the sale of most assistance in valuing the land in July 1994 and May 1995 was the sale of the Brookfield Lodge development land over the road from the developer’s land. That occurred in August 1994. He analysed this sale to produce a site value of $13,700 per unit for an 81 unit development. He observed that it was “similarly affected by a watercourse” to the developer’s land. In my view this is patently incorrect. While it may have been affected to some minor degree there is no suggestion that more than 30% of it was below the Q50 flood level. In any event although its analysis may be relevant to establishing the value of the subject land at the date of the defendant’s valuation it seems to me to have little relevance in determining whether the sales were analysed and considered by Mr Lang in his July valuation in the way a reasonably competent valuer would do so. Suffice it to say that, for the reasons which Mr Slater gave in his analysis of that Brookfield Lodge sale, I reject Mr Ehlers’ analysis appearing in his remarks on page four of his valuation.
- I do not accept that a competent valuer would value the developer’s land on the assumption that it had a real potential for development for any of the potential unit sites which appear on page six of his valuation – 195 or 180 or 167. In my view the method adopted in each of the alternate valuation processes depending on the site density of each of the three stage developments is fundamentally flawed by his valuation of the first 81 unit sites to be sold in each stage development at the figure he analysed from the sale of the Brookfield Lodge development – being the sum of $13,700 per unit site. The valuation of the second lot of unit sites at $9,000 each at the second stage of development to my mind is unsupported by any research or any argument that I find at all persuasive. It seems to involve simply making a 35% reduction in the value of unit sites to be sold in the second stage of development.
- With respect to the balance of unit sites in each of the third stages of hypothetical development being valued at $6,000 per unit site being a 35% reduction in value over the previously adopted unit site price of $9,000 per unit site, this again seems to me to be unsupported by any reason based in logic, experience or valuation practice. Why a reduction of 35% should be made rather than one of 50% or 25% simply does not emerge.
- To my mind although Mr Ehlers contended that it was inappropriate to perform a hypothetical development exercise of the sort which Mr Lang did – at least that hypothetical exercise followed a traditional approach. No authority whatever was cited to support the approach adopted by Mr Ehlers in his valuation of the developer’s land as at 14 July 1994. In spite of all the evidence that was given as to the effect of the Q50 flood level and the evidence of the easements to which I have already referred and in spite of Mr Lang’s concession that the proper valuation of the land should have been reduced from something over $2 million to about $1.6 or $1.7 million on 31 May 1995, Mr Ehlers considered that the developer’s land had the same value on 31 May 1995 as it had had on 14 July 1994 – indeed he seems to have adopted a similar approach in his valuation to that which Mr Lang conceded was inappropriate when he gave evidence.
- Mr Ehlers also expressed the view that there was no evidence of any decline in demand for residential B land with the potential for group housing development when Mr Lang made his second valuation on 31 May 1995.
- I am unpersuaded that this opinion has any basis of fact. I prefer the evidence of Mr Slater on this issue and take the view that his opinion is supported by the statistical records of “LOGAN CITY BUP & GTP SALES BETWEEN $60,000 & $150,000 FROM JANUARY 1994 TO JUNE 1995”. This appears as annexure S5 to the supplementary report of Mr Slater which is Ex 4A. That annexure clearly shows a peak in the market in July 1994 with a gradual decline to February 1995 with a very slight increase to May/June 1995. The market had obviously fallen dramatically from July 1994 when the defendant’s first valuation was made and had barely started to recover in May/June 1995 when the second valuation was made. Indeed as I understood him, Mr Lang conceded this to be correct. A further indication of rising interest rates emerged in Treasury Bond interest rates between July 1993 and December 1995 which is annexure S4 to Mr Slater’s supplementary report. That indicates a rapid rise of interest rates from July 1994 through February 1995. Although the interest rates in May/June 1995 were marginally less than they were in July 1994 they had risen significantly during the course of that period and had peaked in October, November, December 1994 and January 1995. This information was available to anybody interested enough to seek it out. Mr Ehlers in the course of his evidence said that it was mere “background information” of which he was aware and that he was aware that the sales of group title townhouses peaked in July 1994 and then dropped away by September 1994. He said that he was aware of that now although I infer that he was not aware of it until he had examined the detailed consideration of this matter in Mr Slater’s report. Mr Ehlers said that he could not agree that a valuer should have kept these matters in mind and explained that many townhouse developments were “sold off the plan” and there was difficulty in gaining access to Valuer General’s records of sales promptly. He said that the downturn in sales of developments of this sort was not evident prior to 31 May 1995 but became evident “sometime in 1995”. He said that although it had become evident in hindsight in his view it would not have been evident at the time the defendant gave its May 31 valuation.
