Case: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
Outcome: discussed
At the time of the decision of the High Court in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 it was well established that, in the case of the purchase of property induced by misleading statements, the correct measure of damages (apart from consequential losses) was obtained by deducting the true value of the property at the date of the purchase from the purchase price. It is not necessary to go beyond the analysis of the authorities by the Full Court in Expectation Pty Ltd v PRD Realty Pty Ltd [2004] FCAFC 189 ; (2004) 140 FCR 17 at [252] [258]. It is submitted on behalf of the respondents that HTW Valuers 217 CLR 640 fundamentally changed the situation. I do not agree. In that case, the plaintiff, not the defendant, was seeking to rely upon events subsequent to the transaction. The actual decision affirms the Potts v Miller measure of damage but points out that subsequent events can throw light upon the true value of the property at the time of the transaction ( HTW Valuers 217 CLR 640 per Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ at [34] [40]). That principle is well known in valuation law and practice and had been referred to by the High Court in Kizbeau Pty Ltd v WG &amp; B Pty Ltd [1995] HCA 4 ; (1995) 184 CLR 281 , particularly at 291 296 per Brennan, Deane, Dawson, Gaudron and McHugh JJ. The Court went on to consider an alternative approach proposed by the plaintiff, that is, that the measure of damages would be the price paid minus the benefits left in its hands at the time of trial it being a case where there had been a significant decline in value by the time of the trial. The Court indicated that there may be circumstances in which that approach would be appropriate ( HTW Valuers 217 CLR 640 at [63] [67]). The decision in Murphy v Overton Investments Pty Ltd [2004] HCA 3 ; (2004) 216 CLR 388 points in the same direction. This flows from the principle that a plaintiff induced by misleading conduct to enter into a transaction is entitled to be fully compensated. The same principle led to additional consequential losses being awarded in Gould v Vaggelas [1985] HCA 85 ; (1984) 157 CLR 215. That reasoning does not support the view, espoused by the respondents in this case, that the party responsible for the misleading conduct can benefit from an increase in value in the property acquired by the time of trial. 14 I accept the substance of the evidence of Roberts as to assessment of the sustainable annual net profit. Counsel for the respondents made some progress in cross-examination of Roberts, particularly as to some items of expense. However, there was little ultimate difference between the experts as to total expenses per annum as at the date of settlement. Roberts' approach to the assessment of income is more acceptable than that of Drewitt Smith. However, the actual results for 2004 2005 were better than those for 2003 2004, and those for the period taken by Roberts. I would, therefore, take the later higher figure, rounded up to $200,000, as the maintainable annual profit. I am confirmed in this by noting that in the following year the net profit was comparable, with revenue rising. In my opinion, the trading results more than 12 months after purchase have little relevance as to the value of the motel at the time of purchase. To give any significant weight to them would go beyond use envisaged in HTW Valuers 217 CLR 640. The later results received some attention because of the way in which the respondents put their case. That attention was sufficient to illustrate the difficulty in determining why the results improved in later years capital expenditure by the purchasers, better management by the purchasers, improvement in the Australian economy and improvement in the local economy, due particularly to increased coal mining, all played a part. Furthermore, there is no way of telling how an alternative investment of the purchase price may have fared over the period to trial. 15 This integer reflects the rate of return from a business that a purchaser seeks to achieve from the capital outlaid on the purchase of the business. Generally speaking, a purchaser will accept a lesser return on purchase price (and so pay a higher price) for a business that is either very secure or has good prospects of improving than for a business that is riskier or stagnant. That judgment will be affected by factors such as location, facilities and improvements, trade mix, style and pattern of trade, opposition and potential for improvement. This can be observed by comparing varying capitalisation rates reflected in the purchase price of different motels analysed by the valuers. The calculation of the capitalisation rate in a transaction depends upon the assumption made as to maintainable net profits at the time of purchase of the motel. It is thus necessary to consider the features of each motel and choose the deduced capitalisation rate most appropriate for the motel being valued. 16 In the present case, much of the guess work is removed as the capitalisation rate actually represented by the purchase price paid by the first applicant on the basis of the represented figures is known it was 15%. This is confirmed by the contemporaneous valuation carried out by Robertson and Robertson for the financier. The represented results for the financial years ended on 30 June 2002, 30 June 2003 and 30 June 2004 and the six months from 1 July 2004 to 31 December 2004 were considered. The valuer deduced an annual net profit of $300,465 and applied a 15% capitalisation rate to arrive at the valuation of $2,003,098, increased to $2,050,000 in view of the purchase price. The valuer considered that this was in line with capitalisation rates deduced from a number of other sales. 17 Roberts adopted the rate of 15%. In his opinion, the evidence in relation to motels that could be described as comparable to the Sovereign Inn Motel was generally within a range of between 14% and 16%. In substance, Roberts agreed with Robertson and Robertson. 18 Drewitt Smith considered that the most directly comparable sales supported a capitalisation rate of 12.25% to 12.5%, but adopted 12.75% to reflect the motel's present underperforming position and the time required by an alternative operator to improve occupancy and overall profitability. 19 The difference of opinion between the valuers as to the capitalisation rate that should be deduced from other sales was the subject of cross-examination and was scrutinised in submissions. In my opinion, the actual rate of 15% that was paid, supported by a contemporaneous valuation, is decisive as to that which was represented to the purchaser. However, that was not the true picture as to the past, and the future was not known. 20 If the actual results were known, an informed purchaser would have recognised the possibility of correcting the downturn in results by better management and would have been prepared to accept a lower capitalisation rate (and so paid more) on that account. In my opinion, a capitalisation rate of 12.5% would be appropriate. That choice is confirmed by the improvement of revenue in the following year (albeit with no greater profit).