- This expression of opinion seems more strongly supportive of Mr Lang’s performance as a competent valuer than indeed the evidence of Mr Lang himself who freely admitted that his May 31 valuation was “deficient” in some respects (vide para 34) and may have overstated the value of the land by from $.3m to $.4m (vide para 94).
- He said that he disagreed with Mr Slater’s view that the easement area to be developed as a road should be excluded from the site area of the developer’s land when considering the number of units which might be constructed on it. I am unable to understand from the explanation he gave what the basis of his disagreement with Mr Slater is. The plain fact of the matter is townhouses could not be erected within that easement area anymore than they could be erected below the Q50 flood line. He agreed that if one excluded that part of the developer’s land beneath the Q50 flood line and also excluded the easement area which in effect was to be a public road from one side of the developer’s land to the other, if 195 units were to be built on the available land left, there would be one for every 137sqm of land physically available for unit construction. He agreed ultimately that the more intense the development of a site the more inferior that site becomes when considered against otherwise comparable sales.
- I am unpersuaded that the general approach of Mr Ehlers with respect to his application of comparable englobo sales is any more acceptable than that of Mr Lang.
- In considering the evidence of Mr Ehlers and the weight to be given to it, I have derived some assistance by considering the full Town Planning Certificate relating to the Brookfield Lodge development obtained by the plaintiff from the Logan City Council on 16 June 1997 which is Ex 12.
- Attached to that certificate are several group title plans of re-subdivision of the site. This was not analysed in the course of the evidence but reference to it indicates the approximate range of sizes of the actual group title lots eventually registered and sold.
- According to Mr Parrer the Law Society guidelines for securing a mortgage loan recommends that the maximum advance be 70% of the value of the security. I accept Mr Parrer’s evidence to the effect that his firm’s practise was to require a loan to value ratio of 66.6%.
- I infer that both the developer and its mortgage broker were aware at least of the guideline of 70% recommended by the Law Society, if not indeed of the practice of the plaintiff to adopt a slightly higher value security ratio.
- On a security valued at $2 million, the Law Society guideline would have permitted an advance of no more than $1.4 million, and the plaintiff following its guidelines would have lent up to $1.3 million.
- Accepting the reliability of the defendant’s 1994 valuation therefore the loan sought by the developer would be secured on land with a value of roughly $0.7million greater than the usual loan to valuation ratio applied by the plaintiff.
- I accept the evidence of Mr Parrer that at the relevant time his company was handling between thirty and fifty loan applications per week. It had been dealing with the developer’s broker for some time and the application for loan received on 15 July 1994 was in the usual form.
- I am satisfied that the loan to valuation ratio of 48.5% which Mr Parrer calculated on the basis of the reliability of the defendant’s valuation was well within the plaintiff’s guidelines and those recommended by the Law Society and made that loan an attractive commercial proposition. I am satisfied that the defendant intended that the plaintiff should rely upon the July 1994 and May 1995 valuations in lending monies to the developer and that the plaintiff did rely upon those valuations.
- Evidence was called by both the plaintiff and the defendant to show what a carefully and properly prepared valuation of the land should have shown in both July 1994 and May 1995.
- Mr Slater called for the plaintiff:
- expressed the view that the market value of the developer’s land on 12 July 1994 was $1m.
- expressed the view that the market value of that land on 13 May 1995 was $610,000.
- Mr Ehlers expressed the view that depending upon which was the appropriate density of development in July 1994 the developer’s land had one of three values –
- He also expressed the view that the developer’s land had a similar value on 31 May 1995 as it had on 4 July 1994 – whichever of his three hypothetical site density developments was accepted.
- To the extent that the actual value of the land on the two relevant dates is relevant to the determination of breach of duty either in negligence or under the Trade Practices Act on the part of Mr Lang I accept the evidence of Mr Slater. I reject the evidence of Mr Ehlers.
- Accepting substantially the evidence of Mr Slater as to the market value of the land for security purposes at 12 July 1994, I find that its value was about $1m – or about half the value attributed to it by Mr Lang in his first valuation.
- Again accepting the evidence of Mr Slater I find that on 13 May 1995 the land had a value of about $610,000 or about one third of the value attributed to it by Mr Lang at that time.
- It does not follow of course that a breach of duty either in negligence or under the Trade Practices Act is necessarily established merely by a finding that the valuation arrived at by Mr Lang was twice the properly ascertainable value of the land (in 1994) or indeed was approximately three times the properly ascertainable value of the land (in May 1995).
- There may be occasions upon which a valuer proceeds on mistaken assumptions not attributable to negligence or breach of duty under s 52 of the Trade Practices Act.
- Indeed in this case it was contended that the error of analysis which Mr Lang made with respect to his sale five was attributable not to any failure on his part to make proper enquiry but to a mistake contained in the electronic search that he made upon which he was entitled to rely and upon which most valuers would rely without further investigation. While initially this contention may have been arguable, any weight to be given to it disappeared when it emerged in the evidence that in fact the defendant had in its possession another valuation – from a different valuer – which correctly described the area of land and which presumably correctly analysed it. However it is unnecessary to further analyse this aspect of the defence case. It suffices to say that Mr Lang conceded that if he had known that his sale five related to a sale of nearly 2 ha instead of merely 1 ha he would then have rejected that sale in any event as being “out of line” with his other sales.
- I have regard to the failure of Mr Lang to arrive at the approximate current value of the developer’s land on each occasion that he valued it in 1994 and 1995 and the extent of the discrepancy between the real current value and his assessed value in considering whether the plaintiff has proved that the defendant was guilty of negligence and breach of duty under s 52 of the Trade Practices Act.
- That finding however is not itself determinative on those issues. Those issues must be determined upon proof that Mr Lang in fact was guilty of professional negligence as a valuer in failing to take proper care to investigate relevant material and apply the proper principles of valuation in arriving at his valuation and in considering these issues I have regard to the evidence generally which includes the matters to which I have referred in para 131 and 132.
- With respect to the duty on valuers whether in tort or contract in the performance of their professional work I refer merely to the observations of The Master of the Rolls in Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co Ltd  QB 375 at 403 – 404 which was applied by Williams J in Oz Finance Pty Ltd v JLW (Qld) Pty Ltd  QSC 155.
- That duty is to take reasonable care as a trained professional valuer to give a reliable informed opinion on the open market value of the land in question at the date of valuation.
- In that case the Master of the Rolls continued at 404 (C-F):
“V knows that L seeks and obtains his valuation in order to guide him in deciding whether he will lend on the security of the land in question and, if so, how much he will lend. Both of them appreciate that if V overvalues the land L may lend more than he would have been willing to lend if the land had been correctly valued. The valuation is given so that L knows the current value of the land offered as security. The risk both have in mind is the risk that L will either lend when otherwise he would not or that he will lend more than he would be willing to lend on a correct valuation of the land offered as security for the loan.
In the absence of special instructions it is no part of V’s duty to advise L on further movements in property prices, whether nationally or locally. The belief among buyers and sellers that prices are likely to move upwards or downwards may have an effect on current prices, and to that extent such belief may be reflected by V in his valuation. But his concern is with current value only. He is not asked to predict what will happen in future. His valuation is not sought to protect L against a future decline in property prices. In no sense is he a guarantor of L’s investment decision”.
- In this case I am satisfied that but for its reliance upon the defendant’s valuation of 12 July 1994 it is improbable that the plaintiff would have lent the developer a greater sum than $666,000 – approximately $134,000 less than the sum required to redeem the developer’s existing mortgage debt. I am also satisfied that but for the defendant’s valuation as at 23 May 1995 the plaintiff would not have lent the further sum of $205,000.
- I am satisfied on the evidence generally to which I have referred at some length, also taking into account the discrepancy between the value shown upon a proper assessment of relevant facts and the valuation at which Mr Lang arrived that he was guilty of professional negligence and of breach of s 52 of the Trade Practices Act and that those breaches of duty were a cause of loss suffered by the plaintiff.
- For the defendant it is contended that the plaintiff’s loss was also caused by its failure to:
- have regard to the express qualification in the valuation which should have put it on guard with respect to its reliability; and
- make more careful investigations as to the financial capacity of the developer and that of the guarantors of the developer’s obligations under the mortgage of its land to secure the performance of those obligations should the exercise of its rights under the mortgage not adequately do so,
which amount both to contributory negligence and/or a justification for awarding the plaintiff only part of its loss under s 87(1) of the Trade Practices Act.
In this regard the defendant relies upon I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2000) 179 ALR 89.
- Section 10(1) of the Law Reform (Tortfeasors, Contribution, Contributory Negligence, and Division of Chattels) Act 1952 provides −
“10. (1)Where any person suffers damage as the result partly of the person’s own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the Court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage”.
- Since the introduction of this statutory provision it has not been necessary to give consideration to approaches developed under the common law involving such concepts such as “substantial cause” and “last opportunity”.
- In spite of that consequence there is always some difficulty in theoretically apportioning responsibility for damage suffered by a plaintiff by comparing that plaintiff’s negligence in failing to take more care to avoid being damaged by the negligence of the defendant with the failure of the defendant to take more care to avoid causing that damage to the plaintiff. A plaintiff’s entitlement to damages caused by the negligence of the defendant will not be reduced merely by comparing the extent to which the activities of each might be thought to be causative of the damage actually suffered by that plaintiff. It will often be the case that but for the failure of a plaintiff to take proper care for his own security a defendant’s negligence would not have caused any damage to him.
- Courts endeavour to reduce the damage proved by a plaintiff to the extent they think “just and equitable” to do so having regard to the plaintiff’s “share in the responsibility for the damage”; while undoubtedly taking into account the extent to which the acts or omissions may each have been “causative” of the damage suffered by the plaintiff, that is only one factor to be taken into account in the determination of the “share in responsibility” for the damage to be attributed to the plaintiff.
- The High Court of Australia on 2 October 2002 (2002 HCA 41) allowed the mortagee lender’s appeal against the decision of the Court of Appeal in I & L Securities v HTW Valuers (Brisbane) Pty Ltd (2000) 179 ALR 89 and dealt with the basis upon which a Court may determine what “part” of the loss or damage suffered by a plaintiff as a consequence of the defendant’s breach of section 52 of the Trade Practices Act should be borne by a plaintiff.
- In I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd  QSC 320 Williams J considered a case where he held that the same facts alleged to constitute contributory negligence on the part of the plaintiff also amounted to “a collateral cause” of the plaintiff’s loss.
- Williams J held at para 33 of his judgment that the plaintiff had been guilty of contributory negligence in failing to make sufficient inquiries as to the borrowers financial ability to meet its obligations under a mortgage. He found in the circumstances that the plaintiff had failed to act as a reasonably prudent lender would act and had so exposed itself to risk of financial loss.
- He then apportioned responsibility “according to the comparative degrees of culpability”. (vide para 52).
- On the basis of comparison of fault Williams J reduced the plaintiff’s damages by one third (vide para 53).
- His Honour then considered the same conduct on the part of the plaintiff with respect to its claim under s 52 and s 82(1) of the Act.
- Section 82(1) permitted the plaintiff to recover the amount of loss or damage suffered “by conduct of” the defendant which His Honour analysed. That case did not involve a failure to further investigate the valuation upon which the plaintiff relied, but rather its failure to satisfy itself that the borrower had the financial capacity to meet its obligations under the mortgage it gave to secure repayment of the loan.
- His Honour found that the deceptive conduct of the defendant which was actionable under s 52 and s 82 of the Trade Practices Act was a cause of the plaintiff’s loss, but the plaintiff’s own conduct was also a cause of that loss.
- His Honour concluded in para 65 that −
“In deciding how the consequences of how those two causes should be divided I am of the view that the approach that should be adopted is broadly similar to that which would apply in determining apportionment of negligence”.
On this basis His Honour concluded that damages to be awarded to the plaintiff as a consequence of the defendant’s breach of obligations under s 52 of the Act should be assessed at two thirds of the total loss suffered by the plaintiff.
- Having regard to the judgment of the High Court in I & L Securities v HTW Valuers it is unnecessary to attempt to apportion causation between plaintiff and defendant on a plaintiff’s claim for damage pursuant to s 52 and s 82 of the Act, under 87(1) of the Trade Practices Act.
- At para 27 of its judgment the Court of Appeal observed −
“We agree with the view of Williams J that under s 87(1) the Court may award only part of the loss causally connected with the contravention found; we think it may do so in the circumstances of the present kind, where the plaintiff’s conduct of which the defendant complains is quite independent of the defendant’s breach. We are aware that views of varying degrees of strength have been expressed, in the cases, in support of the proposition that the “gullible plaintiff” defence is never open – that the defendant can never defeat the plaintiff by asserting that “you should not have believed me when I misled you”: Sutton v A J Thompson Pty Ltd (1987) 73 ALR 233 at 239; but see Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193 at 241 per Gummow J, and the other authorities discussed in Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 at 136. We do not think it necessary to venture into this field which although important, has no direct relevance to the point we have to consider”.
- Consideration of the availability of “the gullible plaintiff” defence was not discussed in the Court of Appeal in this case. Neither was discussed any proposition that a plaintiff who relies upon a valuation which it has carefully considered but in which it has failed to detect deficiencies of the sort which I have analysed with respect to the deficient hypothetical development exercise, is at fault and therefore partly responsible for the damages suffered as a consequence of not rejecting the valuation or procuring a check valuation or perhaps cross-examining the valuer. On the facts of this case having regard to the stance adopted by the valuer Mr Lang which it was sought to support to a significant extent by evidence given by the defendant’s valuer Mr Ehlers, one can only conjecture as to the outcome of any discussion the plaintiff may have had with Mr Lang, even if deficiencies in the valuation – obviously at least with respect to the hypothetical development exercise – were apprehended.
- The developer of course had retained an experienced and reputable valuer who asserted that a consideration of comparable englobo sales of Residential B land at about the time of valuation led him to conclude that the direct application of those sales supported the two valuations at which he arrived. On the face of the 1994 valuation the hypothetical development was advanced after the comparable englobo sale valuation had been expressed. I am unpersuaded that even if the plaintiff had reason to suspect the reliability of the hypothetical development valuation for reasons I have canvassed, it should have rejected or doubted the reliability of the comparable sales exercise by preferring the approach to which I have referred in paras 75 and 77 to that referred to in para 78. The plaintiff was not negligent in my view in adopting the second approach in the absence of information for the first time elicited from Mr Lang in this Court.
- While undoubtedly the plaintiff was not entitled simply to go to the “bottom line” of the valuation before considering whether or not to rely on it, I would be surprised if as a matter of common practice in the plaintiff’s business, or in similar competing businesses, that would not be about the first part of the valuation which would be considered. A lender of any experience would then probably consider the comparable englobo sale exercise and would probably treat the hypothetical development exercise as a check on the englobo comparable sales aspect of the valuation. Had the defendant not asserted in its valuation that the figure arrived at “was in line with” and indeed supported by the seven sales to which Mr Lang referred one wonders what weight the plaintiff may have given to the valuation had it been based only upon the hypothetical development exercise involving prognostications as to the time of development over the ensuing three years, the maintenance of demand for townhouses during that period and the maintenance of their sale prices.
- In my view the most important aspect of the defendant’s negligence and breach of s 52 of the Trade Practices Act in this case was the failure of Mr Lang to ascertain that only 2.686 of the developer’s 4.514 ha area of completely undeveloped land was available for the construction on it of townhouses within the town planning constraints then applicable which were readily ascertainable at the time. This negligence in my view affected equally his comparable englobo exercise and his hypothetical development exercise.
- In my view the plaintiff was not negligent in the circumstances in failing to retain another valuer to check the valuation which the defendant had assigned to it. Neither was the plaintiff negligent in failing to travel out to the developer’s land with a surveyor and flood map obtained from the local authority and tramp around the boundaries of the land to determine for itself whether the whole or what part of the area could be developed for townhouses – whether approximately 200 or only approximately 120.
- With respect to the plaintiff’s failure to further investigate the reliability of the statement of assets provided by the directors of the developer to show the value of their guarantees one must consider whether there was anything emerging from the valuation which accompanied those particulars which would or should put the plaintiff on guard with respect to its reliability. If it was reliable then the land had a value double that of the advance that was to be made. Even in May 1995 when the updated valuation was obtained the land was said to have the same value as it had had 10 months earlier which was about 1.7 times the amount of the increased loan of $1.2m.
- The plaintiff was aware that the developer had successfully developed and/or sold other areas of residential B zoned land in the immediate vicinity of the land it offered as security and I am satisfied had no reason to suspect that the money to be advanced to the developer was at risk because of outstanding financial obligations borne either by the developer or by its directors in their personal capacity.
- The circumstances in this case are quite different from those considered in Oz Finance Pty Ltd v JLW (Qld) Pty Ltd  QSC 155 which turned on whether in the circumstances the lender in fact had been induced by a negligently prepared valuation to advance monies the repayment of which would be secured on a number of parcels of land valued.
- At the time the plaintiff advanced money to the developer in this case, in my view there was nothing to indicate to it that the developer might be unable to meet its obligations under the contemplated mortgage in six months time. Enquiries made by the plaintiff of the mortgage lender, owed $800,000 to be paid out from monies to be advanced by the plaintiff, indicated that the developer had honoured its obligations under that mortgage. The first six months interest of course had been capitalised and deducted from the monies advanced. Although when the second advance of $.2m was made there had been late payment of interest on one occasion which was explained by the developer to the plaintiff’s satisfaction – the developer having other real estate developments for sale – I am unpersuaded that there was any unreasonable failure on the part of the plaintiff to make further inquiries and investigations to assess the risk of making the loan which it did make. Had the valuation been in a sum which approximated the minimum loan to value ratio of 66.6% normally applied by the plaintiff it may have been prudent to investigate further the likely capacity of the developer and its directors to meet their obligations over the next 12 to 18 months. That was the situation considered in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (supra).
- On the facts of this case where the value attributed to the security held by an experienced developer was double the amount of the loan to be secured, in my view it could not be said that the plaintiff acted unreasonably in relying upon the information it received as to the background and financial resources of the proposed guarantors and could not be said to have been negligent in failing to embark upon further independent inquiry to verify that information which, as far as the evidence shows, may in any event have been accurate when it was provided.
- With respect to the loss established in this case the plaintiff has assembled records of losses incurred. These records and the total loss recorded is contained in Ex 7.
- As well as the capital loss suffered upon sale of the land, the plaintiff also suffered loss of interest due under the mortgage. It also claims interest pursuant the Supreme Court Act. It also incurred expenses in holding, maintaining and attempting to sell the property before eventually achieving a sale.
- The total damages claimed which the plaintiff says is supported by the contents of the folder which is Ex 7 amounts to $1,685,988.32.
- The defendant has not really contested the issue of damages except that it asserts that $20,000 claimed by way of solicitors fees, have in fact already been recovered against a former party to this action which has been settled. It is contended consequently that that item contained in Ex 7 together with interest attributable to it ought be deducted from the sum claimed. At the end of the day the defendant admits that the plaintiff suffered loss only in the sum of $1,662,507.40. The plaintiff did not contend to the contrary.
- The circumstances of this case are a little unusual in that the action was initially taken against not merely the defendant but also another defendant Landmark White (Qld) Pty Ltd which was another valuer allegedly involved in valuing land owned by the developer subsequent to the plaintiff making the loan in issue in this case.
- The terms of settlement were tendered by consent and are contained in Ex 3 (Pt 54). No submissions were made as to the effect of that settlement upon the quantum of loss suffered by the plaintiff. I have had regard to the reasons for judgment of Shepherdson J delivered on 18 May 1998 in an endeavour to determine whether any part of that settlement related to the loss which the plaintiff seeks to recover in this action.
- It seems that initially the plaintiff sought relief against Landmark White as sole defendant to a claim in this action for loss suffered as a consequence of a third advance it made to the developer in reliance upon a valuation provided by Landmark White. R.S. Melloy was added as a second defendant by order of Shepherdson J on 18 May 1998 in respect of the advances the plaintiff made in July 1994 and May 1995 – twelve months before a third advance was made in reliance upon a third valuation given by Landmark White in 1996. The claim against Landmark White was settled upon Landmark White paying to the plaintiff the sum of $250,000.00 inclusive of costs.
- I am unpersuaded that any money received by the plaintiff under the settlement had anything to do with the loss it suffered by reason of the breaches of obligation which the defendant owed to the plaintiff which have been litigated in this Court. I therefore disregard monies received by the plaintiff pursuant to those terms of settlement in assessing the loss suffered by the plaintiff as a consequence of the breaches of duty which the defendant owed to it.
- I assess the loss suffered by the plaintiff in the sum of $1,662,507.40.
- I find that:
(1) The defendant R S Melloy Pty Ltd is liable to the plaintiff both in negligence and for breach of its obligation under s 52 and s 82 of the Trade Practices Act.
(2) The plaintiff was not guilty of contributory negligence.
(3) No act or omission of the plaintiff would justify awarding to it part only of the damages assessed pursuant to s 87(1) of the Trade Practices Act for loss sustained as a consequence of the defendant’s breach of duty under s 52 of that Act.
(4) The loss and damage suffered by the plaintiff as a consequence of the defendant’s negligence and breach of obligation under s 52 and s 82 of the Trade Practices Act is assessed in the sum of $1,662,507.40.
(5) I give judgment for the plaintiff against the defendant for the sum of $1,662,507.40.
(6) Subject to submissions from the parties I would order that the defendant pay to the plaintiff its costs of and incidental to the action including reserved costs if any to be assessed on a standard basis.
- Published Case Name:
I & L Securities P/L v R S Melloy P/L
- Shortened Case Name:
I & L Securities Pty Ltd v R S Melloy Pty Ltd
 QSC 306
04 Oct 2002
- White Star Case:
No Litigation History